The study attempts to assess the prospects for lending in a number of European markets and depicts the specific mood of lending sentiment in each of those countries: Austria, Bulgaria, Croatia, Cyprus, the Czech Republic, Hungary, Ireland, the Netherlands, Poland, Romania, Serbia, Slovakia, Slovenia and Sweden. The survey involved 70 representatives of banks from the 14 countries included in the report.
In addition to painting a broad picture of such sentiments, the 9th edition of the Property Lending Barometer reports on banks’ preferred asset classes, assesses the effect that alternative lenders have upon these markets, and how lending institutions are faring when it comes to impaired loans.
Smooth sailing European economy
Part of the optimism surrounding the financing of real estate projects in Europe may have to do with the fairly upbeat economic activity recently seen across much of the continent, according to Andrea Sartori, who heads KPMG’s Real Estate practice in Central & Eastern Europe.
He comments: “The decent economic growth as well as other improved economic measures we’ve seen in the last few years may continue, though at a more moderate pace. In all the countries where we’ve surveyed real estate lending sentiment, GDP growth of approximately 2-3% is expected.”
Of course, Sartori adds, each country’s perceived risk profile must be taken into consideration. He offers that external risks like Brexit could also exert their effects upon some markets going forward.
Slight dip in investments, H1 2018
However, he notes that in the first half of this year European property investment has seen somewhat of a reduction.
“Total investment volume for the first six months of this year decreased by 19% compared to H1 2017, falling just below EUR 110 billion,” explains Andrea Sartori, “which is the lowest level since the first half of 2014, but this may be due to most of these deals from the first half being pending.”
CEE vs. “developed markets” - convergence
This year’s edition of the Barometer also includes a section on the factors affecting loan markets in established versus emerging markets. The countries have been categorized in two groups - Central & Eastern European, and “Other” European economies - with the latter representing mostly more mature, “western” markets compared to the states in CEE, which share many similarities and can be considered developing markets for the purposes of KPMG’s analysis.
Andrea Sartori explains: “Having performed the Property Lending Barometer survey for a number of years now, we are able to draw a historic trend for Central & Eastern Europe (CEE), comparing the numbers from Western Europe.”
He reports that now similar factors appear to affect such markets in both regions, for example in terms of loan interest premiums, which have steadily decreased in CEE.
However, differences remain - preferred asset classes
Survey participants’ responses to their preferences regarding asset class, however, still show that there remain essential differences for lenders in Western Europe compared to those lending in developing markets in Central & Eastern Europe.
KPMG’s Andrea Sartori explains: “Residential is the preferred area for lenders in established markets like the Netherlands, Austria or Ireland, our survey respondents tell us. Meanwhile, most in CEE have indicated their preference for the office segment, but the industrial/logistics asset class is also becoming increasingly popular, especially in places like the Czech Republic, Romania and Slovakia. This is a clear result of strong economic recovery experienced in these markets in recent years.”
He adds that hotels appear to be the least favored asset class among the choices, although Cyprus and Croatia are exceptions to this rule, whose economies are strongly influenced by tourism.
“Romania remained an attractive real-estate market for existing and new investors in the CEE region, fueled by consumer demand and increasing purchasing power, with the retail and office sectors dominating” explains Ori Efraim, Partner, Head of Real-Estate, KPMG in Romania. “The recently positive growth period of the European economy is likely to continue, though at a more moderate pace. Unemployment is decreasing, disposable income is expected to increase, but inflation has begun to increase and interest rates may not remain unchanged for the medium term. Tensions in global trade, slow Brexit negotiations and the unresolved refugee crisis in Europe overshadow long term prospects for growth,” he adds.
“We notice an optimism surrounding the real estate financing projects in Europe that can be observed also in Romania. This is reflected in the approach of Romanian banks, as most have included real estate financing in their banking strategy as a pylon for their growth. Nevertheless, there is a general concern that increased uncertainty in the global political and economic environment may continue to have an impact on the development of real estate lending activities” says Ionut Mastacaneanu, Director, who leads the team of tax consultants specialized in Financial Services within KPMG in Romania.
Impaired loans down, non-traditional lenders
“Other good news is that impaired loans are fewer and fewer in the CEE region: the proportion of fully compliant loans in banks’ portfolios in Central & Eastern Europe has become much greater, over 85% in most of the countries. Romania is among the top performers in the region, with almost 95% of loans fully compliant. In comparison, four years ago, only two countries in CEE enjoyed a higher than 85% proportion of fully-compliant loans in their banks’ portfolio,” adds Tudor Grecu, Partner, Head of Financial Services, KPMG in Romania.
In terms of the CEE / Other European markets’ comparison, KPMG’s Barometer also reveals how banks view other potential lenders as competition. For those bank representatives surveyed in Central & Eastern Europe, non-local commercial banks appear to exert the highest level of competition, while insurers/pension funds appear to be the up-and-coming challengers for banks in Other European markets included in the KPMG survey.