How will developers get back into the game in Warsaw? What will their strategies be?
Smarter land option agreements and phasing of office developments over time will become more prevalent. As the market bottoms, you will see long-term leases entered into in the city center. Mokotow will have its challenges unless [a project has] a good location regarding amenities and transport; 15k is a good size. The leasing risk for larger projects is a big factor. As such, the only larger projects which will appear will have either a substantial prelease or be heavily equity funded. Real Estate Finance International, Deutsche Pfandbriefbank.
What are the biggest structural changes currently taking place in the banking sector, especially as they will impact on commercial real estate financing in CEE?
The financial crisis has led to significant changes in the funding structure of banks, amongst others the German banks, who have traditionally provided the bulk of real estate financing in CEE. During the crisis, the German covered bond market was virtually the only funding instrument which stayed intact. Deutsche Pfandbriefbank will use this instrument as its predominant funding instrument and is committed to continuing to provide services to its customers in CEE. But even today uncovered funding for real estate lenders (i.e. funding outside the covered bond eligibility) remains expensive and limited for all lenders. As a consequence, LTVs remain in general closer to covered bond funding level and between 60 and 65 percent. Funding above that level will continue to be very expensive for banks if it is available at all. It is important to understand that this constraint comes from the funding side and not from the risk side. However, Deutsche Pfandbriefbank has access to a wide network across the global organization which allows sourcing of different kinds of debt to fill funding gaps at stretch senior, mezzanine and preferred equity levels. The combined underwriting capacity with such partners enables us to jointly go higher up the risk curve beyond the portion that covered bonds be associated with.
How has the business environment changed over the past six months from a lending point of view?
In Poland, drastically. Some six months ago, there had been hardly any financing available, except for Hypo Investmentbank, for example, although there were some signs of recovery. Since October 2009, German banks became active and offered unexpectedly good conditions to investors making them available to carry out transactions. As a result, yields dropped drastically compared to the perceived valuation yields some months ago. As a result of too much money chasing too few investment opportunities, the safe haven of Poland will become a nightmare. This scenario will be repeated in the rest of Europe.
In CEE, although there are some signs of more interest, lenders are still less active due to the macroeconomic situation of more countries, but there are still significant differences between Romania and the Czech Republic.
What are the biggest risks in your opinion that remain when considering development financing?
When considering developments probably the associated risks are completion and letting. In a fragile environment when many firms can go bust, the risk is about completion and whether a general contractor can finish the job. You can hedge against this risk by getting a completion bond. This will protect you against the risk that you need to replace your contractor. Cost overruns are usually covered by the guarantee of the project sponsor. The latter was less of an issue when construction costs were going down during 2009 as a lack of construction projects created severe competition among the construction firms. However, construction is for future tenants. The question is always: will there be any tenants at all to produced enough cash flow to cover at least debt service? What if potential tenants engaged in preletting don’t survive until completion? There is no instrument to hedge against this risk within the framework of non-recourse financing.
How confident are you in the ability of banks to handle their CEE/Polish RE portfolios without resorting to foreclosures?
I think the most difficult part of the crisis is over. Most of the projects which survived will probably manage to continue. If they have to foreclose, there will be a bit stronger demand.
What factors could prevent residential prices from rising over the next couple years? Is it only incurable optimists who think that banks, developers and customers have learned their lessons?
I don’t believe that clients have learned many lessons. Most clients are taking the maximum the banks offer. The real question is whether banks have learned
