550,000 m² -
These Notes, which are by no means exhaustive, were prepared on the basis for outlining some of the advantages investing in Cyprus and to analysing further the concept of Ayios Demetrios Village Health and Wellness Centre (AD).
They can be categorized as follows:
3 ASSUMPTION (MAIN)
7 PLANNING PERMIT
8 ADDITIONAL INVESTMENT
It is a well known fact that Cyprus and particularly its economy is trying to find its feet after the moratorium and “the unprecedented haircut” that took place in March 2013. A lot of fiscal and monetary measures were taken since then by the government to re-activate the economy, bring back confidence, promoting investment and subsequently Cyprus to be able to borrow freely in the international currency markets and eventually to be getting out of the moratorium. It is expected to be able to do so in early 2016. AD hopefully will be implemented by 2017.
The government managed to raise €100 m, last April, borrowing at a rate of interest of 6.50%, by issuing and selling bonds to a private international investor. It wanted to raise another €500 m, at the beginning of June, and was offered €2.000 m. The deal closed on the 19th of June by raising €750 m borrowing at a rate of interest of 4.75%. Deutche Bank, Goldman Sachs, HSBC, UBS and VTB Capital were its advisors.
As a general rule when there is instability in any economy the scope for wider profit margins, in some sectors of the economy are greater, than under normal market conditions, as it is in the case of Cyprus and subsequently for AD. The demand for the medical sector is inelastic.
There are two deciding factors that can change the entire economic picture of Cyprus in the near future. The exploration of natural gas and possibly petroleum that already started taking place and solving the stagnant political problem.
The following reasons, amongst others, make Cyprus an attractive investment place:
1 Corporation tax 12.5%, the lowest in the E.E.C.
2 No taxes on the distribution of dividend for investors residing abroad.
3 No capital gain taxes of changing the use of any land for development.
4 Labour wages have been reduced by, at least, 20% in the private sector.
5 Incentives to companies for employing unemployed persons.
6 The government is willing giving additional building density to attract foreign funds for substantial investments.
7 Cypriot passports for non E.E.C. nationals.
8 Other incentives can be given to cater for AD needs due to the magnitude of the investment.
There are a number of substantial business deals, in the private sector, that took place during the last twelve months, naming just a few:
1 Sahil Peerzanta, the Indian owner of Expandable Infra PVT Ltd, is considering participating with Zenon consortium to invest in the construction of a new port and marina in Larnaca. Anticipated investment in excess of €500 m. The project will commence early in 2015.
2 MTN telephone communications 50% shareholding was bought for an amount in excess of €70 m by a South African company. This company already owned the other 50%.
3 Hermes duty free shops, in the two airports, were bought for an amount of €42 m to a Russian consortium.
4 A shareholding of 75% of Le Meridien hotel in Limassol was sold for an amount of €75 m to a Russian investor. At the beginning of November 2014 the hotel will be closed for 18 months so refurbishment will be undertaken for an amount of €30 m.
5 Alexander the Great, a hotel in Paphos, was sold to a Russian consortium for €48 m.
6 The new main shareholders of Hellenic Bank, 29.99% each is an American hedge fund and a Russian consortium and Demetra Investments is having 15%. Total amount invested €100 m.
7 The Cyprus Development Bank is sold to a Ukrainian consortium for an amount of €36 m and pledging another amount of €14 m as working capital provided Central Bank approval is granted.
8 Buena Vista Hospitality Group (BVHG), the American Orlando based company, that specializes in hospitality and golf management property services is considering investing in Kalavasos village in the district of Larnaca an amount of $300 m in a project called “Fortune Health Resort” which will construct and operate a rehabilitation clinic, hotels, shops and villas. The expected investment will be $800 m. Officials of BVHG will come to Cyprus end of October 2014 to finalize the deal.
9 On 28th July 2014 Bank of Cyprus successfully issued a new share capital of €1.000 m. Wilbur L. Ross, founder and president of W L Ross & Co LLC purchased 19% of the new share capital for €400 m and the European Bank of Reconstruction and Development (EBRD) purchased 5.7% of the new share capital for €120 m. The remaining issue was taken by other foreign investors. The price of the new share capital was €0.24 per share.
10 Russian investor Nikolai Potapenko’s development company Lanomex is pumping about €80 m in Larnaca for a 22 storey luxury hotel.
In comparison to some of the above AD will be one of the largest in the private sector projects ever undertaken in Cyprus and the biggest in incorporating the medical and sport sectors in tourism. The investment required will be circa €250 m at current market prices.
There are not that many substantial investment opportunities in Cyprus that can offer the expected financial results which were analysed in the various reports on AD.
