Turning on the taps

Ewa Andrzejewska

What do developers dream of, and what gives them sleepless nights? What turns their dreams into nightmares... and what enlivens even the most boring debate? The obvious answer is: money! Have the banks finally started to loosen their purse strings?

In early April, Globe Trade Centre concluded a loan contract worth EUR 20 mln with Berlin Hyp Bank. The company is to use the money to develop the third stage of the Platinium Business Park, which began last autumn. When asked about the significance of the deal, experts acknowledged that the transaction was a major breakthrough on the credit market following a bleak winter on the Vistula river. In mid-June, the temperature was raised further heated up by German bank Eurohypo and Kielce-based developer Echo Investment, who announced that they had agreed a loan contract of EUR 50 mln for the re-financing of the Park Postępu office complex in Warsaw. Real estate operators who had been in a cold sweat for more than six months could finally breathe a sigh of relief, while Echo Investment could feel a sense of triumph over signing the largest credit transaction on the Polish property market for a long time. More good news came a few days later when Echo revealed that it had been granted another loan. This time the lender was Westdeutsche ImmobilienBank, which expressed its confidence in the Poznań Malta Office Park development by lending EUR 31.785 mln for the project, with the loan to be repaid in 63 months.

Eurohypo returns to jousting

Grzegorz Trawiński, head of corporate banking for Eurohypo in Poland, says: “Following the reorganization of the last few months, Eurohypo has decided to focus operations on 10 key markets where the bank holds the largest credit portfolio and where the greatest potential growth opportunities exist. This means Poland and – out of the other Central and Eastern European markets, in the widest sense of the term – Turkey and Russia. But new projects will not be financed in any of the other countries in the region. The new strategy was announced in May and the Echo Investment transaction is this year’s first in Poland.”

While it is true that the deal was the first this year, it was in fact the ninth such transaction between the two in their 10-year history of co-operation. Prior to this, Eurohypo was already committed to financing (among other projects) shopping centre developments in Siemianowice Śląskie, Tarnów, Szczecin (the Galaxy centre) and Wrocław (Pasaż Grunwaldzki), as well as the Postępu 3 and Athina Park office buildings in Warsaw. The total amount of loans granted so far to Echo Investment exceeds EUR 350 mln.

The most recent, a loan of EUR 50 mln which the developer has to pay back by January 30th 2020, is to be used to re-finance debts incurred during the development of the four 7-storey buildings of Postępu Park in Warsaw’s Mokotów district.

Grzegorz Iwański, Echo Investment’s financing department director, explains: “The costs we have incurred during this development originated in loans granted within the Echo Investment group. The two goals of the newly obtained bank loan are to re-finance those costs and finance future expenditure.”

According to the developer, the construction phase is 80 pct completed, while the business park is already occupied by companies including PeKaO Financial Services, Lux Med, Abbot Laboratories, Estee Lauder and Termoizolacja. The fact that the project is approaching completion and that contracts with tenants have largely been finalized has played a substantial part in negotiations, while the financial world is still treating investment outlays with a great deal of caution. But Grzegorz Trawiński adds: “We are currently ready to finance projects in the investment stage as well as those which can demonstrate a substantial percentage of tenancy occupation. In both cases, leasing revenue should determine the debt service coverage ratio established individually with each debtor. Completed buildings or those in their final stages are being looked at more favourably.”

Can you only love once?

The Eurohypo official insists that: “Further transactions are planned on the Polish market, particularly since we have focused up to the present on financing large and complex projects, primarily on the Warsaw office market and the retail markets of major Polish cities. We plan to finance new projects, but we must stress that there will be greater emphasis in the decision-making process on minimizing loan risk, as opposed to the sales aspect.”

However, it seems bankers are much more enthusiastic about the office sector. The latest contract agreed with a developer also concerns an office project. Westdeutsche ImmobilienBank is providing app EUR 32 mln in finance for the Malta Office Park Poznań complex. But does this mean that financier interest is restricted to offices? Maciej Tuszyński, executive director and head of real estate finance for Westdeutsche ImmobilienBank in Poland, remarks that: “This is the fifth loan this year and we are still not done. The first transaction this year was to re-finance the Renaissance Tower office building in Warsaw’s Wola district for BPH TFI. Moreover, we have tied up several more transactions in the past few days.” According to him, the general feeling in Germany is that the office sector is the safest. As he goes on to relate: “We are currently drafting a warehouse and retail transaction and are taking a selective look at hotels. But shopping centres at the moment are subject to foreign currency pressures, as tenants pay rent and purchase imported goods in euros. The outcome is pressure to reduce leasing rates, so we are being even more stringent in assessing them.”

