Property Lending Barometer 2018 - KPMG

Property Lending Barometer 2018 - KPMG
Property
Lending
Barometer
2018
A survey of banks
on the prospects
for real estate sector
lending in Europe




kpmg.ie
Property Lending Barometer 2018 - KPMG
2/   Property Lending Barometer 2016
Property Lending Barometer 2018 - KPMG
Property Lending Barometer 2018
                                                                                                             Introduction
                                                                                                                            3




                                     Dear Reader,
                                     It is our pleasure to present the Property   JOUIFTFDPVOUSJFT5IF#BSPNFUFS
                                     Lending Barometer 2018, which is the         includes input from close to 70 banks
                                     9th edition of our annual survey of banks’   active in these markets, collected
                                     SFBMFTUBUFěOBODJOH5IJTSFQPSUSFWFBMT   QSJNBSJMZWJBJOEFQUIJOUFSWJFXTBOE
                                     insights into lending market conditions      online questionnaires. Representatives
                                     in a range of countries in Europe and        GSPNMFBEJOHěOBODJBMJOTUJUVUJPOTIBWF
                                     also gives a separate snapshot of the        provided their views on the key issues
                                     participating countries to highlight their   JOĜVFODJOHQSPQFSUZMFOEJOH
                                     unique market characteristics.
                                                                                  5IFěSTUIBMGPGUIJTSFQPSUQSPWJEFTBO
                   Andrea Sartori    5IFQVSQPTFPGPVSSFQPSUJTUPBTTFTT      overview of the European market as a
                          Partner,   the prospects and sentiment for bank         whole, by focusing on key issues such
              Survey co-ordinator    ěOBODJOHJOUIFSFBMFTUBUFTFDUPSJO       as the strategic importance of real estate
              Head of Real Estate    Europe based on interviews conducted         ěOBODJOHGPSCBOLT UIFQSPQPSUJPOPG
in Central & Eastern Europe (CEE)    with bank representatives from 14            impaired loans and bank representatives’
                                     European countries.                          views on how to manage these loans.
       E: andreasartori@kpmg.com
                                                                                  We also consider areas such as various
                                     5IFSFDFOUMZQPTJUJWFHSPXUIQFSJPE         banks’ average and preferred loan
                                     of the European economy is likely to         size, as well as the length of their
                                     continue, though at a more moderate          loan contract term. Furthermore, we
                                     pace. Unemployment is decreasing,            have also taken the opportunity for


                    9th
                                     disposable income is expected to             OFXěOBODJOHBOECBOLTijBTTFUDMBTT
                                     JODSFBTF CVUJOĜBUJPOIBTCFHVOUP         preferences into consideration.
                                     increase and interest rates may not
                   annual edition    remain unchanged for the medium term.        5IFTFDPOEIBMGPGUIFSFQPSUJODMVEFT
                    of the survey    5FOTJPOTJOHMPCBMUSBEF TMPX#SFYJU       BQSPěMFGPSFBDIDPVOUSZTVSWFZFE
                                     negotiations and the unresolved refugee      In those sections we have addressed
                                     crisis in Europe overshadow long term        the prospects and terms available for
                                     prospects for growth.                        EFWFMPQFSTBOEJOWFTUPSTUPěOBODFOFX
                                                                                  SFBMFTUBUFEFWFMPQNFOUTBOEJODPNF
                                     A sustained growth tendency of lending       generating properties, and survey
                  Interviews
                conducted with       activity in Europe is likely to prevail      participants’ expectations for the next
                  banks from         in 2018, supported by eased lending          NPOUIT
                                     conditions and stable demand since

                 14
                  European
                                     2014. Competitive pressure in the
                                     ěOBODJOHTFDUPSBOEGBWPSBCMFPVUMPPL
                                     regarding risk have also spurred overall
                                                                                  We would like to take this opportunity to
                                                                                  thank all of those who participated in this
                                                                                  TVSWFZ5IFJSDPPQFSBUJPOXBTLFZUP
                                     growth in lending. Further easing of         the success of this initiative.
                  countries
                                     credit terms and increasing loan demand
                                     are expected to have a positive effect       8FIPQFZPVXJMMěOEPVSSFQPSU
                                     POěOBODJOHCPUIDPSQPSBUJPOTBOE           informative and enlightening in
                                     IPVTFIPMET5IF&VSPQFBONBSLFUGPS         supporting your future business
                                     loan portfolios saw a return to growth       EFDJTJPOTSFMBUFEUPSFBMFTUBUFěOBODJOH
                      Close to       JO5IFUPUBMWBMVFPGSFBMFTUBUF     If you would like to receive any
                                     backed loan portfolio sales reached over     DMBSJěDBUJPOPSEJTDVTTUIJTZFBSijTTVSWFZ

                     70
                      banks
                                     EUR 100 billion for a third consecutive
                                     year, at a record EUR 114 billion.
                                                                                  results, please feel free to contact us
                                                                                  or any member of KPMG’s Real Estate
                                                                                  Advisory Practice.
                     surveyed        5IJTSFQPSUJTBOBOBMZTJTPGUIFěOEJOHT
                                     of our survey of the leading banks active



                                     Yours sincerely,
                                     Andrea Sartori
Property Lending Barometer 2018 - KPMG
Table of
contents
         Overview of the European
     7   real estate market




         Managing impaired loans
    12

         ProspFDUTGPSSFBMFTUBUF
    15   loan portfolios



         0QQPSUVOJUJFTGPSěOBODJOH
    18   OFXSFBMFTUBUFQSPKFDUT




         Closing the gap:
    27   UIFDPOWFSHFODFPGUIF$&&SFHJPO



         $PODMVTJPOT
    31

         $PVOUSZQSPěMFT
    33
Property Lending Barometer 2018 - KPMG
Property Lending Barometer 2018
                                                                                                                                                              Our methodology
                                                                                                                                                                                     5




.FUIPEPMPHZBOETBNQMFQSPěMF                                  Central & Eastern European (CEE)                               Survey limitations
                                                               FDPOPNJFT5IFTFDPVOUSJFTBSFMPDBUFE
5IJTTVSWFZBJNTUPQSPWJEFBOBOBMZUJDBM                     either in Central or Eastern Europe,                           5IFGPMMPXJOHMJNJUJOHGBDUPSTTIPVMECF
overview of the current approach of                            including the Balkans. Due to their                            noted:
CBOLTUPSFBMFTUBUFěOBODJOHJO&VSPQF                      geographic proximity and comparable
Lending institutions from the following                        stages of economic development, it                             – 8IFOUIFBOTXFSTHJWFOUPTQFDJěD
countries are represented in the 2018                          is our assumption they share similar                             RVFTUJPOTXFSFOPUTVGěDJFOUUP
survey: Austria, Bulgaria, Croatia,                            BEWBOUBHFTBOEDIBMMFOHFT5IFHSPVQJOH                         provide reliable information on a
Cyprus, the Czech Republic, Hungary,                           includes Bulgaria, Croatia, the Czech                            TQFDJěDDPVOUSZ XFIBWFJOEJDBUFE
Ireland, the Netherlands, Poland,                              Republic, Hungary, Poland, Romania,                              this, or the country was omitted from
Romania, Serbia, Slovenia, Slovakia and                        Serbia, Slovakia and Slovenia.                                   that part of the analysis.
Sweden.
                                                               0UIFS&VSPQFBOFDPOPNJFT In contrast                          – In the case of some parameters and
5IFEBUBGPSUIFTVSWFZ1 were primarily                        to the CEE markets, the category                                 DSPTTUBCVMBUJPOT TVSWFZěOEJOHT
DPMMFDUFEUISPVHIJOEFQUIJOUFSWJFXT                         “Other European Economies” consists                              may be considered indicative but not
with bank representatives and via                              of countries from across Europe, most                            representative due to the low number
online questionnaires. Depending on                            of them representing more mature real                            of responses to some questions.
the survey participants’ organizational                        estate markets. Due to their economic
structure, interviewees were the                               capabilities, they provide a benchmark for                     – As in previous years, our assessment
IFBETPGSFBMFTUBUF QSPKFDUěOBODJOH                        BTTFTTJOHEBUBGSPN$&&5IJTDBUFHPSZ                          of the residential sector excluded
or risk management departments.                                includes Austria, Cyprus, the Ireland, the                       residential projects whose
Banks were selected from among the                             Netherlands and Sweden.                                          construction costs were below EUR
MFBEJOHěOBODJBMJOTUJUVUJPOTPQFSBUJOH                                                                                        10 million.
JOFBDIJOEJWJEVBMDPVOUSZ5IFTVSWFZ
participants entailed nearly 70 banks, all
of which were active in the real estate
market in Europe over the last year. Data
collection for this survey took place from
May to July 2018.

