Great banks’ favours remain uncertain

Will banks be more willing to provide credit for real estate this year? This is something that remains to be discovered. The atmosphere is warmer, but we are unlikely to return to the hazy days of two years ago. Lending activity is still weak and money is more expensive – but there is no shortage of companies in need of it

Emil Górecki

The Polish government has had to “borrow” in order to close this year’s budget. The sale of PLN 60 bln of securities on the Polish market is planned in 2010. This will be bought by the financial sector, i.e. mostly by the banks. The relevant economic theory implies that the money spent on bonds will not be spent on credit. And a large amount of the latter goes to the real estate sector. Will government bonds now be in competition with developers and people interested in buying apartments in 2010? Fortunately, the Polish banking sector has been excessively liquid for a long time and there is still a lot of loose capital in it. “The planned budget deficit will not have a big influence on the level of lending activity from the banks. In my opinion the government’s offer in the form of treasury bonds does not clash with the funding of developers’ activities by the banks,” believes Jacek Furga, chairman of the Polish Bank Association (ZBP). As he explains, these are the domains of two completely different business sectors of banks. “Preliminary results for 2009 show that banks have already managed to accumulate sufficient reserves and have funds available for lending. A change in the approach of banks has been noticeable since at least Q4 last year. New advertising for mortgages has appeared and the credit on offer – so far only for individual clients – has become more and more attractive. The period of uncertainty has finished and the banks are more willing to provide credit both to developers and to individual buyers of apartments,” notes Jacek Furga.

However, there is the possible side-effect of the various sectors of the economy competing for bank money driving each other out of business. “Banks will try to diversify their credit portfolios in order to be safe. If in the past they were investing in the real estate sector, now when there are fewer funds and less belief, they might increase their financing of renewable energy or infrastructure projects – and quite possibly at the expense of real estate,” argues Marcin Dubno, director of property finance at Bank Zachodni WBK SA.

Mother holds the cash

Problems with financing could derive from a different origin. Most banks are members of international capital groups and act according to the real estate investment limits set by these groups, and this also applies to the Polish market. In the boom years banks even financed purchases of land for new projects. “Now they have to face a decision, which in fact is quite easy to make: either they will continue financing projects on plots paid for through debt, or they will not get involved, which might result in problems with the servicing of the loans that have already been granted. At this point in time, there is no possibility on the real estate market to recover the funds frozen in such plots by selling them,” Jacek Fruga remarks.

Such credit limits in Poland, for obvious reasons, are not a problem for PKO BP. The bank does not need to fear limitations imposed by the mother company. “We are able to finance even bigger development projects and we do not have any imposed limitations with regard to real estate funding,” asserts Tadeusz Swat, director of the residential department at PKO BP.

According to Marcin Dubno: “The credit limits that have been imposed are a problem for smaller banks or branches, as their policies are dictated by parent companies in Western Europe or the United States. In comparison, the big players that focus on Poland or Central Europe have a much greater amount of autonomy in this respect and much higher limits.” He goes on to add that the planned level of lending activity for real estate by BZ WBK will be a little higher compared to 2009, when only the loans for construction that were negotiated a year earlier in 2008 were paid out.

One argument in support of resuming such investment is the validity period of the building permits granted, which is two years. Their number dropped in 2009, but those issued in the “good old days” of 2008 are still in force this year. Consequently, either the construction work starts now or the permits expire.

Points for cooperation

The scale of bank financing of residential development projects has been relatively small in recent years. This could lead us to believe that bank investment in attractive treasury bonds should not significantly influence lending activity related to developers and home buyers. There should be enough money to satisfy both these needs. According to the SARFIN ZBP (a system of real estate analysis and monitoring which is used by banks to exchange information about the number and scale of residential loans granted), banks gave out nearly PLN 39 bln of residential loans last year. The residential development sector was granted PLN 3.8 bln in the same period. 
“Such a ratio has held for a number of years and clearly proves that developers still finance themselves mostly from advance payments – that is, through the debt incurred by individual clients. This is another reason why any decrease in the financing available for developers should not be expected,” adds Jacek Furga.

The most significant barrier to relations between the development sector and the banks could have been created due to the breaking off of cooperation between the two over the last few years. When developers were not forced to resort to bank loans, they were not subject to the strict verification procedures now applied by the banks. A loan application submitted by a client the bank does not know is therefore verified even more scrupulously and assessed with greater care. On the other hand, those developers that still have good relationships with banks, and have been scrutinised on a regular basis, have managed to build up a positive credit history, which will make their cooperation with the banks much easier in the future. This is important due to the fact that individual clients will not be so willing to invest in “holes in the ground”, preferring instead to buy homes that already exist. Financing development activity to a greater degree might now be a necessity. “Taking into consideration all the factors, one can expect that the scale of development project financing by the banks will be slightly higher compared to previous years. Financing development projects – particularly now – carries a relatively high risk, but everything depends on the condition of the borrower, their experience and the terms of the loan. However, in case of a shortage of funds for lending, the high profitability of development loans might be the key to an improvement in the financial results of the bank,” claims Jacek Furga.

