Domestic banks are continuing to finance real estate development. Preference is being given to existing major clients, as well as those who focus on the residential and logistics segments. Bankers are being very vigilant regarding locations which are more connected to tourism. Requirements for pre-sale or pre-lease have also increased, especially with office and retail properties. In these cases, banks will not finance speculative development, as has sometimes been the case in established locations in the past.
This summarises the results of the sectoral analysis of bank financing, which was carried out at the end of last year by the international consulting company, BNP Paribas Real Estate.
Conservative. This one word can be used to describe the approach of banks in relation to developers and investors after the two waves of Covid-19 and the subsequent restrictions. Great caution prevails towards the vast majority of new real estate projects, where the financial condition of the financed entity and the business potential of the project are examined more comprehensively than ever before. The requirements for the debt service coverage ratio (DSCR) increased and, conversely, the maximum limit of the LTV indicator (the ratio of the loan amount to the market value of the financed real estate/project) decreased by 10 - 15%, with the exception of residential projects.
Developers with a portfolio of easily repaid loans are at an advantage, as well as those who implement their projects in quality locations - preferably from the industrial or residential segment (including the increasingly popular cooperative housing). "But even in this respect, it is not a universal key to obtaining funding. It depends on the business strategy of banks and their diversification of risk." explains Jan Bohata from the investment department of BNP Paribas Real Estate. However, increased prudence does not necessarily mean a slowdown in banks' activity. In the case of domestic banks, the opposite trend was noticeable at the end of 2020. This may also be due to the projected year-on-year decline in banks' profits at 45-55% (comparison for the first three quarters of 2019 and 2020). Among other things, this is due to the decline in the number of loans provided.
So far, there has been no evidence of banks revoking loans from older lending decisions. Currently, however, plans for the construction or reconstruction of office and retail buildings, or projects related to tourism are being assessed more rigorously. Therefore, projects, specifically in the main streets around the centre of Prague, are at a serious disadvantage. Conversely, there is clear priority given to plans based on an already functioning local communities.
"As a result, banks are welcoming multifunctional projects where offices are mixed with retail or services. This adds more to larger urban projects in the wider city centre." remarks Jan Bohata, adding that the real estate market remains very attractive for banks in terms of interest margins.
However, according to the response from key bank managers, the Czech real estate market will not reach the levels seen at the beginning of 2020 until nearer the end of this year. Of course, this is provided that there are no further waves of the current pandemic and the consequent restrictions.