Whom Banks Favor

Project financing in the development market remains quite vague, and it is difficult to define clearly what the banks want. The companies that managed to obtain financing for their projects, do not tend to share their experience, explaining that everyone has to follow his own scheme, to invent ways to bring the bank to his side, to use administrative resources, etc. To date, the biggest players in the market are Sberbank (whose share is about 80 %, according to expert estimates), VTB, construction loans issued by the European Bank for Reconstruction and Development, and other commercial banks.

The credit financing of the"Construction and Real Estate Operations" industry remains underfunded. More than 60 % of the financing had been achieved thanks to market, own and state budget funds. This index reflects a high potential for the credit market, as a whole, and for VTB Bank in particular – said Pavel Kosov, vice-president of VTB. Vera Setskaya, president of GVA Sawyer, thinks that the issue of project financing was just as acute in 2012 as it was in 2011. Despite sufficient liquidity, the banks considered the quality of the project with much greater care than before the crisis. The quality of the project implies a proven concept, profound marketing studies, showing the relevance of a project and the potential level of return on investments, good reputation of the team carrying out the development, as well as the company that will manage the project after its completion. Banks’ requirements include pre-signed contracts with tenants, and their quality. Despite the fact that classical project financing assumes that the loan will be repaid from flows generated by the property itself, Banks’ requirements, as a rule, include additional guarantees by surety companies, personal guarantees by shareholders and other liquid collateral, turning project financing into funding against a collateral pledge.

Doubtful ideal

Western banks are very cautious in considering projects this year; mainly they only refinanced completed projects in Moscow. Russian banks were ready to lend up to 70 % of the total project cost. Western banks were more conservative and preferred the traditional scheme of 60 to 40 % – say the experts at EBRD. According to Roman Taptygin, head of the representative office of Aareal Bank in Moscow, mostly banks give money to completed objects with stable cash flows. A few are engaged in the financing of development, as an industry put on steam, – mostly these are state-owned banks and, to a very limited extent, some private banks and subsidiaries of foreign banks. Moscow, of course, is of the greatest interest, while in the regions,the financing is limited, mostly available to retail and warehousing projects. If we talk about various real estate sectors, then the retail branch most readily receives credit financing. The cash flows are the most demonstrable in this segment – to a certain extent, as they are guaranteed by signed prelease agreement with prospective tenants. It is more difficult to get loans for a hotel, as the occupancy and room rates are less predictable. It is difficult to obtain project financing for unconventional and untested, in Russia, project formats – added Vera Setskaya. Modern economic trends are directly reflected in the financial sector, in general, and determine approaches to project financing in the banking sector in particular. For example, VTB actively finances the construction industry. However, several factors determine the specificity of each project’s financing. It is the long-term character of the loans, high capital intensity of the projects, complex financing structure (usually the ratio of borrowed and own funds is 30/70), the complex structure of the relations between lenders and investors, and others –- says Pavel Kosov. That is why banks consider every project individually, studying the business plan for each project attentively.

The loan interest rate directly depends on the conditions of the loan agreement. The more guarantees and security available, the lower the rate is. In summer 2012, rates in foreign currency ranged from 9 % to 11 %. This fall banks have increased interest rates and toughened the terms. At present the ruble rate averages 13–15%, as estimated by experts.

Interest rate vacations are not provided for the period of construction, but there may be holidays for up to a year and more for repayment of the principal, says Vera Setskaya. Explicitly or implicitly, banks also reserve the right to unilaterally change the rate in case of changes in Central Bank' refinancing rate and other cases, which is extremely dangerous for the borrower. All banks offer refinancing of the project after its completion, and stabilization of flows on much more favorable terms. For example, after refinancing the rates can be 1–2 % lower. The loan period may be from five to seven years, with the loan amortization period of 10–12 years.

The representatives of banking institutions were not inspired by the question about market forecast, but some, nevertheless, expressed their views. So, Roman Taptygin believes the situation will not be easy. Now as banks are seriously concerned about the level of liquidity of the banking system, the new regulations and more tightened requirements for risk assessment, there hardly will be any significant increase in loan portfolios. Generally, banks will maintain the current level of real estate lending. At the same time, according to VTB Capital, relatively high growth rates of the credit market sector are expected in 2013–2015 (26–27 %),as well as an increase in residential property prices and increase in rental rates of commercial real estate.