- 18 Dec 2012 8:00 AM
In one capital city in Central & Eastern Europe (CEE), a white concrete foundation sprouting iron rebar sits silently, patiently waiting for construction workers to return and finish the stalled asset: a new office building.
“They couldn’t find enough tenants to guarantee repayment of financing within a reasonable time,” explains KPMG Partner Andrea Sartori, Head of Real Estate, Leisure and Tourism in CEE. “So they froze it,” he says of the project, “deciding that if the market went up again they could continue building it. This has happened in many countries in the region – it’s true.”
Quiet construction sites are an apt illustration of the region’s lack of finance for the real estate sector. According to the findings of the third edition of the annual survey released by KPMG’s CEE Real Estate Advisory practice, the CEE Property Lending Barometer 2012, a survey of banks on the prospects for real estate sector lending in CEE, banks in the region are indeed focusing less on real estate financing.
“The survey results have made us wonder if another cycle of the crisis is about to begin,” Mr. Sartori continues. “Last year, we thought maybe we’d seen some light at the end of the tunnel; now we’re not so sure we’re not entering another tunnel.”
He notes that in some countries, survey participant bank representatives have even expressed they want nothing to do with real estate projects.
The KPMG’s Property Lending Barometer, conducted this summer, surveyed 35 banks that are active in the CEE real estate market. Survey participants came from Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovenia and the Baltic countries.
Not all is doom and gloom in CEE. The authors of the survey would like to emphasize that Poland and the Czech Republic are in better shape in this respect – a trend which has not changed. “Poland is a bit of an exception, as the country has never experienced negative GDP growth during the period of the international economic crisis. The size of their domestic markets also helps.
“In other countries, we don’t really see this changing in the next few years.
In Hungary, the uncertainties of macroeconomic outlook did not help the real estate sector recover. It may take another year or more to see any sustainable improvement in the financing conditions of the sector” he says.
Andrea Sartori says that the hotel and leisure sector has been the most impacted by the downturn, but that CEE banks’ willingness to lend is still determined by how good a project it is.
“If you build an office or residential structures that serve a particular need that’s not being served by existing supply, then you have a business case. For example, in some CEE countries there is demand for specific residential buildings but there’s no supply for that particular type, so if someone is going for that specific type of project then they can acquire financing.
“Still, in general, it’s a question whether real estate projects have a positive future in the near term, or whether they will cool down again.”
The effects of the euro crisis upon the real estate market in CEE have been palpable, he says.
“Yes, because the general risk perception has increased and this doesn’t help in financing. Also, in many countries foreign currency loans are typical, like in Hungary. And as a consequence, those people that took out foreign currency loans now have to pay more back to the banks, and this doesn’t help because they might default on their payments. Then the bank might take over the property, but what can it do with it?”
One of the most crucial points from the survey’s findings, Sartori says, are the interest premiums, which have increased – not good news for the property development industry in Central & Eastern Europe.
In addition to an overview of the CEE real estate market, the KPMG survey also covers aspects like management of impaired loans, overall prospects for banks’ real estate portfolios, and opportunities for financing new real estate projects.
Regarding the last aspect, the report notes banks’ preference for income-generating properties, i.e. those properties that have been built and are being used, over new construction projects.
“They are already there and generating income,” Sartori explains of income-generating projects. “So there’s already a user who’s paying rent and much less risk for such projects because there is no development risk and a performance track record exists.”
Early stage investment, he explains, is of course high risk.
“Because you don’t know if it will find the right clients - when it goes to the market, will it be ready on time and within budget? So there are a lot of risks associated with such projects. If a bank is financing that project, they price it accordingly: If it’s high risk then they ask for higher margins.”
According to Andrea Sartori, general market conditions need to improve in CEE before the real estate sector can regain its footing.
He concludes, “It’s not really country specific – neither the real estate developers nor the banks are in a position to change things themselves. If the economy improves and enterprises become more successful, people will have more money to spend, their interest in new real estate will increase, and that will help to improve the business case for these real estate projects. If that’s good, then banks are always happy to finance them. That’s the trajectory that we envision.
“In general, if you have good projects you can still find financing for them. This has been the case for the past few years, showing that developers are still capable of implementing projects even under the current circumstances,” adds KPMG’s Andrea Sartori.
Methodology: The Barometer includes input from 35 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: the Baltics, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia and Slovenia.