AD was prepared by a team of consultants having expertise in the various related fields. It took almost three years to prepare most of the reports which at times these are adjusted to accommodate for the current economic climate and/or changes in the existing laws and/or technology. Initially, a “proper” hospital of international standards was considered and reports were prepared on that basis.
Great care and attention was taken to assess and minimise the environmental impact of the development. To this end, full consultation has taken place with local communities to ensure the project enhances local prosperity whilst retaining the integrity of the countryside. In fact, written support for the project was given to the Housing and Planning Department of the Ministry of Interior by the five local councils of the nearby villages supporting the application.
The focus of attention of AD is tourism in general which can be sub-categorized into:
B Touristic and Commercial
The reports on medical tourism were prepared on the basis that a diagnostic centre will operate and there will be a rehabilitation hospital (123 rooms), a geriatric clinic (100 rooms) and a special care home (150 rooms).
Emphasis is given to the diagnostic centre with medical equipment that can easily diagnose infections, allergies, diseases for immediate and effective treatments.
The structure of the hospital and clinics will cover almost the entire needs of an elder person depending on the state of his health. The Executive Report states and I quote “as the population is aging there are in need for such institutions to accommodate for the old”. Cyprus comparable advantage to other North European countries is the climate that offers speedier healing process to patients let alone at cheaper rates. Another factor not to be undermined is that there is high demand and lack of these specialized institutions in the local market.
There will be a training centre so all personnel of AD will undergo a rigorous and specialized training to accommodate for the various tasks needed. The company will liaise with the Ministries of Education and Health so professional people will be visiting AD at regular intervals to abreast the personnel with recent developments in the related fields of expertise.
The residential development will cater for two different types of customer. The one that falls into this category will be assisted living services. A wide spectrum of services at the highest level will be provided to customers ranging for housekeeping related facilities to keeping company on a 24 hour basis. The other category will be a “traditional” carefree residential development which will be analysed under the heading touristic and commercial development here below. In the various reports the residential development (assisted and non assisted living) was analysed under the heading trading development.
There will be on offer for sale 130 bungalows out of which 80 units of 90 m² each and another 50 units of 120 m² and all will be built on demand. A choice of 5 different designs and level of luxury will be on offer for a prospective customer to choose from to cater for his different needs.
B Touristic and Commercial
A “centre village square” or “piazza” with a few specialized shops and restaurants will demonstrate the Greek culture of art, craftsmanship and entertainment. There will be also an amphitheatre that will be staging different Greek, opera and classical plays. A small and luxurious cinema will offer different new releases films a few times a week. A mini market will open on a daily basis and week-ends that will give the opportunity to residents and tenants to purchase their essentials.
Near the piazza there will be a spa, medical spa and wellness centre so the opportunity will be given to residents and non residents to enjoy the benefits of laser treatments, Botox treatments, and other facial and body treatments. Alternatively they will be able to just have a relaxing hydro – massage and enjoy the facilities of the wet and pool areas i.e. sauna, steam bath, hammam, aroma pool, deep sea water pool.
A 250 room luxurious hotel apartment complex with conference facilities will operate thus the guess will be able to visit their friends and relatives that reside in AD and/or just want to come and stay for a week-e or longer and to take advantage of the various facilities on offer and be away from the hazards of the towns and daily routine.
There will be 205 villas in total and each one will be between 120 m² to 200 m² in size. All villas will be individually designed, have their own swimming pool, garage and have their own proper sized garden. These villas will be more luxurious that the assisted living bungalows.
The project includes tracks for walking, running, cycling, outdoor swimming pools and six tennis courts.
Two full sized football pitches will be available therefore foreign and international teams will have the opportunity to come during their pre-season and mid-season training being able to take advantage of all the facilities that are on offer. A specialized orthopaedic department within the rehabilitation hospital will cater for the special needs of footballers and other athletes.
The company is in consultation with the Cyprus Sport Association (CSA) and Cyprus Tourist Organisation (CTO) to introduce many sport facilities during the course of the year thus residents and guests will indulge in a variety of sport activities.
The sport sector was analysed in the various reports under the heading touristic and commercial sectors.
3 ASSUMPTION (MAIN)
The reports were prepared on the assumption that the prospective investor requires to inject an amount of €90 m into the project. Thereafter the investor becomes a 50% partner in the company and the AD project can be implemented. In this way he is exempted from paying the 8% transfer tax duties as it is the case when acquiring land. This, however, is a mere assumption and the prospective investor might opt to take over the whole company or having a majority shareholding a proposition which the company will consider.
It should be pointed out that due to the size of the land and the level of investment required there are so many permutations, changes and alterations that can possibly be made on AD by a prospective investor. All these will depend on the size of his shareholding to accommodate with his policy requirements, the markets he is aiming at and the funds that he is prepared to invest.