As a result, verifying the credibility of a company without a credit history will take longer, so at the front of the queue for loans will be regular customers. This does not mean that there is no possibility of obtaining financing. “I would be more worried about the fact that a developer that did not apply for a loan for two or three years will want to obtain one under the conditions that were common during that period, and will prepare all its analyses and models on that basis. Any enthusiasm will, however, be dampened by the discrepancy between the developer’s optimism and the conservatism of the banks,” says Marcin Dubno of BZ WBK.

Uncountable credit

It is hard to assess the entire scale of real estate financing in Poland. Many foreign developers finance their projects through foreign banks, usually in their countries of origin. These transactions are not included in the statistics of the ZBP, the National Bank of Poland or the Polish Financial Supervision Authority. And the estimated share of foreign financing of real estate is substantial. The most spectacular commercial projects were financed or refinanced by foreign – mostly German – banks. In the same way, Spanish residential developers have turned to Spanish banks. “Perhaps this is the source of the rather weak correlation between the amount of credit issued to developers and that granted to individual clients,” stresses Jacek Furga.

Moreover, bankers want to lend more money. “Pentor, in cooperation with the ZBP, carries out a monthly survey of the economic situation in the banking sector. We observed the first positive symptoms in December last year, reflecting an improvement in the situation of the sector. Furthermore, the optimism over the prospects for the next year is the highest for some time. As many as 71 pct of bankers felt that the development of the banking sector in 2010 would be positive,” says Jacek Furga of the ZBP.

Many companies with foreign roots raise their finance abroad – but not all of them. This depends on whether they want to take on currency exchange risks and on the type of project – in fact, it depends on the currency in which the finished apartments will be sold. Residential developers tend to use local financing because their apartments will be priced in złoty. Commercial developers that sell or lease their space in shopping centres, office buildings or warehouses, demand payment in euro. This is why they are more likely to turn to Western European banks.

Conditions are the same, but more difficult to fulfil

Austrian-owned company UBM Polska is currently negotiating the finance for its Willa Galicja residential project with Polish bankers, and will also be going to the same source for the money to build retail parks in Lublin and Sosnowiec. The company has also received assurances about buying an office park project in Szczecin. “The offer is simply very advantageous for us,” reveals Peter Obernhuber, a board member of the company. “We operate in Poland and we settle most of our accounts in złoty, so we believe it is worth taking out loans in the same currency. The banks finally opened up to negotiations over financing several months ago, especially for strong, stable developers with a large base. However, they are insisting on bigger own-contributions, bigger pre-sales or more pre-leasing contracts. Only half a year ago, every bank was shutting the door between developers and investors,” claims Peter Obernhuber of UBM Polska.

PKO BP was the main player on the market for loans to developers and individual clients in the country. Outside the largest cities, activity on the market was relatively strong despite the difficult situation, and this is where the bank has the largest network of outlets. The sale of mortgages to individual people amounted to PLN 1 bln monthly, while the sale of investor credit for developers came to around PLN 200 mln. “The planned scale of lending activity this year is comparable to that of 2009. We have not observed a dramatic slump in terms of lending to developers at PKO BP that would be comparable to how other banks have acted. Have we regained our trust in borrowers from this sector? It is hard to talk about trust when it comes to development loans. Every loan application is considered individually. However, we have noticed some symptoms of a revival on the real estate market, so the number of “good” credit applications will for sure increase,” says 
Tadeusz Swat of PKO BP.

As he explains, the structure for financing development projects is different now compared to two years ago. Banks do not want to provide credit for plots of land anymore, preferring to finance development projects. The conditions for loans have not changed radically, but developers are finding them harder to fulfil. “During the boom, every developer was able to obtain the required level of pre-sales of apartments; but at the moment, this pre-condition has become prohibitive. Our bank has not changed the level of required own-contributions, or the redemption or grace periods, but projects with own-contributions higher than the basic 20 pct are valued more highly,” he adds.

Careful steps

BZ WBK now requires from potential borrowers a higher level of own-contributions, a higher level of pre-sales of apartments or pre-leases of commercial space, a good design and location, and a reputation for being a solid player. The commercial projects seen in a favourable light include office buildings and retail facilities. Mid-market residential projects in good locations can also count on financing being available, since they are the quickest form of development to find buyers.

Małgorzata Dłubak, the head of the public relations department at BPH Bank, part of the GE Capital Group, refused to discuss real estate financing in 2010. Maciej Popadiak of ING Bank Hipoteczny thanked us for our interest in the bank’s views; however, the numerous responsibilities of all the members of the board prevented them from any discussion of their plans for 2010. ν