Consultants say that this represents an end to the era of speculative projects during which people felt that anything that was put up could be sold. Instead, developers will come under pressure to be more selective in terms of the number and types of projects they pursue, as well as more careful in attending to the preferences of their clients.
What began as a crisis in the American mortgage market has, during 2008, developed into a matter of global concern affecting every almost part of the global economy. In its wake, the 158-year-old global investment bank Lehman Brothers filed for bankruptcy; after astronomical losses, Merrill Lynch agreed to sell itself to Bank of America; while insurance giant AIG has had to be propped up by the US government to the tune of tens of billions of dollars.
Over the course of the year Slovak market watchers have modified their earlier rosy predictions, which were based on the hope that Central Europe was to a certain degree immune to the global crisis. In late September they revised downwards their predictions for the country’s economic growth.
While Slovakia is still expected to remain a top European Union performer, economic growth will slow, with both businesses and banks being more cautious in their investments and plans.
Banks in Slovakia admit that the price of borrowing is likely to grow, especially for clients with variable-rate loans and, in the medium-term, for those with short-term fixed rates.
The Slovak Bank Association has already said, for example, that mortgage loans will become more expensive and that the willingness of banks to finance the entire purchase price of real estate through a mortgage will also decrease, according to the SITA newswire.
One of the main effects of the financial crisis on foreign banks has been to restrict their access to credit; an increasing lack of confidence among them has meant that they have been charging ever-greater premiums when lending to each other, if they are willing to lend at all.
“The fundamentals of real estate are still very healthy, but without financing, nothing can reasonably be built,” Laurie Farmer, managing director of Spiller Farmer international real estate consultants, told The Slovak Spectator.
According to Andrew Thompson, a managing partner at Cushman & Wakefield, some banks are already putting on hold any new speculative lending and all of them are altering their terms so that existing business plans have become either unviable or much less attractive.
This is affecting all sectors of the market, according to Glyn Evans, head of the project management team for the Czech Republic and Slovakia at King Sturge, adding that the current stagnation of the market is likely to continue until lenders ease their borrowing conditions.
“All real estate segments are currently slowing down,” he added.
Jörg Kreindl, the managing director of global real estate consultancy firm CB Richard Ellis, said that what the market has seen is a change in the strategy of investors and developers, which has been imposed on them by the banks.
“Everybody has had to become more cautious as the banks are no longer providing loans and credits in the way they used to,” Kreindl told The Slovak Spectator. “Certain projects that had been planned are not being pursued or proposed, or are not even being considered at all.”
All sectors affected
Clare Moger, director of the tax and legal services department at PricewaterhouseCoopers Tax in Slovakia said that the global financial crisis is the biggest factor affecting the Slovak real estate market and is having an impact on all its sectors.
“At present, even those buyers with available funds are reluctant to acquire real estate unless sellers make very large price reductions and they are prepared to wait for some time, because no-one knows what is going to happen to market values,” Moger told The Slovak Spectator. “Meanwhile sellers are not prepared to reduce prices unless they are forced to sell.”
In all sectors, quality is increasingly important, and the gap in pricing between high and lower quality assets is likely to be greater after this crisis than it was before, she added.
As for future developments, Moger said it is difficult to predict how prices for apartments will develop as there have been significant changes in Slovakia in recent years and many factors other than the financial crisis have affected residential prices.
“As it is difficult at present for developers to obtain debt funding for projects, the number of new developments being started at this time is lower than it would otherwise have been,” Moger added.
According to Moger, banks and financial houses are no longer willing to lend at high loan or cost to value ratios, and are requiring high margins even for relatively low-risk projects.
“Banks are currently unwilling to lend to speculative or otherwise high-risk development projects,” she added.
Developers admit that several projects might slow down or be halted completely due to the change in banks’ attitudes towards financing new projects.
