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THE FINANCING CHALLENGE IN THE
NEW SCENARIO
Commercial banks face a complex challenge in
managing the impact of this crisis, which will mainly
affect arrears on consumer loans and loans to small and
medium-sized businesses.
The crisis comes at a time when banks are already
struggling to meet the higher capital requirements
imposed by the European Central Bank (ECB) and
margins have dwindled as a result of the drop in interest
rates.
In this perfect storm, banks are cutting back significantly
on lending for new residential construction and real
estate projects of all kinds. The upshot is that banks’
mortgage business will be concentrated in their best
customers and the markets least affected by the crisis.
We expect to see stricter pre-sales requirements, which
for many developers will become an insuperable barrier,
and changes to mortgage agreements to allow financial
institutions to allocate the loan amount to the properties
sold in the way that is most to their advantage.
At the same time, the number of funds entering the
alternative financing business is increasing, although,
because of their minimum finance amounts and profile,
these funds tend to focus more on the financing of
commercial assets than residential developments.
THE DEVELOPER SECTOR
New build housing developers tend to have bought the
land with their own funds and seek financing only for
the construction phase of their developments.
Banks have always required a high percentage of presales
before they will grant financing for such
developments. The greatest risk for developers at the
start of the pandemic was that their customers would
withdraw from their purchases, especially in the last few
months before delivery. This risk has not materialised
and practically all residential developers are delivering
their completed homes without problems. There was
also a risk that the banks financing the developments
would refuse to allow buyers to take over the
developers’ mortgage loans (subrogation) if the buyers’
creditworthiness was in doubt as a result of lay-offs
under workforce adjustment plans (ERE); or that the
valuations performed by independent valuers would fall
significantly, to the point where the banks would no
longer allow subrogation.
In the end, these risks have not materialised, so the
developer sector is continuing to deliver its sold homes
without any difficulties, while significantly increasing its
levels of cash.
For all these reasons, coupled with the migration of
secondhand home buyers towards new-build, residential
property developers are not under any financial pressure
that might persuade them to lower prices.
In our view, the biggest constraint on the development
of new-build housing will be the restrictions on the
financing of new projects and the greater caution
exercised by residential developers in starting
developments they have been ready to launch on the
market.
As the market self-regulates, we expect to see a 30-35%
decrease in housing starts in 2021 compared to 2019,
which will take production back to the levels seen four
or more years ago, i.e., around 65,000 to 70,000 homes.