Loans paid back by loans

Those who pay back one loan with another tend not inspire the greatest confidence, which is quite natural 
in business. In today’s conditions, when it is nigh on impossible to get the money to pay for a hole in the ground, companies are trying to raise finance by mortgaging existing buildings. Debts are paid off with 
the loan and the remainder is invested in new projects

Emil Górecki

The investment scene has been mired in despondency since the beginning of the year, although several major transactions have been concluded in Poland this summer. In late June ,Echo Investment was granted a loan of almost EUR 32 mln by Westdeutsche ImmobilienBank. Part of the loan was used to refinance construction of the first stage of the Malta Office Park office complex in Poznań, with the remainder to be used to cover the costs of the next stage of the project and to finance the company’s current operations. The same developer received EUR 50 mln from Eurohypo to refinance the Park Postępu office complex in Warsaw. Westdeutsche ImmobilienBank also played a part in refinancing the Galeria Mokotów shopping centre in the same city. EUR 205 mln was channelled in from Westdeutsche through electronic transfers and those of its partner Berlin-Hannoversche Hypothekenbank to Galeria Mokotów’s owners, Globe Trade Centre and Unibail-Rodamco. Around EUR 120 mln remained on the accounts for use after earlier debts had been paid off. A sum of EUR 104 mln was the next transaction, remortgaging Warsaw Financial Center, in which the creditors were WestImmo and Berlin Hyp/Landesbank Berlin. The WFC building is the property of Pramerica and CA Immo International. In addition, Berlin Hyp/Landesbank Berlin loaned IG Immobilien EUR 52.5 mln for the Horizon Plaza office building, which opened in Warsaw in June. All these transactions were negotiated in a climate of frustration over the lack of access to finance.

Spring is still far off

Could such loans be evidence of the stirrings of new life on the investment market? Piotr Górecki, director of the capital markets department of consultants Knight Frank, is keeping a level head about the possibility, insisting that such a conclusion is over-optimistic and dangerously premature. “These are often very large transactions, but I cannot discern any new trend within them. The Polish real estate market is already quite large and there are many smaller refinancing transactions of which little is reported and which fail to generate much attention. I do not think at the moment that there are more such contracts being signed than at the beginning of the year.”

Piotr Cyburt, board president of BRE Bank Hipoteczny, comments that: “One swallow does not make a summer. These transactions are for excellent projects that have been leased and are generating profits. So they do not carry any great risk. It would be wrong to suggest that they are the beginning of an avalanche of similar deals, since banks just do not have enough money. Although similar individual transactions could be performed, I would rather expect more small refinancing deals to have been concluded by the end of the year, with values of between EUR 20 and 30 mln.”

Like all banks, BRE Bank Hipoteczny has severely curbed its lending this year. Loans of around PLN 200 mln have been issued since the beginning of 2009, two thirds of which went into development projects, both residential and commercial, with the remainder being used to refinance completed projects. The bank has focused its efforts on providing finance and liquidity for projects underway or already approved.

The market starts moving

Martin Erbe, managing director and head of property financing in Continental Europe for Westdeutsche ImmobilienBank, believes that these transactions constitute a positive sign: “The fact that banks have appeared which want to get involved in financing is an excellent signal. It is no accident that this is happening in Poland, since many real estate investors and banks have a lot of faith in this market, including WestImmo.”

A 1:9 ratio exists between transactions financing new development projects and those refinancing existing properties concluded this year by WestImmo in the CEE region. Martin Erbe admits that this is not a normal situation and is certainly not healthy for the market. The reverse of this ratio was the case more than a year ago, with as much as 70-80 pct given out by banks as new loans to finance development projects. In Martin Erbe’s opinion: “New transactions are almost non-existent on the market, but refinancing is the logical way to maintain bank activity, apart from prolonging already existing loans.”

Refinancing existing properties is not only a means to raise finance for new projects. Some owners are opting to refinance their properties at the moment to free up part of the equity they hold or to secure a loan for an uncertain future, without paying attention to the fact that today’s conditions are no better than those of yesterday. “Some banks are still being very cautious when granting loans, especially to new customers; but all banks prefer a smaller risk, to achieve better profit margins and have greater credit security in an existing, leased property,” explains Martin Erbe.

Loan refinancing is a highly specific instrument to use on the real estate market. Real estate is generally refinanced after being purchased or built, when its value is at least several dozen percent greater than the residual loan. This is both a way to acquire more money for investment and to restructure debts. There are several banks today that are restricting their real estate loan exposure and refusing to prolong debts whose repayment deadline is just around the corner. This is why property owners must look to other banks for new credit.

IVG Immobilien has been the owner of the Horizon Plaza office building since May 2009, but has been financing the project since 2005 and participated in its development. It was financed by an internal loan within the IVG group. To free the required capital the company was granted a loan for the property from Berlin Hyp. Maciej Zajdel, the board president of IVG Development’s Warsaw branch, stresses that: “The bank is our partner in other investments throughout Europe, which led to our being granted a loan very rapidly and on excellent financial conditions. It turned out to be less expensive than an earlier loan from the mother-company. Such terms are still not available under Polish conditions.” The acquired finance will be invested in one of the company’s several projects being constructed throughout Europe. Maciej Zajdel revealed that the company will probably go in for other investments in Warsaw this year or the next.

Keep the change for new projects

One motive driving a company to refinance its real estate today is the desire to gain additional money for further investment. A property’s value increases over a longer period when the loan is partly paid. When a new loan is acquired and secured by the same property but is proportionately less burdened in relation to its market value, the excess sum becomes available for further investment. Piotr Górecki relates that: “Prior to 2009, refinancing and development loans practically co-existed on the bank market. Today, however, some banks insist that they will only agree to refinance a building after it is completed and leased, but will not consent to financing the construction work itself.”

How often can a property be refinanced? Theoretically, there are no restrictions, although quite significant costs have to be expected when taking out a new loan.

The banks also do all they can to prevent such a procedure, charging a commission for the payment of an existing debt. However, Piotr Górecki remains confident: “I hope the development financing market will soon start moving. Some improvement has been visible since the beginning of the year, although not to the expected extent. We are currently waiting to see what next year will bring in the shape of the growing confidence of banks in new projects. Under the current market conditions, I would say that any further slowdown in financing projects is entirely unjustified.”