"MNPTUUXPUIJSETPGTVSWFZQBSUJDJQBOU
banks were local, i.e. those operating
predominantly within one European
country, whilst the rest were mainly
regional banks; some multinational banks
also participated.

Comparison of surveyed countries

Based on the countries geographic
locations, we have created the following
two categories for the purposes of our
analysis:

                                                                                                                           Source: KPMG Property Lending Barometer, 2018




Geographic abbreviations

AUT – Austria; BEL – Belgium; BUL – Bulgaria; CEE – Central & Eastern Europe; CRO – Croatia; CYP – Cyprus; CZE – Czech
Republic; DEN – Denmark; EMA – Europe, Middle East and Africa; GER – Germany; HUN – Hungary; IRE – Ireland; ITA – Italy;
NLD – Netherlands; POL – Poland; ROM – Romania; SRB – Serbia; SVK – Slovakia; ESP – Spain; SWE – Sweden;
GBR – United Kingdom; WE – Western Europe
1   The survey also uses information obtained from public sources, which KPMG believe to be reliable. These market reports were published in 2017 and 2018 by BNP Paribas Real Estate,
    $PMMJFST*OUFSOBUJPOBM $VTINBO8BLFěFME &DPOPNJTU*OUFMMJHFODF6OJU &)- &VSPQFBO$FOUSBM#BOL +POFT-BOH-BTBMMF .(3FBM&TUBUF 3FBM$BQJUBM"OBMZUJDT *.' 0&$%     
    and Societe Generale.
Property Lending Barometer 2018 - KPMG
Property Lending Barometer 2018
  6    Overview of the European real estate market




Average GDP growth forecast (2018 - 2020)*
       Central & Eastern European economies
       Other European economies




                                                                   Sweden
                                                                   2.23%




        Ireland
        3.80%


                                                                Netherlands
                                                                2.17%                    Poland
                                                                                         3.53%


                                                           Czech Republic
                                                           2.97%
                                                                                                  Slovakia
                                                                Austria                           3.53%
                                                                2.17%
                                                                                       Hungary
                                                     Slovenia                          2.87%
                                                     3.60%
                                                                    Croatia
                                                                    2.70%
                                                                              Serbia
                                                                              3.30%




*Source: Economist Intelligence Unit
Property Lending Barometer 2018 - KPMG
Property Lending Barometer 2018
                                                           Overview of the European real estate market
                                                                                                         7




             Overview of
             the European
             real estate market
             Macroeconomic outlook of the region           DPNNPOFYQFDUBUJPOSFHBSEJOHUIFTIPSU
                                                           term future of oil prices. Eased lending
             Following the weak growth period after        conditions, increasing loan demand and
             the economic crisis, the global economy       consistently low interest rates in previous
             is in a phase of steady improvement.          years caused an increase in the value of
             5IFVOFNQMPZNFOUSBUFJOUIF&VSPQFBO        certain assets, including real estate. In
             Union has been decreasing since               spite of the recently increased interest
             2013 and is anticipated to reach its          rates in the USA, European rates are
             lowest level in 40 years. In line with        not expected to increase this year, until
             the relative scarcity of labour, real         the quantitative easing policy set by the
             wages are projected to rise in several        European Central Bank ends, with the
             countries, while household income is          exception of the UK where the Bank of
             likely to continue its robust growth trend    England raised interest to its highest
             manifested since the millennium.              since 2009. In this context, the trajectory
                                                           of the European economy may be
             Average real GDP growth in the countries      JOĜVFODFECZBSBOHFPGSJTLGBDUPST
   Romania   included in this year’s survey was 4.1%
   3.73%     last year, which signals accelerated          Besides the potentially detrimental
             growth compared to previous years.            impact of a slowing Chinese economy,
             'PSFDBTUTJOEJDBUFNPSFNPEFSBUFCVU         there is also a risk of a deepening trade
             robust growth in the next few years, with     war between China and the USA, with
Bulgaria     all countries growing by less than 4% in      far reaching consequences on global
3.03%        2019, and the average growth for these        trade. Political uncertainties and threats to
             economies reaching 2.4% by 2020.              economic growth appear to prevail, such
                                                           as slow Brexit negotiations, and Europe’s
             *OĜBUJPOSBUFTTJHOJěDBOUMZJODSFBTFEJO     still unresolved issue of a potentially
             Europe over the second half of 2017.          enduring refugee crisis. Although the
             After a temporary decrease during the         Macron reform program in France has
             ěSTURVBSUFSPG JOĜBUJPOJTFOUFSJOH   had a positive effect on investments and
             a steady growth phase and is expected         given the country higher growth potential,
             to reach a rate of 2.1% by the end of this    the social support of the program may
             year. Oil prices have been volatile and       not be strong enough to allow for a
             there are several unpredictable forces        sustained economic impact. Meanwhile,
             behind the change in today’s oil prices. In   the German economy is booming, with
Cyprus       November 2017 OPEC agreed to maintain         increasing savings and investment,
2.70%        oil production cuts throughout 2018 to        fundamentally driving the growth
             QVUBĜPPSVOEFSQSJDFTZFU UIFSFJTOP     prospects of the region.
Property Lending Barometer 2018 - KPMG
Property Lending Barometer 2018
  8    Overview of the European real estate market




However, outstanding questions related                   Bank lending                                    experienced growth of their total and
to the migrant crisis have put pressure                                                                  liquid assets mainly due to favorable
on the government coalition, causing                     5IFTVTUBJOFEHSPXUIPGMFOEJOHBDUJWJUZ       SFHVMBUPSZPSTVQFSWJTPSZBDUJPOT5IF
uncertainty in Germany’s political                       in Europe has been supported by eased           European Central Bank’s quantitative
environment that has not been in the                     lending conditions and stable demand            easing has continued to support
country for many years.                                  since 2014. Competitive pressure in             borrowing opportunities and improve the
                                                         UIFěOBODJOHTFDUPSBOEGBWPSBCMFSJTL         QSPTQFDUTGPSCBOLMFOEJOH5IJTZFBS 
Due to the diverse economic and                          perceptions have also spurred overall           the ECB reduced its monthly net asset
social context of various economies in                   loan growth. Competitive pressure in            purchases by half compared to 2017, from
Europe, the extent to which the above                    UIFěOBODJOHTFDUPS BOEGBWPVSBCMFSJTL       &63CJMMJPOUP&63CJMMJPO5IJTQBDF
macroeconomic and political factors                      perceptions have also spurred overall           is scheduled to be reduced to EUR 15
NBZJOĜVFODFUIFBDUVBMFDPOPNJDBOE                    loan growth and this positive tendency is       billion until December, when the program
political trajectory of various countries is             likely to prevail throughout 2018. During       will be phased out completely.
expected to vary greatly.                                UIFěSTUIBMGPG &VSPQFBOCBOLT
                                                                                                         Meanwhile, the cleaning and
Breakdown of real estate transactions volume                                                             strengthening of banks’ balance sheets
- Europe, H1 2018, H1 2017 (%)                                                                           BSFTUJMMBQSJPSJUZ5IF&VSPQFBONBSLFU
                                                                                                         for loan portfolios saw a return to growth
                        H1 2018                                             H1 2017                      JO5IFUPUBMWBMVFPGSFBMFTUBUF
                                                                                                         backed loan portfolio sales reached over
                                                                                                         EUR 100 billion for a third consecutive
 2 2                                                                                                     year, totalling a record of EUR 114 billion.
                                                                                                         Pressure from European regulators
 2                      12                        1 1           3                                        concerning balance sheet consolidation
                                                                            14          24
       3                              27                                                                 BOEUIFTBMFPGOPOQFSGPSNJOHMPBO
                                                            4                                            portfolios remain considerable drivers of
      3                                              2                                                   the market.
       4
                                                            5
        4                                                                                                Real estate market in Europe
                                      22                        6                           26
                9
                        10                                          6       8
                                                                                                         %VSJOHUIFěSTUIBMGPG UPUBM
                                                                                                         investment volume decreased by 19%
                                                                                                         compared to H1 2017, reaching just
                                                                                                         CFMPX&63CJMMJPO5IJTJTDPOTJEFSFE
                                                                                                         UIFMPXFTUMFWFMěSTUIBMGTJODF5IF
      GBR                GER          FRA            NLD            ESP                SWE         POL   slowdown is partly due to the amount
      ITA                IRE          BEL            DEN            Other Europe                         PGQFOEJOHEFBMTSFDPSEFEJOUIFěSTU
                                                                                                         months along with the maturity of the
Source: Real Capital Analytics
                                                                                                         market and high prices in Europe’s core
Breakdown of real estate transactions volume -                                                           countries and cities. Political concerns
                                                                                                         are also considered as a negative driver
Central & Eastern Europe, H1 2018, H1 2017 (%)
                                                                                                         for investments.
                        H1 2018                                         H1 2017
                                                                                                         Real estate investment activity shows a
                                                                2                                        diverse picture across Europe. Germany
                                                                                                         and the UK were responsible for half of
                         6
                    6                                                   7                                total investment volume in Europe, at
            7                                                   8                                        22% and 27%, respectively during the
                                                                                       28                ěSTUNPOUITPG5IFGPSNFSIBT
                                                                                                         showed a notable volume decrease of
        6
                                                           15                                            31%, while the UK market volume has
                                     58                                                                  GBMMFOCZTJODFUIFěSTUIBMGPG
                                                                                                         5IFXJOOFSTPGZFBSPOZFBSJODSFBTFT
                17
                                                                                                         are undoubtedly Poland and Ireland
                                                                             40                          which exhibit almost double the real
                                                                                                         estate investment volumes compared
                                                                                                         UP)5IF/FUIFSMBOETBMTPCFBST
                                                                                                         a positive change of 17% growth from
                                                                                                         the previous year, as it attracts 9%
        POL                    CZE          HUN             ROM                  SVK             BUL     of the total volume in Europe. Other
Source: Colliers                                                                                         major markets, such as Spain, Italy and
Property Lending Barometer 2018 - KPMG
Property Lending Barometer 2018
                                                                                             Overview of the European real estate market
                                                                                                                                           9




