“2011 lending trends show banks and investors looking for quality in their portfolio as they target only proven performing markets, alleviating as much risk as possible,” says Andrea Sartori, Partner, Head of Real Estate, Leisure and Tourism in CEE. “This search for quality assets has produced a mixed picture in the region. Investors are looking at the political and economic situation of each individual country and are still cautious to invest in markets as being more risky.”
Sartori continues, “While the banks still have strict criteria for lending and debt financing is still problematic for many investors and developers, there have been signs of improvement in their appetite for real estate financing over the past 12 months. However, the markets are currently volatile with negative investor sentiment regarding the Eurozone due to increasing European sovereign debt concerns and a strong Swiss franc. This can have a considerable impact on the CEE where there is a high level of both government and household borrowing in foreign currencies.”
Restructuring as an opportunity to manage impaired loans
Compared to 2010, a greater number of banks in all countries believe that in the majority of cases, impaired loans may be managed successfully through restructuring. The results of the survey confirm that banks are doing their best to actively manage their real estate loans, as the percentage of impaired loans has not changed since last year. However, it is not clear whether restructuring might be a long-term solution or just a temporary one.
A primary precondition before any restructuring is the cooperative behavior of debtor companies’ management. Once this condition is met, a strong business model is the most important factor to drive successful restructuring in all countries, followed by additional equity.
Overall prospects of banks’ real estate portfolios
Real estate projects are strategically important to banks as none of the survey participants in any country indicated they had significantly low importance. However, the level of importance varies from country to country which may suggest that banks are cautiously positive about the long-term prospects of the real estate market, but they are continuing to monitor developments. This may also reflect the fact that a number of banks have significant non-performing real estate loan portfolios that they have to manage.
Overall, the financing of real estate in CEE has shown signs of improvement since last year, concentrated on income-generating prime assets in better performing countries. Poland stands out from the other countries in CEE, as banks are more open to finance new development projects than income-generating properties.
In general, responses seem to link the prospects for real estate financing with the general macroeconomic outlook in each country. Hence, Austria leads the field, followed by the Czech Republic and Poland.
“In Hungary, banks are more open to finance income-generating projects than they were 12 months ago,” Sartori says.
Opportunities for financing new real estate projects
The majority of surveyed bank representatives were neither clearly open nor explicitly negative about financing real estate projects. However, their approach to providing financing for real estate development projects varies greatly across the region.
In terms of sector preferences, these are inconsistent and vary from country to country. In Hungary and Serbia, retail is the first priority, whilst in the Czech Republic, Poland and Romania the office sector is the most preferred. In Austria the office, industrial and retail sectors all share a similar degree of bank interest. In Bulgaria, Slovenia and the Baltic countries, the industrial/logistics sector is at the top of the priority list, whilst the hotel/resort sector is generally the least preferred sector, except in Slovenia.
In terms of criteria before providing financing, participating bank representatives expressed that a strong business model and the high quality of assets were the most important considerations, together with the level of equity provided by a developer or investors.
Conclusions from the CEE Property Lending Barometer 2011 include:
- The prospects for the real estate market in a given country remain generally linked to its macroeconomic outlook.
- Banks are still looking to restructure existing loans which are in default, rather than seeking foreclosure. Higher quality projects with a potentially strong business model have a better chance of successful restructuring.
- Basel III is likely to make bank financing more expensive.
- Compared to a year ago, banks are focusing more on real estate financing.
- Banks are still more interested in financing income-generating projects than development projects, even if their openness to finance new developments has increased in comparison to 2010.
- Bank expectations on the potential increase in the size of their future loan portfolios are distinctively improving.
- The hotel sector remains the least preferred by banks in terms of financing, but again good projects can obtain reasonable terms for financing.
- The Czech Republic overtook last year’s best performer, Poland, in the results of the Property Financing Sentiment Index, but is still second to Austria, which is included in the survey this year for the first time.
“Bank financing will play a vital role in the recovery and for the development of the real estate sector in the region. Overall, the results show that there is financing available for high quality real estate projects, and the financial sentiment is more positive in countries that have a more solid macroeconomic performance. However, despite these positive signs, there is still a great amount of uncertainty ,” contends KPMG’s Andrea Sartori.
Notes to editors:
- Methodology: The barometer includes input from over 50 banks active in real estate in CEE. Mainly through in-depth interviews, representatives of leading financial institutions have provided their views on the key issues affecting property lending. The following countries were included in the KPMG survey: Austria, the Baltics, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia and Slovenia.
- Property Financing Sentiment Index
As a conclusion of our survey, we have prepared an index – the Property Finance Sentiment Index – to depict how positively banks approach financing real estate projects in each country covered by this survey.
The index is calculated using responses covering 10 issues of the survey. As is apparent from the Index, Austria leads the pack, with the Czech Republic and Poland following closely behind. In these countries, banks are more positive about financing real estate projects than elsewhere in the region.
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