Critical conditions

Money does not grow on trees. Well, maybe sometimes it does – but in small amounts and not enough to build a shopping centre. We are left with falling back on traditional sources of financing – and at the moment these are rather unyielding. However, there should be enough money around for good projects. At least so the bankers are telling us
Emil Górecki

It is much more common in 2010 to hear of properties being financed or refinanced, such as shopping centres and retail parks, than it was a year ago. Moreover, the heads of companies in the sector and the banks are now making re-assuring noises that there will be a few more transactions of this kind before the end of the year.
It was July 2009. The banks tentatively started to unlock safes that had remained firmly shut since the onset of the credit crunch. But the main beneficiaries of the banks’ re-found largesse were office buildings. Hungarian developer TriGranit received a loan of EUR 150 mln for the construction of the Arena Centar shopping centre in Zagreb, with six banks from Italy, Hungary and Croatia contributing to the financing. This was the first significant loan agreement for a retail project since the crisis started. Others followed, including one for the extension of Galeria Echo in Kielce (EUR 100 mln from Eurohypo bank for Echo Investment), but the majority have taken place this year.
European distribution of favour
Negotiations between bankers and retail developer ECE Projektmanagement eventually bore fruit in the form of two loan agreements this year. In March, Berlin Hyp bank provided EUR 111 mln for the construction of the Galeria Kaskada shopping centre (43,000 sqm) in Szczecin. Some time later, at the beginning of October, the company managed to refinance Serdika Center in Sofia, which has been operating since March this year. The developer is to share the EUR 70 mln granted by the Bank of Austria with its partner for the project, Sparkassen Immobilien. “In both cases the terms of the loan were standard for the state of the market at that time. The loan was and still is expensive. You are virtually unable to negotiate the conditions offered by banks nowadays. You have to take them or leave them,” claims Karsten Hinrichs, the financial director of ECE Projektmanagement.
However, Karsten Hinrichs emphasises that there are significant differences in the opportunities for acquiring finance in different countries. In Russia it is theoretically only possible to receive loans from Russian banks, but the rather opaque and complicated procedures for doing so in practice prevent foreign players from accessing this finance. In Romania and Bulgaria, it is virtually impossible to secure such finance when it comes to large retail projects. The acquiring of funds for Serdika Center was the result of moves that were initiated much earlier. There are only a handful of banks in Hungary that could finance retail projects and just a few more in the Czech Republic. Poland is probably the easiest place to access finance in Central Europe. Acquiring financing for a good project in the West, however, no longer poses a problem. “There are only a few active players on the market willing and able to finance retail properties. At the moment we are negotiating a few loan agreements in the CEE region and Turkey. I expect more banks to become active in the market next year,” argues ECE Projektmanagement’s financial director.
We do not cure, we do not teach
What conditions do you need to fulfil for  BRE Bank Hipoteczny to grant you a loan for the construction of a shopping centre?  It depends. A bank can offer loans of between  PLN 8 mln and PLN 100 mln for a medium-sized project. A developer needs to be able to pay for 30-35 pct of the costs of the project from its own equity and has to be able to present evidence of preliminary lease agreements for app. 50-60 pct of the space on offer to show that the debt can be serviced. “Before 2008, we had a rule which said that we do not provide miracle cures: we did not finance projects that were launched under the assumption that ‘we will manage somehow’. Now we have added another rule: we do not teach. Our clients must prove their ability to build commercial projects, i.e. show that they have already developed at least one shopping centre. Before we used to think that if they had proved themselves in another line of business then they would also be able to carry out a retail development. The next difference is over the company’s own equity. In 2008 it was enough to have 15-20 pct. These days this is too little,” explains Sven-Torsten Kain, a member of the management board of BRE Bank Hipoteczny.
The criteria have been increased to the limit, but neither developers nor the banks will have problems in the future as a result. According to Sven-Torsten Kain, such a strategy is worthwhile because during the credit crunch none of the retail projects in BRE Bank Hipoteczny portfolio experienced problems. “Our plans for property loans in 2010 were drawn up in a conservative way, because PLN 500 mln is merely a quarter of what we advanced to developers in 2007 or 2008. We have already reached our targets. However, our ambition has been much higher, but the market is emerging from the downturn relatively slowly. This is not only because banks do not want to offer financing, but also because developers are launching new projects much more cautiously,” says Sven-Torsten Kain. He goes on to add that a total of  PLN 920 mln for lending to properties in each real estate sector for 2011 has just been approved by the management board.
Who can count on the money?
“I’ve recently noticed a considerable improvement in the relations with banks and financial institutions. In the recent past I participated in a number of meetings in which bankers questioned the credibility of some of our partners who were among the biggest global retailers. It’s funny because sometimes they were bigger and richer companies than the banks themselves. Fortunately, the first examples of financing are now appearing. Good projects with the required number of preliminary lease agreements can finally be built,” observes Grzegorz Mroczek, the commercialisation director of Caelum Development.
