We can rebuild you

Even though the  European Bank for Reconstruction and Development has been providing finance for real estate projects since 2001, it wasn’t until recently that the  bank emerged as the go-to partner for troubled developers. Sylvia Gansser-Potts, director of the EBRD’s property and tourism division, explains to ‘Eurobuild CEE’ what has changed over the last 18 months and why not everyone is getting a slice of the  cake

Mladen Petrov, ‘Eurobuild CEE’:  Journalists covering real estate and finance these days are tending to make the same observation: that the EBRD has emerged as an important player on the market. As press releases about new loans keep coming in, one wonders what has changed and why has the bank become so active now?

Sylvia Gansser-Potts, Director Property and Tourism Division EBRD: As a team we have committed about EUR 2 bln so far since 2001. On an annual basis we would normally commit around EUR 200  mln. By all accounts it is not big proportion of the bank’s business. Nevertheless, it is true that in the last 12-18 months, because the  commercial banks are staying out, we had to be more active, as we are one of the very few lenders remaining on the market.

Does being an active lender on the market also mean you have more money at your disposal now?

No, not really – at least for our division. Nevertheless, across the region the EBRD has been very active helping clients who are both suffering due to the crisis and from the lack of available finance. In 2009, the team closed 13 deals worth a combined EUR 207 mln in Albania, Armenia, Georgia, the Kyrgyz Republic, Moldova, Romania, Russia and Ukraine. We are seeing a lot of demand for finance and many proposals coming to our desks. But as we have a limited amount of resources we have to be selective and establish priorities. We have to bear in mind that the bank has a highly diversified portfolio and it has to support other sectors too.

Fair enough. What priorities have you set and who are the lucky winners – the investors who are signing contracts at the end of the day?

Location-wise we are obviously trying to cover the whole region we are present in: the CEE region, the Balkan states, Russia and the other CIS countries. But what we are doing is looking at cities and regions that are less developed. This is why you won’t see us financing projects in one of the most developed CEE markets. It is our policy to reserve our resources for the markets that are not seeing a large flow of investment. Just recently we financed a shopping centre in Russia, which, however, was not located in Moscow or St Petersburg, but in Novosibirsk in Siberia. It was a project half-completed before the crisis. They had the financing in place, but the crisis changed their plans. Generally speaking, we are active in all the sub-sectors of the market. It all depends on the region when it comes to the sub-sector we are to support – in Russia we have been looking at logistics projects, but we also believe there is the potential for a mid-market hotel concept in regional cities.

I see some big international players on the list of your clients. What are the chances of small local companies getting you interested in their projects?

We work with both big international companies and local players. One of the great benefits of having a local presence is the fact that it is easier for local investors to access us in their own country.

Russia, Moldova, Croatia… I am listing just a few of the countries where you have recently acted as a lender for real estate projects. There aren’t any Central European countries on the list. Given the conditions and the limited resources of the bank, does this mean that in 2010 these countries will still be off the list?

We have two types of activity in the region. We do direct financing in the form of lending or equity investment, but we also provide funding for real estate equity funds, and this is how we are also particularly present in these countries. Some of the funds we have been working with so far still have the ability to invest in CE markets. Heitman is just one of the examples here. We have been working with the company over the years and in 2009 we provided a commitment to their latest fund targeting Central Europe. Through them we would therefore continue to act more as equity investors than as lenders. We are, however, open to ideas and projects that represent a new approach to certain issues. Real estate projects dealing with the issues of energy efficiency is one of the examples that come to my mind. We could look at such projects even in more developed markets as long as the project emphasizes important features.

Moving south to the Balkans, what kind of activities are you involved with in the region?

Obviously, the Balkans are on our list of geographical priorities. We are very active in Romania and Bulgaria, although these two countries have already joined the EU. We still feel that they are few steps behind the other markets that joined the EU in 2004. In Romania, one example is a EUR 10 mln mezzanine loan that the EBRD made for Sema Park, a class ‘A’ office building in Bucharest. It was a crisis-response loan, made to fund the gap resulting from a reduced senior loan. The rest of the Balkans are pretty much a priority area for us. These markets are challenging, as they are small countries such as Montenegro and Bosnia-Herzegovina. Other priorities include Russia and Ukraine, and Central Asia and the Caucasian region – these are all markets where we are seeing the largest transition gaps.

This also means that these markets carry a larger risk. Where does the EBRD stand on the issue of risk when considering financing a project?

This is a very important issue for us, and in this regard we are no different than any other bank. We would like to avoid any risk, but we are still conscious of our obligations and the need to remember what the bank was established for. We try to understand the level of risk, but at the end of the day this is what we are here for – to take that risk. Yes, these markets are very risky, but we aim to structure the projects the best we can in order to address those risks; but there is no doubt that being active in these markets is connected with the highest levels of risk.

Compared to other markets, there is still activity in Poland – albeit reduced – but the banks are still lending. What is the situation across the region, as seen from your London headquarters?

Yes, Poland has proved to be more resilient to the crisis, but we can also say that investors in the Czech Republic and Slovakia are also on the safe side. Hungary has had a much rougher experience, as have the Baltic states. We are not present in the Baltic states, however, as we believe they are still quite developed markets, despite the hits they taken from the credit crunch. Therefore, we have taken the conscious decision not to go back to these three markets, at least when it comes to real estate finance.

Is it you that approaches developers first, or do you wait for them to present you with a project for evaluation?

We actually do both. The real estate market is quite small. People tend to know each other and they know the EBRD, especially these days, with the sources of financing being so limited. Typically, the EBRD doesn’t finance more than 35 pct of the project’s cost. It means the investor should put up a substantial amount of equity. As we are a rather conservative bank we ask for a 50 pct equity contribution. On the debt side we typically try to syndicate. Finding a way for a commercial bank to come in is very challenging today, but again, it is still possible.

Commercial banks are gradually coming back to the real estate market. Does this mean that the EBRD will eventually step aside as the market improves?

For sure, there are some green shoots on the market, but I still think it has a long way to go. We are not going to go back to the activity levels of 2006/2007 anytime soon. As we can’t satisfy all the demand we would be very happy to see banks becoming more active in 2010. We are trying to achieve that. On the other hand, with our bank not increasing its capital we can’t expect our division to have more money to give this year. The volume of business has dropped dramatically, but in 2009 in the business that actually took place, the EBRD had a much larger share. As a bank we have been seeing a lot of business. People who would have had access to any commercial bank finance a few months ago wouldn’t normally come to see us, knowing that we wouldn’t be able to offer them terms which they were getting somewhere else. But things have changed and now they are talking to us. ν

A helping hand from London

Founded in 1991, the EBRD uses the tools of investment to help build market economies and democracies in 29 countries from Central Europe to Central Asia. The bank is owned by 61 countries, the European Investment Bank (EIB) and the European Community. The bank’s property and leisure division was established in 2001. Over the years the bank has provided a EUR 95 mln loan for the development of the Mega Mall shopping centre in Moscow (opened in 2002), and a further EUR 105 mln investment in Europolis Invest – financing used for the creation of a regional portfolio of about 20 real estate assets across the whole CEE region with a combined value of app. EUR 1 bln. Sylvia Gansser-Potts oversees both new investment and loans, as well as the management of its EUR 1 bln portfolio. In addition, she serves on the advisory boards and/or investment committees of a number of real estate funds investing in Central Europe and Russia. Prior to joining the EBRD, Sylvia Gansser-Potts worked for UBS in Switzerland and Japan. She is a graduate of Paris University and holds an MBA from INSEAD in France.