The project consists of:
A Capital Development
Rehabilitation Hospital € 22.03
Geriatric Clinic € 10.90
Special Care Home € 14.80
Professional Fees € 1.80
Sub – Total € 49.53
(b) Touristic & Commercial
Management € 1.09
Hotel Apartments € 18.77
Village Piazza € 6.22
Wellness & Spa € 7.94
Professional Fees € 1.40
Sub – Total € 35.42
(c) Miscellaneous € 9.66
Total Capital Development € 94.61
B Trading Development
Residential € 70.18
Basic Sector (Infra Structure) € 13.00
D Land Value € 72.00
Total Development Cost €249.79
The proposed project can be developed in Stages, as it is the case of selling homes and bungalows (a span of 7 years was adopted) in the reports.
The proposed project can be amended and Stage 2 can include the following components:
(a) The geriatric clinic and special care homes. An amount of €26.69 m (including professional fees) will not be required straight away, and/or
(b) Hotel apartments, the wellness centre and medical spa. An amount of €27.83 m (including professional fees) will not be required straight away.
If AD is implemented in stages as outlined above then the initial capital investment required will be reduced to circa €50 m (from €90 m) at current market prices.
The following main issues were identified and addressed when preparing AD:
A Price of Land
B Other Prices
D Safety of Investment
A Price of Land
With reference to the price of land which is determined by (a) location, see analysis here below under the heading safety of investment in paragraph 3 (b) its relation to the whole development in terms of its financial results i.e. profitability, asset value, cash inflow, return on investment, payback period, growth prospects etc. as were set out in the various reports and (c) prices of a nearby similar size land and its location. It should be pointed out that substantial parcels of land in the Paphos area are just a very few.
In relation to land of a nearby similar size (b) which is Leptos land, 1.200.000 m² (just over twice the size of AD land of 533.000 m²), it is located between Paphos and Yeroskipou. It has a planning permit for a university, a hospital and substantial residential development. The selling price of the land for this development is in excess of €300 m.
Venus Rock Estates (Ha Potami) land near Kouklia village has been valued in excess of €280 m. There is a golf course and a planning permit for luxury residential development.
Another piece of undeveloped parcel of land, near Mandria village, of 370.000 m² is valued at €55 m.
These developments have valuation reports in place which were prepared by a panel of chartered surveyors.
B Other Prices
With reference to other prices, two different set of prices were adopted (a) price for selling homes, bungalows and villas and (b) price for the operations i.e. for the medical, commercial and touristic sectors.
The prices quoted for selling homes and villas (a) are similar to those of nearby development as quoted by Leptos, Aristodemou and Paphilia which are the leading developers in the area for attracting foreign investors.
With reference to the prices quoted for having treatment in the medical sector (b) above these were determined by a weighted average mainly of European prices (Scandinavian, Germany, the U.K., and the Middle East). The prices for medical care in Cyprus are lower to those of other European and Middle East countries. It should be pointed point out that the reports did not take into consideration the price of selling medicine to patients.
The prices quoted for the hotel apartments are competitive to those prevailing in Cyprus for a similar type of accommodation.
The service charge for the residential development of €4.800 p.a. per home quoted in the reports is a very competitive price while the charge for assisted living of €24.000 p.a. per home is on the low side. Other European countries are charging in excess of €50.000 p.a. for assisted living services.
The reports did not mention any operators that the company came in contact with. The reason for this is because there is not anything concrete yet i.e. all the operators are interested to know for certain whether the investment will take place and when it will be implemented thus negotiations can commence. These contacts are coming from the Scandinavian countries, the U.K., Russia, Israel and the Middle East. As soon as there is an investor in place negotiations with these contacts will come into play.
An operator for the medical sector will guarantee a continuous flow of patients and at the same time he can provide additional expertise needed. He might also be in charge of the medical sector. There are different ways to work with an operator i.e. management, renting say the rehabilitation hospital and/or agree for a fee per patient and/or paying a fee per patient. Economies of scale will apply due to the sheer size of this sector.
With reference to the residential sector which is divided to non assisted living and assisted home sales. All homes can be sold individually and/or a substantial part to a developer and/or to an operator. There is also the possibility if the investor elects the company to let out some homes on a long term basis rather than to be sold. For completion purposes, some home sales can take the form of time sharing.
Assisted living home sales need a specialized market and to this effect an operator will assist immensely. Careful and specialized planning will take place to accommodate for this market.
D Safety of Investment
With reference to the safety of investment as a general rule “investing in land somebody cannot really go wrong over time”. Historically, land price tend to increase and it is one of the safest forms of investment.
Cyprus is a heaven of small land owners and substantial parcels of land are scarce to be found. Paphos is the best sought after district for investment purposes simply because of its picturesque countryside.