 Cross-border investment in                     billion (EUR 5.6 billion in total), which   %BUBGSPNUIFěSTUIBMGPGTIPXT
 Europe, 2017 (%)                               means that during the last 12 months,       UIBUUIFPGěDFTFDUPSJTTUJMMUIFNPTU
                                                the average total growth rate of these      TJHOJěDBOUBU GPMMPXFECZSFUBJM
                                                CEE countries was 4%. In H1 2018,           (20%), residential (19%), industrial (11%)
                                                investment in Poland leads the region       and hotel (7%). None of the sectors
                                                with a share of more than half of total     has escaped from the effects of a
                  17                            transaction volumes (58%), followed         HFOFSBMTMPXEPXO XJUIBZFBSPOZFBS
                                                by Czech Republic (17%). Compared           EFDSFBTFPGBSPVOE5IFNPTU
        6                                       to H1 2017, the most notable winner,        modest drop occurred in the residential
                                      39        in this respect, was Slovakia with a        TFDUPS CZ5IFJOEVTUSJBMTFDUPS
                                                growth rate of 117%. However, half of       decreased the most by 24%.
                                                UIFDPVOUSJFTFYQFSJFODFEZFBSPOZFBS
             19                                 EFDSFBTFT$[FDI3FQVCMJD             Prime yields are expected to remain
                                                )VOHBSZ  BOE#VMHBSJB           stable through 2018, with little change
                        19                                                                  in the countries in our sample. Following
                                                &VSPQFBODSPTTCPSEFSJOWFTUPST            UIFEFDMJOFGSPN UIFěSTUTJHOTPG
                                                invested EUR 53.4 billion in Europe,        stabilization were acknowledged in Q4
                                                which is a 14% increase compared to a       2017. Concerning CEE countries, there
                                                ZFBSFBSMJFS5IFJSNBJOUBSHFUNBSLFUT    XBTBTMJHIUEFDSFBTFPGPGěDFTFDUPS
      Europe                      Americas      were Germany, the Nordics and the           yields in Q2 2018 compared to a year
                                                UK. American investment in Europe           ago with an average of 0.28 percentage
      Asia Pacific                 Middle East   remained stable after reaching its          points, which is more severe than the
                                                QFBLJO5IF"NFSJDBTTIBSFXBT       comparable decrease of yields in high
      Other foreign not allocated               close to 19% of total investment with       street retail with an average of 0.11
                                                the main deals occurring in Germany,        percentage points, but more moderate
Source: BNP Paribas Real Estate
                                                the UK and France. Middle Eastern           than in the logistics sector (0.32
                                                DSPTTCPSEFSJOWFTUPSTSFQSFTFOUB         percentage points). Current yields are
Sweden, have stepped into a path of             stable 6%, having invested EUR 7.5          JOUIFSBOHFPGXJUITJHOJěDBOU
decline for the second consecutive year.        billion in markets outside their region.    differences across regions and cities.
                                                %VSJOH "TJB1BDJěDJOWFTUNFOU        *ONPSFFTUBCMJTIFEFDPOPNJFT PGěDF
Investment volumes in the six major             into Europe almost doubled, with the        yields decreased the most by an
CEE countries (the Czech Republic,              greatest focus on the United Kingdom.       average 0.3 percentage points, followed
Poland, Hungary, Romania, Slovakia,                                                         by high street retails and logistics with
Bulgaria) have been increasing since            5IFSFIBTCFFOOPOPUBCMFDIBOHF           equally 0.09 percentage points. Yields
2012. In both quarters of 2018 the              in the breakdown of investment by           SBOHFCFUXFFOJOUIFTF
total investment volume was EUR 2.8             asset type in Europe since last year.       economies.
Property Lending Barometer 2018 - KPMG
Property Lending Barometer 2018
10     Overview of the European real estate market




Investment by asset type in Europe, H1 2018




Residential
                                       19


                                 7                             43
Hotel/Resort
                                 11                                             Office

Industrial/Logistics                        20

                                                                                Retail

Source: Real Capital Analytics



Top buyers by location, H1 2018 (ranked by investment volume)
The below tables present and rank the top buyers by location and by investment
volume. Aroundtown topped the European market with a total investment volume
slightly over EUR 2bn followed by BNP Paribas.


 United Kingdom                                      Germany
 1   Unibail-Rodamco-Westfield                        1   Aroundtown

 2   Prudential plc                                  2   BVK

 3   CK Asset Holdings                               3   Universal-Investment

 4   Brookfield AM                                    4   Corestate Capital

 5   TH Real Estate                                  5   Union Investment


 France                                              Nordics
 1   BNP Paribas                                     1   Heimstaden

 2   TwentyTwo RE                                    2   Norden A/S

 3   Societe Generale                                3   Klovern AB

 4   BVK                                             4   Dades A/S

 5   Hines                                           5   Ragde Eiendom AS


 Central Europe                                      Southern Europe
 1   Oaktree                                         1   Kryalos AM

 2   PIMCO                                           2   Groupe Auchan SA

 3   Redefine (REIT)                                  3   DekaBank

 4   Goldman Sachs                                   4   Kildare Partners

 5   EPP REIT                                        5   Apollo Global RE


Source: Real Capital Analytics
Property Lending Barometer 2018
Overview of the European real estate market
                                              11
Property Lending Barometer 2018
12   Managing impaired loans




                                       Managing
                                       impaired
                                       loans
                                       Following the global economic crisis,
                                       banks had a range of options when
                                       dealing with impaired loans, including
                                       SFTUSVDUVSJOH GPSFDMPTJOHPSTFMMJOHOPO
                                       QFSGPSNJOHMPBOQPSUGPMJPT5IFFYUFOU
                                       of successfully managing impaired loans
                                       has been greater in Western European
                                       markets, and at a swifter pace, factors
                                       XIJDIBSFBMTPSFĜFDUFECZUIFGBDUUIBU
                                       UIFOVNCFSPGOPOQFSGPSNJOHMPBO
                                       portfolio transactions in the real estate
                                       sector have been increasing, particularly
                                       in more developed markets.

