Increasing availability of development finance could lead to over-building of retail schemes in some markets in Central and Eastern Europe, a PropertyEU investment briefing has heard.

Increasing availability of development finance could lead to over-building of retail schemes in some markets in Central and Eastern Europe, a PropertyEU investment briefing has heard.

The primary trigger for increased lending will likely be the ground-breaking decision by the European Central Bank (ECB) to introduce a negative interest rate on funds deposited with it by commercial banks.

The ECB's move is designed to compel banks to lend more to boost economic growth in a bid to stave off a slide into deflation that could undermine the region's fragile economic recovery.

'There is going to be an increased amount of liquidity coming to the market. A certain percentage is going to seek real estate type returns and a percentage of that will seek development kind of returns in real estate,' according to David Brodersen, head of portfolio management Europe at US-based real estate firm Heitman.

So far, most of the liquidity is focused on Poland and the Czech Republic. South of Slovakia, he said, is a 'different world' with more limited available financing. But this will change gradually.

Brodersen was speaking at the PropertyEU CEE retail investment briefing hosted at Warsaw's ReDI retail real estate fair in late May. 'Hold on to your seats because I think our markets are in store for maybe more building than would be prudent. The real question is whether the development will be the right kind of retail or more of the copy-and-paste schemes [seen in recent years],' he added.

COMPETITION - UP CLOSE AND PERSONAL
Heitman's Brodersen said that the rise in development funding is also leading to increased competition faced by schemes within specific city markets.

To illustrate the point he cited Hradec Králové, a Czech city with about 94,000 inhabitants and an automotive plant about 100 km northeast of Prague. Heitman owns a retail centre there, HB Reavis has its own scheme and a planned development by ECE failed to get off the ground. 'All three schemes might have obtained financing and the question is does a city like Hradec Králové need three shopping centres?'

Brodersen cited Liberec, a Czech city of 102,000 people close to the northern borders with Germany and Poland, as an example of 'over-building of the wrong type of retail'. And over in Poland, Heitman is partnering with Neinver since 2010 on Galeria Malta, a 54,000 m2 retail scheme in Poznan (population 551,000). 'It is a dominant scheme and most people might also be aware of the rumours that there might be a scheme twice the size of ours being built nearby. That is the challenge of increased liquidity.'

HIGHER LOAN-TO-COST
Even before the ECB stimulus banks have been offering better loan-to-cost ratios - the development sector's equivalent to loan-to-value.

'Three years ago we would introduce a project to our road show and in a few months we would have a [bank lending] committee decision and the loan-to-cost ratio of between 50, 55 and 60%,' Elio Szmawonian, board member at developer Mayland, said.

'Last year we had 65% and just a month ago not one but three banks made offers of a 70% loan-to-cost on development financing of over €100 mln. This is a very positive sign that encourages investors in relation to Poland. The only difficulty is that you need a lot of studies and six months to convince the bank the project you are doing is feasible,' Szmawonian said.

PRE-LEASING COSTS
Another challenge for developers is the type of conditions that come with this increased financing liquidity, according to Sean Briggs, managing director, retail agency, Eastern Europe at Colliers International.

'If you look at the pre-leasing requirements that are needed nowadays compared to years gone by you are having to lease so much before the development starts which inevitably leaves money on the table. And, you are leaving rental income on the table by closing deals now there is a huge amount of pressure on whether a project actually works,' he said.

Colliers, Briggs said, is doing a lot of work for established developers, seeing if there really is the demand they require and whether the financial numbers actually hold up because of the leasing requirements.