Property lending leaps forward across Europe

Newsroom 08/10/2015 | 13:24

Bank financing of property investment and development projects has taken a “big step forward” in Europe, according to a recently released survey by KPMG, Property Lending Barometer 2015. 90 financial institutions in 21 countries, including Romania, were interviewed to assess banks’ sentiment towards property financing and key financing parameters.

In 2014 Romania was the third most active market within the CEE with EUR 1.3 billion total investment volume, nearly three times the volume posted in 2013. The first half of 2015 property investment volume was estimated at approximately EUR 190 million, which is a significant decrease when compared with the same period of 2014. However, a strong second half is expected as there are a number of ongoing deals which are set to be closed during this period.

Prime yields in Bucharest decreased since last year (by approximately 25-75 basis points). Currently, the yield expectation for offices is 7.75 percent, for retail: 7.75-8.00 percent and for logistics: 9.25-9.75 percent.

Bank lending is recovering gradually in Romania with lower borrowing costs and better availability of financing. Both the improvement in banks’ capital positions (by selling their non-performing loan portfolios) and an improved economic climate have contributed to this trend, which is expected to continue in the near future as well.

Among the alternative lenders, banks consider private equity as their biggest competitor followed by non-local commercial banks and investment banks. All of the surveyed banks indicated that real estate financing is strategically important to them. Two thirds of the banks indicated openness towards financing both new developments and income-generating projects, the rest indicated only minor interest.

The distribution of total loan volumes provided by the banks in the last 12-18 months between new developments and income-generating projects was 23 percent and 77 percent, respectively. Banks indicated that the average loan deal size was in the range of EUR 7-17 million, while the preferred size is slightly higher at EUR 8-20 million. This year all of the surveyed banks indicated that the level of provisions in the bank sector is adequate or even slightly high, which is a positive shift since last year, when some banks deemed it too low.

“Tax cuts and a favourable labour market enhance positive consumer sentiment, while banks show confidence in expansion in the near future. However, banks in Romania have differing views on the prospects for the sizes of their own and of the whole banking sector’s loan portfolio over the next 12-18 months. The majority of Romanian respondents forecast an increase both in the size of their own and the whole banking sector’s portfolio, while some banks think that these will decrease slightly. The answers suggest that most banks are confident about the expansion of the loan portfolio in the near future, building on the recovering economy, which is expected to grow at a rate of 3-4 percent per year over the next few years,” says Ori Efraim, partner for KPMG in Romania.

Overall, the economic conditions have become more favourable in Europe since last year with improved outlook and less restrictive business sentiment. 2014 was a turning point in Europe since the onset of the global financial crisis. It saw both economic growth and the long-awaited boost in most of the real estate markets. According to analysts’ projections, growth is expected to further strengthen during 2015 with easing credit standards and downward pressure on margins across the markets. Even though there are positive improvements in bank financing it is considered to be still tight in comparison to the pre-crisis level. The current uncertainties about China’s slowdown, the Greek debt crisis and the tension between Russia and Ukraine might threaten the positive business sentiment in Europe.

“Europe is seeing record low interest rates, as well as an asset purchase program initiated by the European Central Bank, which is expected to enhance the liquidity position of banks. There is also increased competition that banks are facing from alternative lenders such as private equity/debt funds and investment banks.

As a result investors are snapping up the choice products on Europe’s property markets, especially in more established economies,” KPMG’s Andrea Sartori, partner and head of real estate in Central & Eastern Europe said.

Meanwhile, banks in the less established markets appear to still be facing difficulties caused by the sizeable proportion of non-performing loans in their loan portfolios, according to KPMG’s report.

The recovery in real estate lending, according to the report, is most tangible in the more developed European economies; less-established economies, it adds, are still under pressure to deal with the damage caused by the global financial crisis. Banks in other less established economies such as Serbia and Croatia exhibit a larger proportion of impaired loans, which has made banks more careful about lending to the real estate sector.

KPMG’s Andrea Sartori points out: “Due to this large proportion of impaired loans, so-called other economies, as outlined in our study, could very well be potential targets for those looking to pick up distressed loan portfolios.”

Among criteria that European financial institutions are taking into consideration when providing loans for property developments/investments are the business model and quality asset, the developer’s reputation and equity, while still preferring income-generating projects compared to new developments, especially in the dominant and established economies.

Another interesting finding from the KPMG survey is that the residential sector is the preferred asset class for banks in the case of development financing in dominant/established economies, followed by retail, office, and industrial space. In other less established economies, however, office space ranked 1st, followed by retail, residential and industrial. The Property Lending Barometer finds that lenders are the more interested in financing hotel projects in countries heavily reliant on tourism, like Greece or Cyprus.

KPMG is a global network of professional firms providing audit, tax and advisory services operating in 155 countries and having 162,000 professionals working in member firms around the world. KPMG in Romania and Moldova operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chisinau.

Natalia Martian

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