                                       5IJTQBSUPGUIFTVSWFZGPDVTFTPOCBOLTij
                                       options for managing real estate loans
                                       where there is a technical breach of
                                       contract, or where debtors cannot pay
                                       their capital and/or interest on time.

                                       Current state and future expectations
                                       for impaired loans

                                       While in more established real estate
                                       markets the proportion of fully compliant
                                       loans has been consistently higher in
                                       recent years, our current results show
                                       positive developments in most countries,
                                       but particularly in Hungary (whose the
                                       current rate of fully compliant loans
                                       reached 90%), Romania (89%), Serbia
                                         BOE$SPBUJB  5IFPOMZ
                                       country in our survey lagging behind with
                                       a deteriorating ratio is Cyprus (56%).
Property Lending Barometer 2018
                                                                                                                              Managing impaired loans
                                                                                                                                                        13




Restructuring as an opportunity to                     Banks see restructuring most positively in
manage impaired loans                                  Sweden, the Czech Republic and Austria,
                                                       where the ratio of impaired loans that may
Respondents in our survey claimed                      be managed through restructuring are over
that almost 75% of their impaired real                 90%. Cypriot banks are the least optimistic
estate loan portfolios can be successfully             (45%), while banks in Romania, Poland and
managed through restructuring.                         Bulgaria are also cautious (58%, 61%, and
5IJTSFĜFDUTBTUBCMFUSFOEUIBUUIF                  62%, respectively).
rescheduling or restructuring of loans have
been the preferred approach for managing
impaired loans.


Proportion of impared real estate loans per country

        0%           10%           20%           30%            40%             50%             60%           70%           80%            90%            100%
 CZE
 SVK
 POL
HUN
ROM
SRB
BUL
CRO


SWE
  IRE
AUT
NLD
CYP
                                                          Minor problem                                             Serious problem
             Fully compliant real estate loans            (e.g. technical breach of Loan to Value covenant)         (e.g. unable to meet scheduled payments)
Source: KPMG Property Lending Barometer, 2018

Proportion of impaired real estate loans that may be managed successfully through restructuring

        0%           10%           20%           30%            40%             50%             60%           70%           80%             90%           100%
CZE
SVK
HUN
CRO
 SLV
 SRB
 BUL
 POL
ROM


SWE
AUT
  IRE
NLD
 CYP

Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
14   Prospects for real estate loan portfolios
Property Lending Barometer 2018
                                                                                                       Prospects for real estate loan portfolios
                                                                                                                                                   15




Prospects for real estate
loan portfolios
In this section, we assess survey participants’ expectations for the future of their
real estate loan portfolios in light of recent developments, as well as their strategic
BQQSPBDIUPSFBMFTUBUFěOBODJOH

Strategic importance of real estate                responded most positively, while a            Netherlands afforded it below average
ěOBODJOH                                           OVNCFSPG$&&DPVOUSJFTBMTPDPOěSNFE        importance.
                                                   that they consider real estate
4VSWFZSFTVMUTUIJTZFBSDPOěSNFEBMPOH          ěOBODJOHUPCFPGTJHOJěDBOUTUSBUFHJD       *OUFSFTUJOHMZ XIJMFUIFTFěOEJOHT
UFSNUSFOEUIBUSFBMFTUBUFěOBODJOHJT           importance, including Hungary, Bulgaria,      EPOPUGVMMZSFĜFDUUIFVOEFSMZJOH
clearly more strategically important in            Slovenia, the Czech Republic and              macroeconomic conditions of the
more established economies. Banks                  Poland. Similar to last year, respondents     countries surveyed, the pattern appears
from Ireland, Sweden and Austria                   from Croatia, Cyprus, Slovakia, and the       to be relatively enduring.

 Strategic importance of real estate financing for banks

       Central & Eastern European economies                                                    Other European economies
 5




                                                                                                                                                    HIGH
4.5
                                                                                               4.25

         3.83                                                                                            4.00       4.00
 4
                  3.75
                            3.67      3.60      3.60
3.5                                                    3.40
                                                               3.20
                                                                        3.10                                                   3.10
 3
                                                                                                                                         2.75
                                                                                2.67
2.5


 2


1.5
                                                                                                                                                    LOW




 1
        HUN       BUL       SLV       CZE       POL    ROM     SRB     SVK      CRO             IRE      SWE        AUT        NLD        CYP

Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
16    Prospects for real estate loan portfolios




$IBOHFJOGPDVTPOSFBMFTUBUFěOBODJOH          Focus on real estate financing within the bank's lending
within the banks’ lending activities              acitvity compared to one year ago
Banks were also asked how their focus has
                                                    Central & Eastern European economies
DIBOHFEUPXBSETSFBMFTUBUFěOBODJOHBTBO
element of their lending activity compared
to one year earlier.

Banks from almost all countries indicated an
increase since last year, the only exceptions
being Cyprus, the Netherlands and Poland,               0       2                   55                        27               16
who reported that their focus on real estate
ěOBODJOHXBTNBJOUBJOFEDPNQBSFEUP
UIFQSFWJPVTZFBS5IFTJHOJěDBOUJODSFBTF
in focus was noted in Bulgaria, Slovenia,
Romania, Hungary and Serbia, also
SFĜFDUJOHBUSFOEPWFSBOVNCFSPGZFBST
(with the exception of Slovenia which was
not included in the survey last year).              Other European economies

Most important factors affecting real
estate loan portfolios

Banks were also asked to identify the key
drivers affecting their real estate portfolios.
                                                        0            6                       67                         27           0
Similar to previous years, the most
TJHOJěDBOUGBDUPSGPSCBOLTJO&VSPQFXFSF
the macroeconomic conditions in the local
market. Increased uncertainty in the global
political and economic environment that
affected local economies in 2016 appears
UPCFBSBOFOEVSJOHJOĜVFODFPOCBOLTij
lending activities.                                     Significantly decreasing               Decreasing                     Maintained


No other factor affects banks’ real estate              Increasing                            Significantly increasing
lending activity by a comparable measure,
according to this year’s survey results.          Source: KPMG Property Lending Barometer, 2018



Most important factors affecting real estate loan portfolios
                                                            CEE economies                                  Other European economies
 Macroeconomics conditions in the local market


 Lack of prime properties


 Lack of active properties

 Activities of European Central Bank / National Banks


 Macroeconomic conditions in Europe


 New strategy


 Lack of equity


 Decreasing / negative interest rates

Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
                                                                                                                      Prospects for real estate loan portfolios
                                                                                                                                                                  17




Nevertheless, a lack of investors and        Central & Eastern Europe and in other                               the most, responses indicated that
new strategy are additional factors that     European markets. Insurer/pension funds                             private equity/debt funds are expected
could impact the growth prospects of         are recognized competitors in real estate                           to see the strongest growth in this area,
their loan portfolios in Central & Eastern   lending predominantly in other European                             DMPTFMZGPMMPXFECZOPOMPDBMDPNNFSDJBM
European markets, more so than in more       markets.                                                            banks. Investment banks and insurers/
established economies. A lack of prime                                                                           pension funds are also expected to
properties, the activities of the European   In their response to our query on how                               grow moderately. Responses showed
Central Bank and/or national banks, and      they anticipate the real estate lending                             similar patterns in Central & Eastern
macroeconomic conditions in Europe also      activities of alternative lenders to change                         Europe, as well as in other European
received moderately high scores in both      in 2018 compared to 2017, respondents                               countries surveyed, with the only notable
country groupings.                           agreed that all alternative lenders bear                            difference being the somewhat stronger
                                             prospects for growth.                                               growth prospects of insurers/pension
Disposing of loan portfolios                                                                                     funds in more established economies.
                                             In terms of which alternative lenders are
In general, banks in most countries          likely to increase their lending activity
are now unwilling to dispose of part
of their loan portfolios in the next
NPOUIT*OIBMGPGUIFDPVOUSJFT      Competition with alternative lenders
surveyed, none of the banks showed
any interest in this opportunity. Even
in the remaining countries, less than a
third of the respondents banks indicated
such an interest. Only in three countries
did we identify a notable inclination
to disposal: in the Netherlands (40%),
                                             Level of competition




Cyprus and Croatia (both 33%), mostly
due to strategic exits by their banks.
Capital adequacy was also mentioned as
another factor for disposal by banks.

