Several banks in Central and Eastern Europe have been preparing to become real estate operators in the last year by setting up private asset management companies to take ownership of underlying real estate collateral, according to a recent report from EMRE Capital Management.
“A number of bank websites feature growing lists of properties for sale, generally at prices that will not sell in today’s market,” said George Leslie, principal with EMRE Capital Management.
Real estate values, in general, have declined so dramatically that banks will post unsustainable losses if they try to liquidate collateral. “There are many cases in which the borrower’s equity has been wiped out, which is a very bad problem for banks when it occurs on a wide scale,” said Leslie.
Borrowers, some of whom have no hope of salvaging any part of their investments, have no incentive to manage cash flow or capital
value so the asset typically deteriorates rapidly if it remains under control of the defunct borrower, he added.
However, the CEE region does not compete well on the sub-performing or non-performing loan investment markets due to its relatively opaque legal systems and other market imperfections which impair liquidity and transparency.
So actually, though properties held in these vehicles are listed for sale, they may not actually be for sale until market conditions improve or some level of value-added has been implemented to enhance capital recovery for a bank, the EMRE principal said.