There are a number of deciding factors that determine the safety of the investment per se (1) land and its characteristics i.e. location and size (2) the development that will take place as analysed by its (a)financial results and (b) growth prospects.
The location of the land is considered to be one of the best in Cyprus. Its characteristics are considered to be unique i.e. not far away from Paphos International Airport, overlooking and proximity to the sea, the motorway of Limassol to Paphos is nearby, and its proximity to two golf courses (Aphrodite Hills and Venus Rock Estates). The villages of Mantria, Anarita, Timi, Kouklia and Nicoclia are not far away. All the land is continuous and adjacent to Asprokreemos dam (the second biggest on the island. It can take approximately 53 m³).
The above characteristics alone make the price of the land quite substantial without any development.
When the land is developed it will appreciate considerably in value. In the reports a price of €400 m at current market prices was quoted as its capital value after the development. There are not that many investment projects that can increase in asset value for an amount of circa €150 m at current market prices in just three years time. Substantial profits will be created by selling villas, bungalows and from the operations of the medical, touristic and commercial sectors.
The total land needed for the development is estimated to be 507.500 m² out of a total of 533.312 m² i.e. 95.2%. If the photovoltaic park that requires 60.000 m² will not be installed then the total land needed for the development will be reduced to 447.500 m² which will be 83.9% of the total area. In this way 85.812 m² of idle land can be used for additional development which will further enhance the asset value of the company.
The company is considering abandoning the 4 MW photovoltaic park, as was originally planned, but to introduce a similar kind of technology instead without utilizing a substantial parcel of land in the process as was initially planned. Frames can be installed on the roof of the buildings.
Assuming sales of the entire residential sector can be achieved sooner than the 7 year span as was initially planned in the reports then the existing financial results will improve substantially.
The leading developers in the Paphos region are selling in the region of 100 homes per annum each. It will not be difficult for AD all residential sales to be completed within a framework of 4 to 5 years.
The report did not include at least, a net saving of approximate circa €1.9m p.a. (12%), current market prices, conservative estimates, on total average labour cost (payroll) of €16.1m p.a. due to the current financial conditions prevailing on the labour market.
A maintenance cost for assisted living was assumed €24.000 p.a. This is low in comparison to other European countries offering the same type of service. If it is assumed that the maintenance cost for assisted living will be increased to €36.000 p.a. then the accumulating gross income before tax will be increased by circa €1.6m p.a.
The medical sector comprises of a diagnostic centre, a rehabilitation hospital, a geriatric clinic and a special care sector. All these sectors provide a continuous and steady profitability which can be further improved to cater for additional specialized needs of many patients and introducing state of the art technology.
The rehabilitation hospital will be designed in such a way so operating theatres will be in place if the company decides adopting in its policy that certain operations will be undertaken.
The profitability of selling medicine to patients was not assumed in the analysis.
The areas which require further research are:
1 Grants and subsidies from the E.E.C.
3 Specialized assisted living services on offer.
4 Price and profit margins of medicine.
5 Energy and green technology.
6 Research and Development on the medical sector.
7 PLANNING PERMIT
There is not a planning permit yet of AD for four reasons. Firstly, it is not difficult at all to get the planning permit since there are laws governed as outlined in the Declaration Policy (Countryside) of the Ministry of Interior and the reports were prepared on this basis.
Secondly, a prospective investor might not adopt AD development policy per se since a number of changes are bound to be made to accommodate for his investment criteria. If the initial plan is submitted to the Housing and Planning Department for approval and then amendments are made the authorities will take much longer time to grant the planning permit as initially submitted.
Thirdly, the expenses involved will substantially escalate by submitting an amended report for planning purposes.
Finally, a prospective investor may opt to pursue a different altogether investment policy instead of pursuing AD. In other words, the investor might be interested to purchase just the company (or land) and proceed with a completely different project.
A notable example will be that international tenders will be invited by the government in the forthcoming months for a casino and peripheral development provided a minimum investment of €500 m, at current market prices, takes place and a prospective investor might pursue such a venture. The location of the land and its proximity to the Paphos International Airport make an ideal place for a casino development.
8 ADDITIONAL INVESTMENT
The following investment propositions were identified that can increase the profitability and asset value of the project:
A Adjacent Land
A Adjacent Land
There is a piece of land, adjacent on the west side of AD, of 139.000 m², that can be purchased at about €7 m at current market prices. In such a case, it will considerably increase the land size of AD accommodating to any future development.
A new master plan has to be designed taking into consideration the existing and future development of AD.
In such a case It will be advisable a unified master plan to be submitted for planning purposes thus saving time and expenses.
An office of 176 m², covered internal area, right in the sea front (prime sought after location) of Limassol can be used initially as AD head office. The asking price is €1 m at current market prices.