Alternative lenders

Banks were also asked which alternative
lender they consider as their biggest
competitor in terms of banks’ traditional
SFBMFTUBUFMFOEJOH5IFJSSFTQPOTFT
revealed, as in previous years, that
UIFTFTVSWFZQBSUJDJQBOUTWJFXOPO                                 Non-local commercial   Private equity/debt    Investment bank         Insurer/pension fund
local commercial banks as their key                                         bank                  fund
competitor in most of the countries.
                                                                                Central & Eastern European Markets            Other European Markets
Private equity/debt funds are considered
similarly strong competitors both in         Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
    18      0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT




2SSRUWXQLWLHVIRUƪLQDQFLQJ
new real estate projects
 5IJTTFDUJPOBTTFTTFTUIFPQQPSUVOJUJFTGPSEFWFMPQFSTJOPCUBJOJOHCBOLěOBODJOHGPS
 real estate projects.

 /FXěOBODJOH                                               ěOBODFOFXEFWFMPQNFOUT"MMDPVOUSJFT      5IFMPOHTUBOEJOHQBUUFSOBQQFBSTUP
                                                            were in the positive, with the only          prevail in terms of banks operating in
 Survey participants in all countries are                   exceptions being Sweden and Cyprus,          the eurozone area being less open to
 RVJUFPQFOUPěOBODFJODPNFHFOFSBUJOH                    where banks, on average, are less open       lending in other currencies. Outside of
 projects, with the highest level of                        in this respect. Banks in Ireland, Austria   the eurozone, banks in Croatia, Hungary,
 interest shown in Ireland, Hungary,                        and Slovenia exhibited the greatest          Poland and the Czech Republic showed a
 "VTUSJBBOEUIF$[FDI3FQVCMJD5IF                       PQFOOFTTUPXBSETěOBODJOHOFX               higher level of openness to the prospect,
 openness of banks in Slovenia and                          development projects.                        while Swedish banks indicated they were
 Cyprus is more tempered, but still                                                                      less open.
 positive in this respect.                                  Bank representatives were also queried
                                                            on whether they are open to lending in
 Respondents expressed a more cautious                      currencies other than that of the country
 approach in terms of their willingness to                  where the property/bank is located.


  Openness of banks to finance development/income-generating projects

            Central & Eastern European economies                                                         Other European economies
MORE OPEN
LESS OPEN




            CRO       ROM        POL       SVK        CZE         BUL   HUN      SRB     SLV              CYP     SWE     NLD      AUT      IRE

               New developments                     Income-generating projects

 Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
                                                                                                             0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT
                                                                                                                                                                     19




Asset class preferences                                     especially in Ireland, the Netherlands                     particularly so in the Czech Republic,
                                                            and Austria. In Central & Eastern Europe,                  Romania and Slovakia.
Banks also provided a response                              POBWFSBHF PGěDFJTNPTUQSFGFSSFE 
regarding their preferred asset class for                   especially in Hungary and Bulgaria.                        5IFMFBTUQSFGFSSFEBTTFUDMBTTPO
EFWFMPQNFOUěOBODJOHJOFBDIDPVOUSZ                                                                                 average was the hotel sector, with the
                                                            Among CEE markets, the popularity                          exceptions of Croatia and Cyprus, where
As in previous years, residential is the                    of the industrial/logistics asset class                    banks representatives expressed a strong
most preferred asset class among those                      TJHOJěDBOUMZJNQSPWFEBDSPTTNPTU                         preference for this class.
surveyed in more established markets,                       markets since the previous survey,


Banks’ sector preferences in providing development financing by asset class (5 - top priority)


            Office                         Residential                      Retail                        Industrial/Logistics               Hotel/Resort

                                                                                                                                                                         Central & Eastern European economies
     SVK        2.5                           3.0                              4.5                           4.0                               1.0

     CRO        3.0                           4.3                              3.0                           2.7                               4.7

     SLV        3.0                           3.0                              3.3                           3.7                               2.0

     CZE        3.3                           3.8                              3.0                           4.3                               1.0

    ROM         3.8                           3.3                              2.8                           4.0                               2.3

     POL        4.0                           2.5                              2.8                           3.3                               2.3

     SRB        4.0                           4.2                              2.8                           2.2                               1.8

     BUL        4.5                           3.5                              3.0                           2.8                               3.3

    HUN         5.0                           2.8                              3.3                           3.2                               1.3
                                                                                                                                                                         Other European economies




      IRE       3.3                           5.0                              1.7                           2.3                               3.0

     CYP        3.5                           1.8                              2.0                           2.9                               4.5

     NLD        3.6                           5.0                              2.6                           2.8                               1.3

     AUT        3.8                           4.8                              2.2                           2.4                               2.2

    SWE         4.6                           4.0                              1.3                           3.5                               1.8


AVERAGE         3.7                           3.6                              2.7                           3.1                               2.3

            0         1   2   3   4   5   0         1   2    3    4   5    0         1   2   3   4   5   0         1     2     3   4   5   0         1   2   3   4   5
Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
20    0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT




$SJUFSJBGPSěOBODJOH                                 JNQPSUBOUDSJUFSJBGPSPCUBJOJOHěOBODJOH   independent feasibility study/valuation
                                                      for a project are a strong business model    and the size of the requested loan, the
Having seen how open banks are                        and the quality of the asset.                latter also ranked the lowest in more
UPěOBODJOHQSPQFSUJFT BOEIBWJOH                                                                established economies.
considered their asset class preferences,             Other important criteria are the
the following section considers the                   reputation and references of the             Loan-to-cost ratios (LTC)
criteria in regards to selecting projects to          developer/operator as well as the
ěOBODF                                               ěOBODJBMCBDLHSPVOEPGUIF                 Bank representatives were also
                                                      developer/investor.                          questioned about their technical criteria
"MPOHUFSNQBUUFSOBQQFBSTUPQSFWBJMJO                                                         GPSěOBODJOH5IFSFTQPOTFTPOUIFJS
terms of a consensus among the banks                  5IFMPXFTUSBOLFEDSJUFSJBJOUIF$&&       MPBOUPDPTUSBUJPTWBSJFECZDPVOUSZBOE
surveyed in all countries, that the most              countries are the existence of an            asset type.


Banks’ most important criteria when considering real estate financing
                                                                 CEE economies                           Other European economies
 Strong business model/quality of the asset


 Reputation and references of the developer/operator


 Financial background of the developer/investor


 Level of owner’s equity


 How well the project is planned, status of permitting process


 Pre-letting/pre-sale level


 Existence of an independent feasibility study/valuation


 Size of the requested loan

Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
                                                                                          0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT
                                                                                                                                                21




Overall, the difference between the              Poland, the Netherlands and Slovenia are       In the case of other European economies,
average ratios in CEE and other European         UIFMFBTUDPOTFSWBUJWF XJUIBWFSBHF-5$      MPBOUPDPTUSBUJPTBSFCFUXFFOBOE
countries, in terms of how much equity           SBUJPTPG                           JFSFĜFDUJOHBDBQJUBMTUSVDUVSF
banks require from developers is not                                                            PGEFCUBOEFRVJUZ *O
TJHOJěDBOU BWFSBHF-5$SBUJPTBSF              -PBOUPDPTUSBUJPTJO$&&FDPOPNJFTGPS      these markets the residential sector also
0.67, and 0.64, respectively). However,          UIFPGěDF SFTJEFOUJBM SFUBJM JOEVTUSJBM    IBTUIFIJHIFTU-5$SBUJPPOBWFSBHF BU
within the country groupings there are           logistics and hotel sectors are in a range      GPMMPXFECZPGěDFBU
TJHOJěDBOUEJGGFSFODFTBDSPTTDPVOUSJFT        PGCFUXFFOBOE JFSFĜFDUJOHB
Banks in Sweden, Romania, Ireland                DBQJUBMTUSVDUVSFPGEFCUBOE       As in previous years, the hotel sector
and Cyprus require the highest level of          23% equity). On average, the residential       requires the highest equity ratio in most
FRVJUZ XJUIBWFSBHF-5$SBUJPTPG         TFDUPSIBTUIFIJHIFTU-5$SBUJPBU      of the countries surveyed, in a range of
0.62, while banks in the Czech Republic,         GPMMPXFECZPGěDFBU                     


Loan-to-cost (LTC) ratio expectations for financing highly rated real estate development projects
in the next 12-18 months

