The banking sector in Hungary is suffering the effect of a government-imposed crisis tax on the financial industry, meaning that players are apprehensive when committing to new deals that carry risks. But more importantly, many banks have not even figured out how to handle earlier deals that have gone sour. Instead of foreclosing on assets where loan contracts folded, they are continuing to revise contract terms and are doing everything they can to avoid taking over ownership of toxic buildings. No wonder: banks are interested in the revenue that these properties are – or would be – producing and not in becoming their owners.
“Banks are pursuing a policy of extend and pretend,” said Gábor Futó, CEO of property developer Futureal. As he sees it, the “denial” of the banking sector to realize and write off losses is only sufficient to hide expenses without actually addressing the issue. The almost complete reluctance of banks to issue development loans is also problematic, because it is unfair toward good borrowers, since they are the ones who have to pay the additional expenses caused by defaults, Futó said.
His concerns are shared by Gábor Borbély, CEE research analyst of property consultant CB Richard Ellis (CBRE). “This is no longer a real estate problem but an issue of the banking system in general. Banks have to accept that the losses these troubled assets represent have to be realized, because if they are incorporated into their portfolios they will not be able to issue loans,” he said.
How much longer?
Banks have been repeatedly called upon to start foreclosing instead of rolling toxic assets in front of them. Though there were indications that this would finally happen with commercial properties, not many distress transactions were seen in either 2010 or this year to date.
So how long can this go on? “It depends on the situation of the given bank. We know of buildings that have been in this limbo for five to ten years now,” said Adrienne Konthur, managing director of CBRE. Nonetheless, she is certain that there will be distress sales this year, even if not too many.
“We have looked at the stock, and out of hundreds of assets, there are maybe five or six that are actually marketable,” Konthur said. She noted that banks are now the – unhappy – owners of a wide range of properties and have to readjust their internal operations accordingly.
As an example, CIB Bank, frequently referred to as Hungary’s biggest hotel owner due to a number of folded loan agreements, has established an entire new department to sort things out in its portfolio. The team will most likely be kept busy just by taking stock of what it is exactly that they now possess.
All about pre-lets
Getting financing is difficult, but not impossible. If a developer manages to produce a pre-let figure of 30–40%, banks will likely be interested. Futó believes it is also a good idea to try and seek out club financing arrangements, meaning that a developer gets the funds from more than one bank.
He also highlighted partnership agreements, something his company is starting to actively pursue in the region, and whichmay also prove compelling. Such a set-up involves a project that lacks capital or is not strong enough on its own to get a loan, teaming up with a bigger reputable player on the market. Banks will be more likely to see this as a guarantee that the project they are about to finance is actually going somewhere.
The sweetest deal a developer could get is being commissioned to construct a new headquarters building for a large company. This naturally means a 100% pre-let, which is certain to get financing. This is not impossible, as an increasing number of companies are showing interest in Budapest as a venue for their base.
This article appeared in the BBJ's Office Market special report on April 22, 2011.
