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Valuing Cyprus property for compensation

By Fiona Mullen

A few weeks ago I wrote an article showing how it should be possible to keep the property compensation bill below €5bn with a mix of reinstatement, territorial adjustment and a form of incentivised exchange.

One issue that could upset this €5bn figure is if legally unsound and politically charged methods are used to calculate compensation values.

To illustrate what I mean, consider that each of the five versions of the Annan Plan had its own version of how to calculate ‘current value’ for the purposes of compensation. Current value is in any case a misleading term, since it implies market value but actually means something else.

Annan I said that compensation would be paid on the basis of the value at the time of dispossession “plus inflation” of properties in comparable locations. It should also be based on the assumption that “events between 1963 and 1974 had not taken place”. By Annan V, there was a requirement (thank goodness) to use experts, but, among other things, one also had to check prices in comparable locations “where property prices were not positively or negatively affected” by the events of 1963-74.

In other words, we have to find properties on the island that were completely unaffected by conflict. That is impossible. Land prices plummeted all over the island in 1974 and the dislocation of Greek Cypriots led to high housing demand and a building boom that would have affected prices everywhere in the south.

Deciding which properties, if any, were or were not affected is therefore highly speculative. That makes the Annan model likely to fail in court. Search the word “speculation” in the Loizou just satisfaction European Court of Human Rights (ECHR) judgment of May 2011 (16682/90) and you will see what I mean.

The other problem spawned by the Annan methodology is speculation about house-price inflation. The Central Bank of Cyprus only started producing a property price index in 2006, so economists argue (speculate) about whether house prices have risen by an average 6%, 8% or 10% since 1974.

To non-finance types, there is little difference between 6% or 8%. But because of the way compounding works, every 2 percentage points thrown onto the inflation rate doubles the compensation bill.

Politicians or negotiators might make off the cuff decisions, not knowing that the difference between two inflation rates is the difference between an affordable and a bankrupt solution.

According to a paper by Symeon Matsis in 2004, the average price of Greek Cypriot property in the north was CYP 1,364 (€2,330) per donum in 1974. If you assume a 6% inflation rate, the ‘current value’ of Greek Cypriot affected property by 2015 comes to €31bn, meaning that the compensation bill (assuming the exchange and reinstatement model proposed in my previous article) comes to just over €5bn.

However, if you assume average inflation of 8% (which probably ignores the massive drop in values since 2008), the current value soars to €64bn and the bill more than doubles to €11bn. Try an inflation rate of 10% and you are looking at valuation of €128bn and a compensation bill of €21bn – the same size as all-island GDP.

Luckily none of this legally risky, economically dubious speculation is necessary. There is a perfectly modern, internationally acceptable way of assessing value, and that is through surveyors assessing the price that a similar property in the same location would fetch on the market today. This is the methodology used by the Turkish Cypriot Immovable Property Commission, which the ECHR in the Loizou case found to be a “fair basis” for compensation.

Using today’s market value as the baseline for compensation does not deal with one issue, however: namely that Greek Cypriot property currently fetches a lower price in the north than Turkish Cypriot property. These prices can be expected to converge after a settlement.

But as leaks from the ‘Downer doc’ have shown, there are much smarter ways of ‘catching’ that upswing in prices and making sure that the compensated owner also gets to benefit. Moreover, it does not involve bankrupting the state in the process.

Fiona Mullen is Director of Sapienta Economics and author of the monthly Sapienta Country Analysis Cyprus www.sapientaeconomics.com 

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