        Central & Eastern European economies                                                    Other European economies
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
          CZE      HUN       POL       SVK      SLV        BUL   CRO     SRB        ROM          AUT       NLD       SWE         IRE       CYP

             Office             Residental             Retail      Industrial/Logistics         Hotel/Resort
Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
22   0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT




Loan-to-value ratios (LTV)                           *O$&&FDPOPNJFT QSFMFUSBUJPTGPSPGěDF
                                                     and retail projects are on average 44%
"TJTTJNJMBSGPS-5$SBUJPT UIFSFJTOPU          and 49%, respectively, while industrial is
BTJHOJěDBOUEJGGFSFODFCFUXFFOUIF                 at 61%.
BWFSBHF-57SBUJPPGUIFBTTFUDMBTTFT
per country grouping, with the average               #BOLTijBWFSBHFQSFMFUSFRVJSFNFOU
for CEE countries at 0.66, and for other             JOPUIFS&VSPQFBONBSLFUTGPSPGěDF
&VSPQFBODPVOUSJFTBU5IJTJOEJDBUFT          developments is 60%, 67% for retail
that banks are willing to provide similar            developments and 73% for industrial
amounts of credit in proportion to the               developments.
total appraised real estate value in both
country groups.                                      5IFHFOFSBMUSFOEUIBUJOEVTUSJBMQSPKFDUT
                                                     BSFSFRVJSFEUPPGGFSIJHIFSQSFMFU
For Central & Eastern European                       SBUJPTUPPCUBJOěOBODJOHIBTCFFO
FDPOPNJFT UIFMPBOUPWBMVFSBUJPTGPS             DPOěSNFECZSFTQPOEFOUTJOWPMWFE
UIFPGěDF SFUBJM JOEVTUSJBMMPHJTUJDTBOE         JOPVSTVSWFZ SFĜFDUJOHUIBUCBOLT
hotel/resort sectors range from 0.59 to              are less open to speculative industrial
 JFSFĜFDUJOHBDBQJUBMTUSVDUVSFPG         QSPQFSUZEFWFMPQNFOUT5IJTJTNBJOMZ
EFCUBOEFRVJUZ 5IF                 related to the fact that in the industrial
retail sector, on average, has the highest           segment it is more common to develop
-57SBUJP  GPMMPXFEDMPTFMZCZPGěDF          properties according to a “build to suit”
industrial and hotel, at 0.66, 0.65 and              concept, which means that the property
0.63, respectively.                                  is developed based on the (dominant)
                                                     UFOBOUijTTQFDJěDOFFETBOESFRVJSFNFOUT
In the case of other European economies,
the range is somewhat broader, between               Debt service coverage ratios
BOE SFĜFDUJOHBDBQJUBM
TUSVDUVSFPGEFCUBOE                 5IFEFCUTFSWJDFDPWFSBHFSBUJPT
FRVJUZ 5IFMPXFTUBWFSBHFQSPQPSUJPOT             İ%4$3ı FYQFDUFEGPSJODPNF
PGFRVJUZBSFSFRVJSFEGPSUIFPGěDFTFDUPS         generating projects of investors with
(35%), while the most equity is needed               excellent reputations and sound business
for hotel and resort projects (40%).                 plans were also examined.

Similar to previous years, the hotel                 *ODPNFHFOFSBUJOHQSPKFDUTJOUIFPGěDF
TFDUPSijTMPBOUPWBMVFSBUJPJTUIFMPXFTU          and retail sector offer the lowest DSCR
among all the asset classes in both                  ratios (1.31 equally), considering all
market groups, with an average of 0.62.              responses across country groupings.

Pre-let ratios                                       Banks operating in CEE economies
                                                     require the lowest DSCR ratio for the
#BOLTijQSFMFUFYQFDUBUJPOTBMTPWBSZ               retail asset class, at an average of
greatly across countries and sectors.                 GPMMPXFEDMPTFMZCZPGěDFBU
0OBWFSBHF QSFMFUSBUJPTGPSUIFPGěDF            Industrial and hotel projects require
and retail sectors are lower in most of              higher DSCR ratios of 1.31 and 1.36,
the markets compared to the industrial               respectively.
sector.
                                                     In other European economies’ banks
"MPOHUFSNUSFOEQSFWBJMTUIBUCBOLTJO            expect the lowest average ratio for
more established economies tolerate                  JOEVTUSJBM  BOEPGěDF  GPMMPXFE
less risk in relation to the speculative             by retail (1.44) and hotel/resorts (1.59).
nature of real estate projects, and require          5IJTVOVTVBMQBUUFSOJTNBJOMZFYQMBJOFE
EFWFMPQFSTUPBDIJFWFBIJHIFSQSFMFU              by the relatively high DSCR ratios Dutch
SBUJPXIFOěOBODJOHBQSPKFDU BMUIPVHI             CBOLTBQQMZUPNPTUQSPKFDUT  
banks in Austria appear to be less                   except for industrial projects (1.43).
conservative in this respect, especially in
the retail sector compared to other banks
operating in more established economies.
Property Lending Barometer 2018
                                                                                                0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT
                                                                                                                                                      23




Loan-to-value (LTV) ratio expectations for financing highly rated income-generating real estate projects in the next 12-18 months

        Central & Eastern European economies                                                     Other European economies
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
        HUN       SVK       CZE         POL      SLV      ROM          SRB     BUL     CRO        AUT        IRE      NLD         CYP     SWE
            Office            Retail             Industrial/Logistics           Hotel/Resort


Pre-let-ratio expectations for financing highy rated office, retail and logistics real estate
development projects in the next 12-18 months

        Central & Eastern European economies                                                          Other European economies
100%


 80%


 60%


 40%


 20%


  0%
          SLV       SRB      HUN         POL      CRO         CZE        BUL     ROM      SVK          CYP         AUT      IRE         SWE      NLD
             Office             Retail             Industrial/Logistics

Debt service coverage ratio expectations for financing highly rated income-generating real estate projects
for selected countries in the region

        Central & Eastern European economies                                                                    Other European economies
2.00
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
          CZE       SVK      HUN         SRB       POL       CRO         ROM     SLV      BUL                      AUT      IRE         CYP      NLD
             Office             Retail             Industrial/Logistics           Hotel/Resort

Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
24     0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT




Interest premiums                                      PGěOBODJOHDPOEJUJPOTBNPOHCBOLT           JODPNFHFOFSBUJOHQSPKFDUT BTUIFSFJT
                                                       hence they required relatively low interest   less risk associated with such projects
Survey respondents submitted a range                   QSFNJVNTJONPTUNBSLFUT5IJTUSFOE         (e.g. there is no longer risk related to the
for the interest premium they would apply              prevailed in some markets (e.g. Hungary,      EFWFMPQNFOUQIBTF 5IFEJGGFSFODFJO
POBNPOUI&VSJCPSCBTJT JGBEFWFMPQFS            Poland, Ireland), but in other markets it     required average risk premiums between
or investor of outstanding reputation with             was reversed (e.g. Romania, Bulgaria,         JODPNFHFOFSBUJOHBOEEFWFMPQNFOU
a solid business plan approached them.                 the Netherlands), according to this year’s    projects vary across the countries. For
                                                       results from our survey.                      example, Polish banks offer premiums
5IJTTFDUJPOPGPVSSFQPSUPOMZJODMVEFT                                                            UIBUBSFMPXFSCZŨCBTJTQPJOUT
UXPBTTFUDMBTTFT PGěDFBOESFUBJM XIJDI            5IFQSFNJVNBQQMJFEPOOFXPGěDFBOE         POBWFSBHFGPSJODPNFHFOFSBUJOH
are in 2018 key focus sectors from a real              retail developments in Central & Eastern      PGěDF  BOESFUBJM  BTTFU
estate investment perspective in Europe.               European economies currently ranges           classes compared to premiums for new
Premiums for all asset classes in each                 GSPN0OBWFSBHF $[FDI            EFWFMPQNFOUT  #BOLTJO
country are presented in the country                   banks require the lowest premiums,            the Netherlands provide lower premiums
QSPěMFTFDUJPOPGUIJTSFQPSU                         while Croatian banks require the highest.      CZCBTJTQPJOUTPOBWFSBHF GPS
                                                                                                     PGěDFBOESFUBJM  JODPNF
Overall, interest premiums are the                     Banks were also queried about the             generating projects than for new
lowest in economies with lower risk                    interest premium that they would apply        EFWFMPQNFOUT  
QSPěMFTBOEXFMMFTUBCMJTIFESFBMFTUBUF              POBNPOUI&VSJCPSCBTJTPOMPBOTGPS
markets, spurred by competition among                  IJHIRVBMJUZJODPNFHFOFSBUJOHQSPQFSUZ      Among the CEE economies, Czech
ěOBODJOHJOTUJUVUJPOTUIBUDPOUSJCVUFE                projects.                                     and Slovakian banks apply the lowest
to more favorable conditions available                                                               premiums, while the highest are applied
to borrowers. However, there are                       Based on the responses of those               by Serbian and Croatian banks. In the
FYDFQUJPOT BTSFĜFDUFECZUIFSFMBUJWFMZ             surveyed regarding the interest premiums      case of the other European economies,
higher loan interest premiums in the                   BQQMJFEPOJODPNFHFOFSBUJOHQSPKFDUT        banks in Sweden require the lowest,
Dutch and Irish real estate markets.                   these countries we ranked regarding           while Cypriot banks mandate the highest
                                                       the favorability of the terms they offer.     QSFNJVNTGPSJODPNFHFOFSBUJOH
In previous years there was a tendency                 Compared to interest premiums required        projects.
that an improved economic environment                  for new developments, a lower premium
across Europe resulted in the easing                   is applied by most of the banks for