In his opinion it is easier to get financing to extend a shopping centre than for a new development. So now that Echo Investment has started work on enlarging the Galeria Echo shopping centre in Kielce and is looking for cash to finance it, does that mean the developer is working on a second loan with Westdeutsche ImmobilienBank or perhaps even a tenth with Eurohypo? When this possibility was put to Grzegorz Trawiński, he fell silent for a few moments, before making the following concise declaration: “Echo Investment is a key developer on the Polish market, and we shall certainly consider every project for which our partners at Echo make approaches to the bank.”

Maciej Tuszyński and Adrian Karczewicz, Echo Investment’s project financing director, who secured the financing for the Poznań project, also glanced knowingly at each other when the question was posed. According to Adrian Karczewicz: “The app. EUR 32 mln loan we were granted should be divided into around EUR 10 mln to be used to re-finance expenditure on the development of two 7,000 sqm buildings, now 100 pct leased by such companies as Polsoft, Medicover, Pramerica and Intel and already delivered for use. The second part of the loan, around EUR 22 mln, is finance to be used for the development of another three buildings of around 15,500 sqm. Work on the sixth building of the complex will start when the second stage is completed, which is currently underway.” The second phase of the Malta Office Park project is now 50 pct completed and around 20 pct occupied. Did those meaningful glances relate to the final stage of the development? “Echo Investment has employed the interesting concept of a business park developed in several stages to encourage tenants by allowing them to see and assess the results of its work. Also, the Poznań office market remains strong. In addition, Echo is close to negotiating the 100 pct lease of the park with a number of tenants,” was all Maciej Tuszyński was willing to say. The only other clue given by the Westdeutsche ImmobilienBank official was when he summed by remarking that it is a very good time to have an entire business park in your portfolio.

There’s cash about, but it’s very expensive

In our February issue, we asked bankers to provide comments and forecasts for the current year. Michał Sternicki, managing director for Poland of Aareal Bank, then remarked that the first half would be a quiet period, with further animation dependent on capital markets returning to a normal state. “We are presently witnessing a much greater participation of developers in investment costs, which can amount to as much as 50 pct of the total,” claimed Mr Sternicki. To this Maciej Tuszyński adds one more condition: “We do not grant loans for proverbial holes in the ground. The space must be at least 50 pct leased, or preferably at a level to secure interest payments.”

Adrian Karczewicz, in the developer’s corner, also stresses that times have changed. “The loan-to-value rate of 80-85 pct that was regarded as normal financing terms a short time ago is no longer acceptable to creditors. A debtor today has to accept less than 70 pct – indeed 60-65 pct,” claims Adrian Karczewicz. But how much more do you have to pay to be granted a loan? “This is a difficult question to answer,” believes Maciej Tuszyński. “Loan margins have risen by around 1 pct and even more for construction loans, while the profits of the lenders have not increased much, as banks also have higher re-financing costs, depending on the source of the borrowed capital.”

The Germans are not alone

Grzegorz Iwański claims that German banks were the first to get in on the act, opening up quite a wide gap on the market, which Polish banks are still not able to fill. According to Echo Investment’s finance director: “German financial institutions are already concluding transactions, while Polish banks are still trying to work out the parameters in which they will be moving in the new economic reality. Also, Polish banks are experiencing more difficult access to the euro, whereas this is a natural currency for German institutions.” However, on July 1st a bank with Polish origins made a surprising move, announcing that it was issuing a loan to Ghelamco. Bank Pekao will be providing the latter with EUR 60 mln for the development of two office projects: Crown Square in Warsaw and Katowice Business Point in Silesia. Justyna Kędzierska-Klukowska, Pekao bank’s deputy director in the commercial properties section, asserts that: “At the moment our bank is one of the very few able to finance new projects on the real estate market. Obviously, we are taking a very close look at every investment, focusing on the best projects and the strongest operators on the market, with an exemplary history of cooperation with our bank.” German institutions are taking a similar position. Grzegorz Trawiński puts it this way: “We are interested, first and foremost, in cooperation with our current clients who earlier put their trust in us, but we are also open to co-operation with new companies.” The remaining question is: what solutions are available to developers who have not yet gained the trust of bankers?