He admits that his company was very lucky not to be building any projects during the crisis. Two of their schemes – Galeria Wisła in Płock and Familia in Gdańsk – had been opened before the crunch. “The pace of construction was very rapid and generated a certain amount of costs. However, the fact that we managed to complete the projects has paid off handsomely. We suspended the construction of one project, the Nova Park centre in Gorzów Wielkopolski. This was quite frustrating, but looking back on it some months later it proved to be a good move for the company. We had started this project financing it with our own equity and were planning to acquire a loan in the course of the construction process. Unfortunately, at the end of 2009 this was no longer possible. We are currently in the final stage of acquiring funds for the remaining part of the project and are planning to re-launch its construction as soon as possible,” says Mr Mroczek.
Is it easier to secure the finance for a project in a big city or a small town? According to the people we spoke to, this is an issue of secondary importance, because banks are only putting their trust in projects. The number of inhabitants of a city or town is beside the point. Some big cities in Poland have very high retail space saturation, so every new retail project will be very risky in such locations, whereas smaller towns are often desperate for new retail space.
Waiting for better conditions
According to Grzegorz Mroczek, developers are currently applying for smaller loans. “A loan is still more expensive than three or four years ago, but much cheaper than at the peak of the crisis. Margins and bank costs are becoming more civilised, but we are waiting for a further improvement in the financing and refinancing conditions for properties in our portfolio,” reveals Mr Mroczek.
Irish Development Group is currently preparing four retail projects: in Legionowo, Toruń, Łomża and Białystok. It is planning to start negotiations for the financing of the Toruń centre by the end of the year and is looking for partners for the other three projects. According to Padraic Coll, the president of the management board of the company: “We are counting on the fact that it will be easier to obtain a loan for a project by the end of the year because refinancing is not so difficult.”
Bankers are slowly starting to behave in a manner that suggests the credit crunch is now behind us. They are still looking at the quality and profitability of projects, which is in fact a healthy foundation for development operations. “Negotiations with bankers at the moment involve the formation of cautious partnerships. The crisis of trust is passing; nonetheless, the parties are still not equal partners. Decisions are now being taken faster and negotiations are carried out in a better atmosphere. Financing small, cheaper facilities is not a problem anymore provided they have been designed well and have the right business plan.  In the case of bigger ones, the situation is more complicated,” explains Grzegorz Mroczek.
The representative of BRE Bank Hipoteczny believes that all the talk of arrogant bankers that could be heard a few months ago was grossly exaggerated. According to Mr Mroczek: “Banks make profits from lending money to entrepreneurs, so they at least have to have appropriate relationships with them. Today’s conditions are harder to fulfil so they have to be communicated in a suitable way. Banks must be honest and firm with clients when the market situation and the risk level do not allow for the financing of a given project. Building long-term relationships with clients requires a professional approach, and there is certainly no place for arrogance here.  If a client accuses us of trying to deprive him of development possibilities we say that we are in fact trying to protect them from the risk.”
The ones who kept the faith
Development and investment group Mint Investment is one player that has kept its faith in the potential of the four countries of the Visegrád Group. Together with the Avestus Capital Partners investment group it is just preparing to launch a new closed property fund, Mint Central Europe Property Fund (MiCEPF), which will focus on office buildings and retail facilities. They are looking to raise EUR 150 mln for the fund, which including leverage would have EUR 450 mln for acquisitions. The strategy of the new fund is to buy projects and finished facilities out of which it will be possible to squeeze additional value – through the renegotiation of contracts, rebranding or an improvement in their space efficiency. Sebastien Dejanovski, a partner at Mint Investment and responsible for expansion and development, feels that the trust in retail facilities is rapidly returning in the region. “One example of this is our project in Opava in the Czech Republic, which we are preparing for construction. We have obtained all the permits necessary for the launch of the construction work, we have signed all the required preliminary lease agreements and we have obtained a bank loan as a result,” he says. The EUR 450 mln target will be split between retail and office facilities, optimally with each receiving half of the funds. “Retail properties are slightly more risky at a time of crisis, but bring more profits during times of prosperity. Office buildings will stabilise our portfolio,” – is how Sebastien Dejanovski explains the diversification strategy. “The probability that we will buy a stable shopping centre in the centre of a big city is very low. They are usually very good projects which do not offer any possibility of adding to their value. We are instead targeting facilities with moderate competition located in regional cities,” he adds.
Bank Zachodni WBK stipulates similar terms for loans for retail projects to developers: attractive locations, low competition, solid experience, preliminary lease agreements for app. half of the area, 30-35 pct of own equity and standard securities: on the mortgage, on shares in an SPV company and on leasing contracts. “We did not finance any new projects until the end of Q1 this year. Banks do want to finance but they will examine each application thoroughly, so it is harder,” admits Marcin Dubno, head of the corporate banking department at BZ WBK. He goes on to add that hopes for a good 2011 are even higher. Retail properties are among the most attractive areas of financing for this bank. “We are not afraid of projects in smaller towns, even below 100,000 inhabitants,” admits Marcin Dubno.
