Banks are happy to finance practically any new logistics project. But they are extremely cautious with the office and retail segments, not to mention hotel investments. Property Forum asked Tamás Deák, Director of Commercial Real Estate Finance at Erste Bank Hungary Zrt. about their financing practices amid the new, harsh economic conditions.
Do you expect fewer RE projects in the financing portfolio of the Hungarian commercial banks in the short run or do you believe this is only a temporary slowdown and lending will be more attractive than today?
There may be a slight reduction in lending activity, but who is borrowing is more noticeable. These days lending is often sought by investors who move to a ’hold’ strategy as disposals slow with less liquidity, so we are looking at several refinancing transactions. Among rising interest rates and volatile procurement prices, developers are cautious about starting new projects, and we too prefer BTS developments or those in exceptional locations, with an extra level of freedom perhaps in logistics where fundamentals remain strong in the midterm.
What are Hungary's most favourable risk/return RE assets to finance? Is office, retail or hotel development an unpredictable business?
I don’t like to differentiate this way. We find that core assets weather the storm well in all RE segments. Investors of non-core assets are prepared for volatile results but of course, for these assets, it is tough to face the current headwinds. Truth be told, hotel investors’ patience is put to an unusually harsh test.
How big is the impact of private equity/debt funds on the RE financing market? Will they become dominant alternative lenders for the Hungarian RE financing in the long run?
We are seeing some increased mezzanine activity, but I expect this to remain low-key as the higher number of stakeholders in transactions brings on disproportionate complexity.
What changes are more realistic in LTC ratio expectations for financing new developments and income-generating projects?
Our LTC requirement has not changed in the last 10 years, and I expect continuity. We may request stronger cost overrun guarantees and pre-leases rather than squeeze LTC.
What are the common pre-let ratio expectations for office, retail, industrial and alternative projects? What is behind the significant differences if they are present?
We look to preleases to handle the medium-term cashflow risk, whereas the other fundamentals (LTV, location, technical features) stabilize the long term. We have more flexibility for prelease in a buoyant market, such as logistics, whereas we prefer near full debt service coverage in office or retail.
Loan interest premiums may vary among banks. What are the minimum and maximum premiums to be applied by banks for highly-rated real estate projects?
A conservative small loan amount allows us to beat the 2% margin. Typically, however, we are above that mark. In the case of developments, a yet higher range reflects the additional risk and the lack of collateral.
How big is the impact of inflation on the average size of RE loans in the Hungarian market?
Loan size is more impacted by interest rates than inflation. As the mid-term interest fixing is 2 pps higher than half a year ago, the total debt service swells more than the CPI-indexed revenues can compensate. When old loans come up for renewal, topping them up will be difficult, but I do not expect compression of loan amounts, because loan sizes in our market have been reasonable. Also relevant to the inflation topic, the price leap in electricity and other RE running costs is a call for efficiency which gets our attention. We take a special interest in our clients’ efforts toward sustainability as we depend on the long-term viability of their properties.
