Do you see this moment as a major inflection moment? I mean for the economy and for the assumptions we make about running a business?
A lot of things have changed since we last spoke. But thanks to the experience in the last crisis in 2008/2009, we feel more confident this time. I don’t think there’s a serious situation on the market because a majority of the companies are healthy and are performing great. They’re fully capable of judging what’s possible in terms of investment and development. What’s changed is the new accent on ESG. This is the dominant topic for all the players in the market: for the developers, investors and in particular banks. The banks need to consider future compulsory reporting, including the mean asset ratio measuring what percentage of projects they finance are green.
You have to react to that, don’t you?
Of course. At the same time, we prefer to finance ESG-compliant projects because that’s where we see the future. We also try to help clients realize the situation and improve their technology.
In the end, then, do you see ESG as a burden that’s been imposed on you, or as an opportunity?
As an opportunity. In my view, it’s an opportunity for all of the players on the market. In fact, from a lender’s point of view, it’s not so difficult, because the majority of financing comes from banks. Banks are in a position to influence quite a lot. But you also have to realize that banks have a limited amount of money available for financing in general. You have to choose what to finance. I always choose ESG projects, through which I’m helping clients adjust their technologies through new norms.
It means such project qualify for loans from you, but the borrowers don’t get any other advantages.
We can’t offer them lower margins, so it’s not an advantage for the client. We have to do it because banks will have to report their green asset ratio. Non-green assets will bear higher risks and will consume more regulatory capital. That’s another reason why I always choose these green assets for financing because it will be more economical in terms of granting new money to the market.
It’s frustrating to listen to market players who can’t get over the need to reduce carbon emissions and complain about being forced into sustainability. It seems very short-sighted.
Exactly. The history goes back to the signature of the Paris agreement on climate control and its main goal for reducing our carbon footprint. As we all know, buildings produce around 30-40% of carbon emissions. It’s a long-term goal and each building can be upgraded to a better status using various measures, not just photovoltaics but even by installing insulation. Of course, it’s easy to decide to finance development projects that are rated C or better. But for ČSOB, 80% of our activity is financing investment where it’s not so easy to select the right product. Still, we can choose and agree with clients that it’s their responsibility to upgrade the status of the building.
That means, you monitor them to make sure they carry out needed investments?
Yes. And it is usually in our joint interest that building owners are aware of the status of their building. We explain to them that we only want to finance green buildings, and that if an existing building has a C label, something has to be done to improve it. They agree to take that on board and on a way how to deal with it. We can’t expect it to be done in three to six months, it can take a year or two to realize.
That won’t please investors who until recently only bought buildings that wouldn’t require any new CAPEX for the next five years. The way the market is developing, everyone has to take a more hands-on approach.
That’s true. Facility management is very important. So is awareness of the status of the building. Each building that’s for sale or for rent must have its own energy certificate. It’s ridiculous because it’s not compulsory everywhere in the EU. We’re lucky in the Czech Republic that it’s compulsory that buildings going on sale must have a certificate. Under the current wording it’s precisely expressed the status of the building and how it can be improved.
The rise of domestic investors helped get the Czech Republic through the last crisis. Will high CZK interest rates hurt their ability to get us through this one?
The majority of the majority of transactions are in euro. In our case it’s around 80%.
But it’s not easy for euro investors either. If rates are at 2.5%, if you include the swap, all-in financing rates are around 5.5%. Prime yields for Prague offices used to be at 4.5. How much of a repricing do you expect?
We are financing usually for 3-5 years, so it’s tough to predict what might happen. Thankfully, all the deals aren’t signed at the same time. We’re conservative lenders, so we usually grant between 50 to 65 LTV max. That means there is space to react to the market.
Are you saying prime yields could stay at 4.5%?
It depends on the type of asset. On certain assets they might remain the same or increase.
If 80% of your activity is with investments, aren’t things slow at the moment? Or is there more activity behind the scenes than meets the eye?
There are some loan top-ups, with some restructuring of big loans. But what’s also important is that the big players who got used to financing themselves with bonds are coming back for leverage.
Suddenly they’re interested in talking with you, because it’s basically impossible to sell bonds now.
It’s gone up dramatically and to go for new bonds will be extremely expensive. I don’t think they will totally switch from bonds to loans because that’s not possible from the volume point of view. But they tend to ask for more leverage now.
As loans come due, won’t potential sellers decide rather than refinance at current rates? A lot of investors are expecting this pressure will force many owners to sell.
It may in some cases, but I don’t expect this for the majority of the portfolio. Because if you have skilled investors, they care about the quality of the asset. They’re constantly in negotiations with the bank, adjusting the conditions and parameters of the loan. They definitely hate to be forced to sell.
If you have space in the LTV ratio, and the client is clever enough to invest into maintaining the quality of the building for tenants, I’m persuaded we can reach agreement on the financing. We can extend it to a certain extent. They can repay part of it and we can extend. I don’t think skilled investors will be forced to sell. They hate to be placed in that situation and if they are wise, they will take care of the quality and protect the value of the building.
By maintaining value, do you mean holding on to tenants or making the right investments?
Both. They must continuously upgrade the ESG level and keep the right tenants. The proper investments at the proper time will attract the tenants. Because these multinationals usually change buildings every 7-10 years and they need to have excellent quality buildings. Even our headquarters has to be kept up properly — it’s from 2007.
Lenka Kostrounová is Head of Real Estate Finance at ČSOB
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