The wall of equity targeting prime real estate investment in Central and Eastern Europe will increasingly benefit from a resurgent debt market, PropertyEU's latest briefing on the region has heard.
The wall of equity targeting prime real estate investment in Central and Eastern Europe will increasingly benefit from a resurgent debt market, PropertyEU's latest briefing on the region has heard.
Levels of equity have increased sharply in the last few quarters, with existing investors boosting the allocations and new players coming in, as economic growth returns to the market. 'There is more equity in the market now than in the peak years of 2005 to 2007, said Jos Tromp, head of CEE research for CBRE.
There are signs, however, that debt financing - which all but disappeared after the outbreak of the financial crisis - is returning for prime assets, though not to the extremes seen in the boom years, according to Tromp and Michael Atwell, CBRE's head of capital markets for CEE.
Atwell: 'There were record levels of debt in 2006-7and we all know that the oversupply of debt caused the problems that followed. Now we have a huge supply of equity. I get the sense in the last few months that certain investors are hoping to get more debt than has been available (since the crisis). Banks are coming under pressure to provide more attractive terms and then we get ourselves a lot of equity and increasing debt,' he added.
Good mix
This sounded like a 'good cocktail', quipped Gordon Black, co-head of Europe private real estate equity at Heitman.
'As long as it isn't a Molotov cocktail,' answered Helaba's CEE head Martin Erbe, the only banker on the panel. The equity-debt mix, he went on to say, doesn't appear to be approaching combustion point as LTV ratios on bank loans are a lot lower than the 75-80% levels during the peak years.
In the lean years following the financial crisis investors were happy if they could get 50-55% LTV or 'any leverage at all,' Erbe told the briefing at CBRE's European headquarters in London. 'Leverage ratios are now increasing but banks will feel comfortable going from 60% to 65% LTV as this is not a dramatic jump. There is clearly a trend and it's okay as long as we don't go back up to 75-80%.'
A new factor in contrast to the 2007-9 period is the emergence of debt funds in the last year or two. These funds, Erbe said, can sometimes provide an extra 10 percentage points of debt above the 65% available from the banks, bringing the overall LTV to 75-80%. 'This is something which is new in the market here and which is getting more and more popular. Some investors get their 75% but now it is a fair mixture between junior mezzanine or second tranche financing.'
Erbe added that the dominance of equity players in CEE acted as another stabilising factor in the market. German investors such as Allianz Real Estate, Union Investment, Commerz Real are prime movers. And more recently, Deutsche Asset and Wealth Management (DeAWM) acquired Rondo 1, the largest office building in Warsaw, for €300 mln.
'These companies are investing a huge amount of equity compared to the situation in previous times and that is stabilising the market,' he added.
Click on the link for more on the CEE Investment Briefing