Under pressure

As the credit crunch drags on, and development projects continue to be postponed or cancelled, and while finance remains hard to find and demand stays deep in the doldrums, it might seem that real estate companies are helpless to act as business dries up. However, in the Czech Republic. a group of players on the market has got together to fight against the dying of the light. 
But what do they hope to achieve (if anything) towards alleviating the situation?

Nathan North

The new group is made up of local developers Real Estate Karlin Group (REKG), Metrostav Development, Finep, Crestyl real estate, Ungelt Partners, Develon CZ and Lighthouse group, as well as construction companies Metrostav, FCC – První česká projekční a stavební, OHL ŽS and Eurovia CS. Two consultancies, Knight Frank and Jones Lang LaSalle European Services, have also joined the consortium, which was originally described (or lost in translation) in the Czech business media as a “pressure group”. This designation – according to Tewfik Sabongui, the managing director of Jones Lang LaSalle in the Czech Republic – is a misleading one. According to him, the group has been established with a mission to explain: “It is not a pressure group in the sense of putting on pressure, it’s more about explaining and raising some fundamental questions and problems,” claims Mr Sabongui. “All parties – banks, governments, etc. – have their own legitimate positions. But over the last 12 months a lot of generalizations and misinterpretations have arisen.” An example he provides is that of the entire CEE region having been “put into one pot”. As he continues: “No-one seems to bother to differentiate between how Poland and the Czech Republic are doing and, say, how Bulgaria and Romania are coping with the crisis.”

More than one basket

This lumping everyone into one basket is something that banks, with their western mother companies, are rather prone to do. The crunch may be nothing short of catastrophic in the Baltics, the Balkans and Ukraine, but the economies of the Czech Republic and Poland do not seem to be suffering to the same extent. As Mr Sabongui explains, the differences at the macro level need to be made clear to financial institutions, to convince them that Poland and the Czech Republic do not share the same underlying problems as some of their neighbours, and therefore do not constitute the same kind of risk. But as he also goes on to argue, there is a similar lack of differentiation at the micro level, between “experienced, successful developers and more amateurish outfits, as well as between prime projects in the best locations and those which do not fulfil such criteria.”

It is commonplace now for banks to demand 50 pct pre-leases and 50 pct equity before agreeing to finance any project – which is not only very harsh, but as Mr Sabongui explains involves developers in a kind of ‘catch-22’ situation. In his example: “If a 50 pct pre-lease is required for a 40,000 sqm building, where can developers find a tenant that can occupy 20,000 sqm? Such a tenant would need to be provided with a guarantee that the building is even going to be completed before signing a pre-lease, but unless this is signed then the bank will not give the finances in the first place. [...] So we hope to explain to the banks, investors and maybe the government that they should examine the situation with more scrutiny.”

Trouble on the horizon

But this is not just a problem for developers and general contractors. Since hardly any new projects are being started and they generally take 18 months to complete, the result will be a wider problem at the end of 2010 and early 2011, when there will be no new supply coming onto the market and major difficulties for tenants. “So we need to explain the situation based on facts and figures, explaining the risks and finding some mutual solutions for the benefit of everybody. It is not our intention to use aggressive actions, but mainly to explain the tenants’ position,” admits Mr Sabongui.

As with any such group of industry players, the individual companies it is composed of will have their own priorities. Milorad Miškovič, a partner of  Real Estate Karlin Group, certainly seems to have a difference of emphasis about its aims. According to him: “We have put our consortium together first of all to put pressure on the Czech state. But the state is slow and the bureaucracy is appalling. We need to launch a dialogue with them. One of our proposals is for a guaranteed state fund to back loans taken out by developers. Another is for a reduction for 3 years in VAT on apartments from 19 pct to 4/5 pct in order to boost sales and the number of projects. A third proposal is to create a state fund to support social housing – again to help the real estate and especially the construction industry. If the state accepts any of these or any new solution, it should help the real estate and construction markets to overcome some of their problems this year and the next.”

Builders in need of buttressing

In Milorad Miškovič’s view, it is the construction sector that has been especially heavily hit. Certainly, the figures published by the Czech Statistical Office (ČSU) confirm this opinion, which show that in each of the last few months there was a 22 pct year-on-year decrease in industrial output and a similar fall in revenues.

Another proposal put forward by Mr Miškovič is for the state to back up developers and projects by providing a guarantee for up to 50 pct of the loan amount, and thus lessen dependence on commercial banks – in his words giving the state the role of some kind of mezzanine lender. But government intervention in markets has a somewhat chequered history, and could provoke objections from certain quarters that such a policy leads to the squandering of public money on projects with a high risk of failure in a harsh economic environment. Not so, claims Tewfik Sabongui of Jones Lang LaSalle: “Now that bad developers and projects have disappeared from the scene, all that is left are well-established companies and prime projects.” Milorad Miškovič does provide a further qualification of this: “If the question is, how could the