Loan interest premium applied by banks for highly rated estate development projects in selected countries

          Central & Eastern European economies                                                        Other European economies
7.0%

6.5%

6.0%

5.5%

5.0%

4.5%
4.0%

3.5%

3.0%
2.5%

2.0%
1.5%

1.0%
0.5%

0.0%
          CZE        SLV      SVK          POL    HUN        SRB   BUL      ROM     CRO                AUT      SWE     NLD      CYP       IRE

               Office              Retail

Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
                                                                                            0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT
                                                                                                                                                  25




Length of loan                                    policies limit the longest term of the          JTJOBSBOHFPGZFBST8IFODFSUBJO
                                                  loan they contract for. Consequently, the       conditions are met, Irish banks are ready
Survey participants were asked what the           difference between the implied maximum          to apply a very low amortization rate (2%),
minimum required average annual loan              amortization period and the available           yet their maximum length of contract is
BNPSUJ[BUJPOSBUFXPVMECFBUUIF-57            maximum contracted length of the loans          relatively low (average 8.9 years).
level applied for highly rated real estate        is much greater in more established
projects, as well as what the longest             economies in other European countries           In comparison with banks’ responses for
contracted term of the loan would be for          (22 years) than the average in the CEE          UIJTTUVEZMBTUZFBS UIFSFJTOPTJHOJěDBOU
ěOBODJOHBQSJNFJOWFTUNFOUJODPNF               countries (8 years).                            difference in terms of the average implied
generating property.                                                                              maximum amortization period (24 years)
                                                  In Central & Eastern European                   and the average available maximum
Calculating the implied maximum                   economies, the implied maximum                  contracted length of the loans (11 years).
amortization period from the minimum              amortization period of the loan and the
amortization rate, and cross checking that        available maximum contracted length             In terms of asset classes, taking the
against the longest indicated contracted          PGUIFMPBOSBOHFZFBSTBOE         average of all markets surveyed, there are
term banks apply, the difference reveals          years, respectively. Banks in Poland,           OPTJHOJěDBOUEJGGFSFODFTCFUXFFOUIF
insights into the market conditions of            when certain conditions are met, are            amortization rates applied for different
banks in the various economies they               ready to apply the lowest average               BTTFUDMBTTFT5IFSBUFTSBOHF 
operate in.                                       amortization rate level (3.6%).                 XJUIPGěDFQSPKFDUTSFDFJWJOHUIFNPTU
                                                                                                  favorable terms, and industrial projects
Overall, banks in more mature markets             In other European economies, the implied        the least favorable ones. Similarly, on
operate in competitive environments               maximum amortization period of loans            average, the available maximum contract
which drive them to offer low                     SBOHFTGSPNZFBST XIJMFUIF             length applied by banks for different asset
amortization rates; however, their internal       available maximum length of contracts           classes ranges from 10.2 to 11.2 years.


Loan interest premium applied by banks for highly rated income-generating
real estate projects in selected countries

         Central & Eastern European economies                                                       Other European economies
8.0%

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
          CZE      SVK       SLV         POL    HUN   BUL     ROM     SRB     CRO                   SWE        AUT       IRE       NLD       CYP

             Office              Retail

Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
26    0QQPSUVOJUJFTGPSěOBODJOHOFXSFBMFTUBUFQSPKFDUT




Maximum amortization period* and available longest
contracted term (in years)

                Central & Eastern European economies

     POL




     CZE




     SVK




     HUN




     CRO




     ROM




     SRB




     BUL




                Other European economies

      IRE




     SWE




     NLD




     AUT




     CYP




AVERAGE




            0     5      10     15      20      25     30    35    40     45    50    55   60

                 Maximum amortization period*               Longest contracted term

*Note: Implied maximum amortization period expressed in years, which is calculated from the
minimum annual amortization rates (expressed in percentage) provided by the surveyed banks.
Source: KPMG Property Lending Barometer, 2018
Property Lending Barometer 2018
                                           Closing the gap: the convergence of the CEE region
                                                                                                27




Closing the gap:
the convergence of
the CEE region
5IJTTFDUJPOSFWFBMTBIJTUPSJDBMQFSTQFDUJWFPOIPXUIFěOBODJOHPG$FOUSBM&BTUFSO
European real estate markets performed against Western European benchmarks.
Based on previous KPMG Property Lending Barometer surveys, eight countries are
included in the CEE grouping: Bulgaria, Croatia, the Czech Republic, Hungary, Poland,
Romania, Serbia and Slovakia. In the Western European sample, we included four
countries in our analysis: Austria, Ireland, the Netherlands and Sweden.

'BDUPSTJOĜVFODJOHMPBOQPSUGPMJPT               in Western Europe has been the lack of
                                                 prime properties, until macroeconomic
Initially we observed what factors               factors rose to the top of the ranking
JOĜVFODFEUIFCBOLTijSFBMFTUBUF                in 2018. In the meantime, in CEE, the
portfolios in the two regions, and how           lack of prime properties has been a
UIFTJHOJěDBODFPGUIFTFGBDUPSTIBT            moderately important factor, but never
DIBOHFEPWFSUIFZFBST5IFNPTU                UIFNPTUJOĜVFOUJBMPOF
TJHOJěDBOUGBDUPSJOUIF$&&SFHJPO
has always been the macroeconomic                5IFBDUJWJUJFTPGUIF&VSPQFBO$FOUSBM
conditions in the local market, and this         Bank and national banks have made an
has also become the most important               increasingly important impact on banks’
factor in Western Europe.                        real estate portfolios in both regions
                                                 examined, particularly in 2016 when
Due to the maturity of the more                  it was the most important factor in
established real estate markets, the most        Western Europe.
JOĜVFOUJBMGBDUPSGPSSFBMFTUBUFQPSUGPMJPT
Property Lending Barometer 2018
28    Closing the gap: the convergence of the CEE region




Most significant factors influencing banks’ real estate loan portfolio




    2015                                            2016                                    2017                                        2018
             CEE Macroeconomic conditions in the local market                       CEE Activities of European Central Bank / National Banks
             CEE Lack of prime properties                                           WE Macroeconomic conditions in the local market
             WE Activities of European Central Bank / National Banks                WE Lack of prime properties