While for retail and residential projects in the mid-range price band banks will more carefully analyse the solvency and experience of the developer, with office space and luxury residential projects they will be twice as careful about picking which projects they finance and
which they reject, Roman Karabelli, a spokesman for developer HB Reavis, told The Slovak Spectator.
According to Karabelli, while the crisis touches everybody in the market, the banks, which in fact set off the spiral, have been most affected.
“From one extreme, when they were placing huge amounts of cheap money in the market and sometimes poured funds even into lower quality projects, they have now swung towards an overly cautious attitude when they want to finance hardly anything,” Karabelli said.
Karabelli hopes that after a certain time the hysteria dragging the market either in one or the other direction will be replaced by “a golden middle road” on which good developers’ projects will be rationally separated from the weaker ones.
Karabelli predicts that the crisis might also have a soothing effect on the market since it could result in fewer active developers.
“We can expect to see the end of the era when anyone who owned land was a developer,” Karabelli said.
Radomír Nemeček, general director of TriGranit Development Slovakia, said in a statement that it is currently very difficult to separate the impact of the financial crisis itself from the panic among investors.
“Only firms which are able to react flexibly with self-reflection will be able to withstand the financial crisis,” Nemeček said. “I don’t see the fact that some projects will not be carried out this year, but rather in two year as a major problem.”
Petra Šedinová of real estate developer Orco Group said that cutting costs is part of the global strategy of the company in response to the global financial crisis.
“We have noted the greater caution on the part of banks and financial institutions,” said Šedinová.
“The primary goal of the company is to secure enough liquidity to allow us to continue working on all the important projects,” Šedinová said. “A possible slowdown in the purchase of land and eventually future projects is linked to this effort.”
Orco has been selling some of its assets, depending on the different stages that projects are at, Šedinová said.
The saving programmes, according to Šedinová, should reduce Orco’s operational costs in 2009 and thus increase total operational profit.
The company is also devoting considerable attention to communication with banks and financial institutions because project financing is one of the core factors affecting the future success of projects, she said.
Luxury segment feels the heat
J&T Real Estate, part of the J&T financial group, cut prices by 40 percent for the first stage of its River Park project, a luxury complex on the Danube embankment below Bratislava Castle, on November 11. The developer made no secret of the reason for its move.
“The main reason for cutting prices is the financial crisis,” J&T spokesman Maroš Sýkora told The Slovak Spectator. “It turned out that the market is not willing to pay the prices that were defined for these apartments.”
According to Sýkora, the financial crisis is affecting everybody.
“The approach of the banks towards projects has changed,” Sýkora said. “This of course means that the real estate market, and along with it the luxury segment, are quite affected.”
J&T Real Estate, however, does not expect a further drop in prices. The present measure applying to River Park, a Sk7-billion project, is for a limited time, Sýkora said, adding that the developer expects the market to recover and prices to gradually return to their original level.
However, the real estate sector in general avoided a major downturn in the third quarter of 2008 and prices have not dropped dramatically.
The average cost per square metre fell by a modest 0.4 percent compared with the second quarter of this year, settling at Sk46,453 (€1,542), according to data from the National Bank of Slovakia, which monitors real estate prices together with the National Association of Real Estate Agencies (NARKS).
The data also showed that prices grew 20 percent year-on-year that quarter, and that in the second quarter prices grew by 4.9 percent quarter-to-quarter and 31 percent year-on-year.
From a regional point of view, the highest average price per square metre of real estate last year was in Bratislava Region, at Sk59,970 (€1,991), down 1.4 percent quarter-on-quarter; in Košice Region, at Sk34,920 (€1,159), down 2.3 percent; and in Prešov Region, at Sk34,866 (€1,157), up 9.8 percent year-on-year.
The least expensive real estate was in Nitra Region, where it reached Sk23,966 (€795.5), up 5.9 percent quarter-on-quarter, the SITA newswire wrote.
Martin Lazík, secretary general of NARKS, said that the real estate market in Slovakia has been stagnating for some time now, as people have become more cautious due to the financial crisis.