In general, 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. This comprehensive, 50-page study by KPMG, interviewing bank representatives from European countries, assesses banks’ sentiment towards property financing and key financing parameters.
The respondents to the 6th edition of KPMG's annual study were representatives from over 90 financial institutions and 21 countries, including Romania. The surveyed economies were categorized as “dominant ”, “established ” and “other ” less established economies.
“Banks' sentiments are improving and they are becoming more willing to finance real estate projects” notes KPMG's Andrea Sartori, Partner and Head of Real Estate in Central & Eastern Europe, who also coordinated this year's edition of the Property Lending Barometer.
“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,” he adds.
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.”
The survey also offers an evaluation of the criteria that European financial institutions are taking into consideration when providing loans for property developments/investments.
“Most banks in our survey – regardless of which economy they're working in– emphasized that the projects they were willing to finance should bear a strong business model and be a high quality asset,” he explains. Sartori adds that while another criterion (second in the ranking); reputation and references of the developer/operator, was more crucial for dominant/established economies included in the study, the level of the owner's equity was more important (and the second priority) for less established economies.
“Our survey respondents report that they still prefer income-generating projects compared to new developments, especially in the dominant and established economies,” he explains.
Ori Efraim, Partner, KPMG in Romania, says: “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% per year over the next few years.”
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.
Including survey responses on the prospects and terms available to real estate developers and investors, Property Lending Barometer 2015 also contains valuable information for those seeking bank financing, offering specific information on the 21 surveyed European markets as well as respondents' expectations for the next 12-18 months.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have 162,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG in Romania and Moldova operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chisinau.