Source: KPMG Property Lending Barometer 2015-2018

Loan interest premiums                               premiums in the CEE region (3.7% for          than half of their portfolios impaired. In
                                                     PGěDFBOEGPSSFUBJM POBWFSBHFJO     the more established Western European
A dynamic change in loan interest                    2015) were much higher than comparable        markets in our sample, the proportion of
premiums applied by banks for highly                 Western European premiums in a range          fully compliant loans was over 80% at
rated real estate development projects               PGJO CFGPSFUIFEJGGFSFODF   the time.
IBTBMTPCFFOFYBNJOFE CPUIGPSPGěDF              between the regions shrank, with CEE
and retail projects. A retrospective view            QSFNJVNTEFDSFBTJOHUPCZ           Presumably as a result of successfully
shows the clear convergence of the two               2018, in close proximity to Western           restructuring of their portfolios, both
regions, as the relatively high interest             European premiums in a range of               regions experienced an improvement
QSFNJVNTJOUIF$&&SFHJPO                                                      in the structure of their real estate loan
on average in 2015) gradually decreased,                                                           portfolios. With a couple of exceptions,
approaching the level of what banks                  Impaired loans                                all CEE countries have managed to reach
BQQMZJO8FTUFSO&VSPQFJF                                                            Western European levels in terms of the
GPS$&&BOEGPS8FTUFSO                    In 2015, the CEE region was quite             proportion of fully compliant real estate
Europe in 2018.                                      diverse in terms of the proportion of         loans by 2018, as all improved to above
                                                     impaired loans in banks’ real estate          85%, with Croatia and Bulgaria, though
5IFUSFOEJOMPBOJOUFSFTUQSFNJVNT                 portfolios. Some countries, like the Czech    improving, still lagging behind at 68%
applied by banks for highly rated income             Republic and Poland had over 85% of           and 78%, respectively.
generating projects shows a similar                  their portfolios fully compliant, while
QBUUFSO5IFSFMBUJWFMZIJHIJOUFSFTU               others like Croatia and Serbia have more
Property Lending Barometer 2018
                                                                                   Closing the gap: the convergence of the CEE region
                                                                                                                                        29




Loan interest premium to be applied by banks for highly rated real estate development projects
4.5%


4.0%


3.5%


3.0%


2.5%


2.0%
       2015                                         2016                            2017                                            2018
               Office CEE                   Office WE              Office CEE          Office CEE

Source: KPMG Property Lending Barometer 2015-2018


Loan interest premium to be applied by banks for highly rated real estate development projects
4.0%


3.5%


3.0%


2.5%


2.0%


1.5%
       2015                                         2016                            2017                                           2018
               Office CEE                   Office WE              Office CEE          Office CEE

Source: KPMG Property Lending Barometer 2015-2018


The proportion of fully compliant real estate loans

 95%



 85%



 75%



 65%


 55%



 45%


 35%
       2015                                         2016                            2017                                           2018
          CRO          SRB         BUL        ROM          HUN   SVK         NLD   AUT        POL          CZE          IRE         SWE

Source: KPMG Property Lending Barometer 2015-2018
Property Lending Barometer 2018
30   Conclusions
Property Lending Barometer 2018
                                                                                                                  Conclusions
                                                                                                                                31




Conclusions
European countries face varying macroeconomic outlooks and       Alternative lenders are expected to increase their involvement
QFSDFJWFESJTLQSPěMFT CPUIPGXIJDIGVOEBNFOUBMMZTIBQFUIF   JOěOBODJOHSFBMFTUBUFJOBMMNBSLFUTJODMVEFEJOPVSTVSWFZ
prospects for each country’s real estate market.                 "NPOHUIFBMUFSOBUJWFMFOEFST OPOMPDBMDPNNFSDJBMCBOLT
                                                                 are banks’ biggest competitors in the CEE region, while
                                                                 private equity/debt funds and insurer/pension funds provide a
                                                                 comparative threat in more established markets.

8IJMFěOBODJOHDPOEJUJPOTSFNBJOPWFSBMMQPTJUJWFJO&VSPQF 
increasing external risks limit the general growth prospects.


                                                                 "MPOHUFSNQBUUFSOQSFWBJMTBTCBOLTJOHFOFSBMQSFGFS
                                                                 ěOBODJOHJODPNFHFOFSBUJOHQSPKFDUTPWFSOFXEFWFMPQNFOUT
A decline in total investment volume continued for the third
DPOTFDVUJWFZFBSJO&VSPQFJOUIFěSTUNPOUITPG
While Germany and the UK continued to attract over half of
UPUBM&VSPQFBOUSBOTBDUJPOWPMVNFEVSJOH) TJHOJěDBOU
growth occurred in Ireland and Poland.
                                                                 5IFQSFGFSSFEBTTFUDMBTTJONPSFFTUBCMJTIFENBSLFUTJT
                                                                 SFTJEFOUJBM GPMMPXFECZPGěDF TJNJMBSUPMBTUZFBS)PXFWFS 
                                                                 JO$&&NBSLFUT PGěDFJTNPTUQSFGFSSFE5IFIPUFMTFDUPS
                                                                 SFNBJOTUIFMFBTUEFTJSBCMFCZCBOLTJOUFSNTPGěOBODJOH JO
                                                                 both country groups.
5IFQSPQPSUJPOPGOPOQFSGPSNJOHMPBOTIBTTJHOJěDBOUMZ
decreased in all markets, with a few exceptions; banks
DPOěSNFEUIFJSPQFOOFTTUPPGGFSSFBMFTUBUFěOBODJOH 
FTQFDJBMMZGPSJODPNFHFOFSBUJOHQSPKFDUT

                                                                 Similar to the last two years, the difference between the
                                                                 implied maximum amortization period of loans and the available
                                                                 maximum contracted length of loans offered by banks is much
                                                                 greater in more established economies (22 years) than in CEE
Banks in our survey indicate a preference restructuring          economies (8 years).
problematic loans rather than seeking foreclosure, especially
in more established economies.

                                                                    4JNJMBSUPQSFWJPVTZFBST BNBSLFUTQFDJěDBOBMZTJTGPS
                                                                    each country is provided in the section that follows.
                                                                    5IFTFDPVOUSZQSPěMFTIJHIMJHIUUIFTVSWFZFENBSLFUTij
                                                                    VOJRVFDIBSBDUFSJTUJDTBTSFĜFDUFECZUIFJSWBSZJOHNBSLFU
                                                                    fundamentals, as well as the present and prospective
5IFGPDVTPOSFBMFTUBUFěOBODJOHIBTJODSFBTFEJOBMM             DPOEJUJPOTGPSěOBODJOH
countries, except Cyprus, the Netherlands and Poland, where
it has remained unchanged since last year.
Property Lending Barometer 2018
32   $PVOUSZQSPěMFT
Property Lending Barometer 2018
                                            $PVOUSZQSPěMFT
                                                              33




&RXQWU\SURƪLOHV
           Austria              Bulgaria
   34-35              36-37

           Croatia              Cyprus
   38-39              40-41

           $[FDI                Hungary
   42-43   3FQVCMJD   44-45

           Ireland              Netherlands
   46-47              48-49

           Poland               Romania
   50-51              52-53

           Serbia               Slovakia
   54-55              56-57

           Slovenia             Sweden
   58-59              60-61
Property Lending Barometer 2018
34   $PVOUSZQSPěMFT




                                        Economy



                                                         2.9%                                   2.0%                                4.9%


                                                   GDP Growth                                *OĜBUJPO                        Unemployment rate
                                                     2018 F                                   2018 F                              2018 F




       Austria
                                        Source: Economist Intelligence Unit

                                        Prime yields



                                                     3.50%                                   3.75%                                 5.75%

         Investment volume
           reached a peak in                    High Street Retail                            0GěDF                               Industrial
      2017, while yields hit a                      (Q1 2018)                               (Q1 2018)                             (Q2 2018)

       record low. Investors,
              especially from             Source: EHL                            Source: EHL                              4PVSDF$VTINBO8BLFěFME
          Germany, acquired
                                        Key investment transactions H1 2018
             trophy assets in
      7JFOOBijTPGěDFNBSLFU                      City                        Property                  Seller                     Buyer

                                                  Vienna                      FMZ Stadlau               Tristan Capital            Bayerische
                                                                              retail park               Partners                   Versorgungskammer
             In 2018 sustained
           high demand in the                     Vienna                      The Icon Vienna           Signa                      Allianz
           investment market
               is facing limited                  Vienna                      Porr Tower                HPM Privatstiftung         KFIM & JR AMC

            availability of high
                                                                              Motel One
                 quality assets.                  Vienna
                                                                              West Bahnhof
                                                                                                        Acron Group                Real I.S


                                                  Vienna                      EHK 107                   Haring Group               Union Investment


                       Christoph Fida   Source: KPMG Property Lending Barometer, 2018

                                        Transaction volume and YoY change H1 2018




                                                      1,468
                                                     EUR m

                                        Source: Real Capital Analytics
                                                                                    -27                          %
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