Lending to European Property Developments Facing Double
Dip, EC Harris Report Finds
27 September 2011
- 45% of European bankers believe they are
unlikely to increase lending to speculative property developments
over the next five years
- Fear of adding to distressed asset
burden making riskier projects less attractive
- Pre-let office and retail developments most
preferred asset types for lending
European banks have been more active in
lending to speculative property developments over the past year,
however this upward spike looks like being short lived according to
the third annual European Property Finance Trends report
from EC Harris, the international Built Asset Consultancy.
The research found that nearly half (45%) of
property lenders at European banks are likely to either lend less
(22%) or maintain the same level of lending (23%) over the next
five years. This was worse than last year when only 3% stated
they would lend less, and 29% said they would lend at the same
level.
Office (28%) and retail (26%) development
projects are lenders’ most preferred asset types. Tier one
cities such as London, Frankfurt and Paris are deemed to be most
attractive for offices due to their healthier economic growth
boosting demand. Tier two cities including Poznan and Wroclaw
in Poland and Lyon and Lille in France are attracting increased
volumes of lending to retail projects. PPP and student
accommodation projects have dropped in popularity as public sector
spending falls away. Only 6% of lenders said they preferred
PPP projects and just 3% preferred student accommodation down from
15% (PPP) and 11% (student accommodation).
Matthew Cutts, Head of Lenders and
Investors at EC Harris said: “We are seeing a crisis of
confidence amongst the European banks at the moment. Very few
are lending speculatively and this is leaving many projects unable
to get off the ground. Lenders are waiting until the eurozone
situation improves, but with this likely to take some time, lenders
and developers need to work together to find new ways of convincing
credit committees to accept manageable project risk.”
More than two thirds (63%) of those surveyed
also said that they preferred to lend to their home market rather
than abroad. Among the reasons given for this were stronger
relationships with developers and a greater understanding of that
market.
There was also concern that the requirement to
hold a greater amount of reserve contained within the Basel III
accord is having a detrimental affect on lending. While investors
understand the need to remove ‘bad’ assets from their books, this
is proving difficult in the tough economic climate, the report
said.
Lending preferences
Nearly all (97%) of respondents stated that
they were more likely to lend to projects that were pre-let, rather
than speculative as these guaranteed cash flow. Almost half
(48%) of lenders had a preference to lend to projects with equity
joint venture partners in the form of investment funds as these
bring control and governance to a project. Alternative
sources of finance such as mezzanine (28%) and corporate or project
bonds (22%) were predicted by many lenders, particularly those in
Western European banks, as becoming more prevalent in the
future.
Matthew Cutts continued: “Risk can be limited
by securing pre-let, but this requires significant investment from
the developer. The flexibility that joint venture equity projects
allow is certainly attractive to banks, however spreading the risk
may ultimately result in reduced margins. We are seeing a
number of innovative deals in the market at the moment which are
helping to secure funding, demonstrating that there are
opportunities there for those willing to do things
differently.”
EC Harris has identified a number of
strategies available to lenders and developers looking to finance
projects in Europe, these include:
- Use of statistical analysis of successful
projects and business plans
- Ensuring there is sufficient financing in
place through alternative sources of funding such as joint venture
equity or mezzanine finance
- Lenders should provide earlier feedback to
developers on their business plans for project developments
- Lenders should accelerate the work out
strategy for their distressed assets to allow them to lend
elsewhere
- Developers can remove as much risk as
possible from the project, through securing pre-lets for
example
- Developers and lenders should build closer
and longer term relationships between each other
- ends -
Notes to editors
About European Property Finance
Trends 2011
The findings in this report are a result of
interviews carried out by experts from EC Harris’ Lenders &
Investors team with property lenders throughout Europe - from tier
1 global banks to local regional banks. EC Harris interviewed
31 property lenders and brought together insights from across
European markets - the UK, France, Spain, Italy, Germany, Austria,
Serbia, Hungary and Poland.
For further information and a full copy of the report
please contact:
Eamonn Collins
EC
Harris
+44 (0)20 7812 2671/+44 (0)7713 639841
eamonn.collins@echarris.com
Simon Pugh, Account Manager
Weber Shandwick
+ 44 20 7067 0320 / +44 7762 657 280
spugh@webershandwick.com
About EC Harris
EC Harris is an international Built Asset
Consultancy, advising clients in the planning and execution of
strategies that deliver the best results from money spent on their
built assets. The firm has 40 offices in 28 countries
employing over 3,000 people worldwide. Group revenue in
2009/10 was £270m ($432m). For further information visit http://www.echarris.com/