The financing of Central and Eastern European real estate has shown signs of improvement over the last 12 months but the situation remains uncertain. There has been a significant increase in real estate investment transactions compared to 2010, but the performance of real estate has varied greatly across the different countries and asset classes. According to KPMG’s new publication CEE Property Lending Barometer 2011, banks are still cautious about a recovery of the real estate market, with the possible exception of Austria, the Czech Republic and Poland, where comparatively, the market has not suffered to the same extent as in other countries from the crisis. KPMG conducted the survey amongst over 50 leading banks in the region, to assess the prospects for bank financing in the CEE real estate sector.
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.”
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.
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.
Sartori says “In Hungary, banks are more open to finance income-generating projects than they were 12 months ago.” (Citation of local Real Estate Country Head)
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.
“Bank financing will play a vital role in the recovery and for the development of the real estate sector in the region,” contends KPMG’s Andrea Sartori. “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.”
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.