Following the breakout of the COVID-19 pandemic, the Industrial/Logistics asset class has presently become the most attractive financing option for a majority of banks in Central & Eastern Europe (CEE), according to the results from the latest edition of KPMG’s Property Lending Barometer (PLB), an annual study that attempts to measure banks’ lending sentiments in Europe’s property markets.
Prior to the pandemic outbreak, the office segment was the preferred asset class for bank financing. Not surprisingly, survey respondents across Europe quoted hotels and resorts as the least preferred asset class, given the recent lockdowns and border closings that have squeezed the life out of European tourism.
In this year’s survey KPMG included over 60 participating lending institutions in 11 European countries, which provided their responses to questions about the level of impaired loans, real estate’s importance as part of their bank’s strategy and loan size averages and preferences, among others.
KPMG’s 2020 survey was conducted in unprecedented times for the global economy; as the PLB results show, the COVID-19 crisis is definitely exerting a profound impact on lending institutions’ perspective on their property lending portfolios and is affecting their eagerness to fund real estate projects going forward. One finding in the survey was unanimous across countries: PLB survey participants agreed that the macroeconomic conditions in their markets would affect both what happens in the property markets in terms of projects initiated, as well as how the lending market will determine its actions and what kinds of property developments are likely/unlikely to receive funding.
The Head of KPMG’s Real Estate practice in CEE, Andrea Sartori, who initiated the Barometer, explained that due to the economic fallout from the COVID-19 pandemic, overall, quarterly transaction activity in Europe dropped in Q2 2020 to a level not seen since 2014. He added that together, Germany and the UK, continued to attract close to half of the total European transaction volume in the first 6 months of the year. Despite that, according to Mr. Sartori, there are rays of light in the KPMG survey for those hoping to invest in property markets going forward: “Bank representatives who participated in our survey are still open to offer real estate financing for income-generating projects, but are not as eager to give loans to new developments.”
Property and bank lending sentiment in Cyprus
From a strategic viewpoint real estate financing seems to be less important for Cypriot banks compared to last year, but also in contrast with the majority of the other European participants. On the question relating to the attractiveness of other industries in comparison to real estate, local bankers chose the Healthcare sector as the most attractive industry sector, followed by the Energy and Utilities sector.
Regarding the openness of Cypriot banks to finance new real estate projects, the results revealed that banks are less open to finance new developments and are more open to finance income-generating projects, in line with European trends. The Industrial/Logistics asset class appears to be the most preferred sector in providing financing. Despite the challenges faced by the industry, local bankers quoted the Hotel & Resort sector as their number two priority (last year it was the preferred choice), in contrast to the rest of Europe, which sees this asset class as the least preferred following the pandemic outbreak. Cypriot banks categorised residential developments as the least preferable (possibly because a stable income-generation flow is not attached to such developments).
The PLB also includes detailed information on responses relating to key financing metrics, like Loan-to-Value (LTV), Debt Service Coverage Ratios (DSCR) expectations and loan maturity profiles. According to the local responses (European averages excluded Cyprus), the average LTV ratios, depending on the asset class, range from 61%-66% (compared to the European average range of 54% - 68%); for DSCR (for income generating projects) local banks gave a range of 1,38 – 1,86 (compared to the European average of 1,26 – 1,60); the loan amortisation period for Cypriot banks was 9,26 years (compared to the European average of 25,15 years).
In respect to recent local developments in real estate and property lending in 2020, Board Member and Head of Deal Advisory at KPMG in Cyprus, Christophoros Anayiotos, said: “The conditions before the pandemic were favourable for real estate financing, with interest rates at their lowest and high liquidity from banks. Despite the pandemic outbreak, the sector appears to have retained its appeal, albeit with a more cautious approach from the banks.”
For more details and insights on the present state of the market and of expected future developments on the real estate lending market, download the survey KPMG Property Lending Barometer 2020 and contact the real estate advisory team of KPMG in Cyprus.