Faith in the real economy
Nearly all bankers are scared stiff of discussions about the interest banks are putting on loans for retail projects at the moment. “Interest rates are established individually for each project. Of course they are higher than before the crisis, because the cost of liquidity has grown. In the case of our bank it is the cost of deposit protection,” explains Marek Koziarek, managing director of the commercial real estate finance department at Bank Pekao.  He goes on to add that the institution looks favourably at retail projects because the sector coped superbly during the credit crunch. “Centres and retail parks constitute app. 35 pct of our portfolio of real estate loans. The vast majority is construction rather than refinancing. We prefer to invest in the sphere of the real economy. Financing a construction equals work – not only for the borrower but also for all the companies involved. Statistically, one third of these companies are clients of Bank Pekao, so the money paid out in loans comes back to us indirectly, increasing the demand for our bank services,” explains Marek Koziarek. His expectations for 2010 are more cautious, however. The experts admit that we should not expect a return to the unhealthy financing environment of before the credit crunch any time soon. Developers are complaining that the access to financing for retail projects is too low at the moment and that banks’ restrictions are too severe. Their only solace lies is the fact that banks do not make profits from keeping money in safes, but from employing it. ?
Bank archive
April 2009
Bank Pekao provided a EUR 39 mln investment and construction loan for the Galeria Mazovia project in Płock. The borrower was Lewandpol.
July 2009
TriGranit was granted a loan of EUR 150 mln for the construction of the Arena Centar shopping centre in Zagreb, which is to be opened in November. It was issued by six banks: Intesa Sanpaolo, Erste Group, Hypo Investment Bank, Cassa di Risparmio della Repubblica di San Marino, MKB Bank and CIB Bank.
In Poland, Galeria 7, a subsidiary of National Investment Fund Octava, signed a preliminary loan agreement to finance the Magnolia Park Wałbrzych shopping and entertainment centre. The lender remains unknown.
TK Development obtained a EUR 27 mln loan from Bank Pekao for the construction of Galeria Tarnovia in Tarnów.
August 2009
GTC and Unibail-Rodamco concluded an agreement with a consortium made up of Berlin-Hannoversche Hypothekenbank and Westdeutsche Immobilien Bank on refinancing the Galeria Mokotów shopping centre in Warsaw. The value of the loan, which was granted for five years, amounts to EUR 205 mln.
October 2009
Echo Investment concluded a loan agreement worth EUR 100 mln with Eurohypo bank to finance the Galeria Echo shopping and entertainment centre, which is being emlarged in Kielce.
November 2009
Deutsche Pfandbriefbank and Westdeutsche ImmobilienBank AG provided Arka Property Funds with EUR 48.5 mln. The money was used to purchase the second stage of Alfa Shopping Center in Olsztyn and to refinance a previous loan taken out for the purchase of the first stage of the centre.
January 2010
Multi Development received a loan of over EUR 98.47 mln for the construction

of the Nova Karolina shopping centre in Ostrava. Four banks granted the loan: Česká Spořitelna, ČSOB, HYPO Investmentbank and KBC bank.
February 2010
German bank WestImmo financed the purchase of two Polish shopping centres by MGPA Europe Fund III from Mayland Real Estate: Karolinka in Opole and Pogoria in Dąbrowa Górnicza. The value of the loan was EUR 119.8 mln.
March 2010
German bank Helaba signed an agreement with Immoeast over the refinancing of two facilities: Silesia City Center shopping complex in Katowice and two office buildings in Warsaw. The value of the loan came to EUR 250 mln.
Bank Pekao provided a EUR 53.5 mln construction and investment loan for Braaten+Pedersen. The loan will be invested in the construction of the Agora Bytom shopping centre.
May 2010
San Development (a subsidiary of P.A. Nova) concluded an agreement with  PKP BP according to which the bank has agreed to issue a loan of  PLN 89.3 mln for co-financing the construction of the Sanowa shopping  centre in Przemyśl.
July 2010
AFI Development signed an agreement with VTB Bank on increasing a loan for the construction of the Mall of Russia shopping centre in Moscow. The value of the increased loan amounts to RUB 8.448 bln (over EUR 215 mln). The redemption date was postponed until August 2013 and the interest reduced from 16 pct to 13.25 pct per annum.
September 2010
Rank Progress concluded a building loan agreement with Bank Pekao amounting to over PLN 23.2 mln and an investment loan agreement for over EUR 5.5 mln. Both loans will be used for the construction of the Park Handlowy  Twierdza retail park in Kłodzko.