Development projects are most at risk during the current crisis, delegates heard at Real Asset Media’s Debt Finance & Investment briefing, which took place yesterday at Norton Rose Fulbright’s offices in Frankfurt.
“All the insolvencies we’re dealing with are developers and construction firms,” said Stefan Schramm, partner, Norton Rose Fulbright. “We thought we would see insolvencies later, at the beginning of next year, but they have come earlier than expected.”
The only positive is that now, unlike in the GFC, there are “many players with plenty of dry powder who are willing to invest,” he said.
“The combination of rising yields and the increase in funding and construction costs will cause some stress to the sector,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “The bulk of development projects are not profitable anymore, so they have to choose whether to go ahead and build at a loss or abandon the project. There will be quite a shake-up in the sector.”
Interest rate rises and higher building costs are hitting small and medium companies hardest.
“On the development side we won’t see the big boys defaulting but the small and medium guys,” said El Alami.
The casualties are already mounting. “There’s a huge amount of work to be done because a lot of small developers are already underwater,” said Oliver Platt, managing partner, Arcida Advisors. “We have to treat every borrower fairly and provide new capital where there are difficult situations, to help this part of the market find some stability.”
Senior lenders are being more cautious and conservative in the current uncertain climate and they shy away from financing product development.
“Many project developments are not bankable anymore and they’ll be stranded, but we’ll always be there to finance a solid bankable asset,” said John Krant, managing partner, Salux Real Estate.
There is less propensity to be bullish in the market, so the availability of financing will shrink and the costs will increase.
“We don’t know where prices, costs or leverage will be so we have to incorporate a buffer for market fluctuations which will make financing more expensive,” said El Alami.
The situation is unlikely to change until there is less volatility in the market and until valuations reflect changed conditions more accurately.
“What’s preventing us from lending is lack of visibility,” said Debora Sobel, head of European debt origination, Allianz Real Estate. “Values also need to be adjusted. If the adjustment is quick, then activity will pick up much faster.”