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Banks getting ready for developers’ problems

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Large Czech banks are getting ready for the possibility that developers will not be able to pay their loans. According to their plans, they are not going to sell much of the flats and offices if they receive them from collateral. “If this scenario comes true, we would definitely not sell the flats and office projects below price,” Marek Ditz, head of specialised and institutional banking at ČSOB, told the daily E15.

Banks will therefore primarily try to save the projects under construction even at the cost of a later settlement of loans, or possibly by pouring in more capital. And if it is not enough, banks want to take over the property and secure that the project is completed to prevent their investment from devaluing. “In such a case, we would found a company to manage such properties,” said Ditz. Another bank, Česká spořitelna, also prefers finishing projects under way. “If a bank decides to sell the collateral, it has to count on that it will probably lose on it,” said Kamil Kosman, head of the property deals section at Česká spořitelna.

Banks can be property managers
Halting real estate projects under construction is not economical, but, on the other hand, developers are now finding it very difficult to secure financing for such projects. If the current crisis continues, many office and shopping centres may be left unfinished, though. That would mean losses not only for developers, but also for the financing banks.

Banks will try hard to prevent forced sales of properties and of projects under construction. They would incur losses in the current situation on the market where property prices have fallen by as many as 20%. “Banks would sell under disadvantageous conditions. That is why their effort is for a project to be completed and appreciated in commercial terms, and only then banks would resort to its sale,” said Zdeňka Klapalová, head of the Czech unit of the real estate company Knight Frank.

The recent takeover of the construction of the residential project Central Park Praha at Prague’s Žižkov is an example of such an approach. The real estate fund CPDP, in which Česká spořitelna is the majority investor, acquired a 99.9% stake in the project, invested CZK180 million in it and took over its management. A similar scenario may concern Sekyra Group and Orco development projects near the Smíchov railway station, in Žižkov and Bubny. Development of these extensive areas involves huge costs and uncertain yields at the moment.

Klapalová said forced sales would not be a good solution also because it is difficult to say now whether the market reaches its bottom soon and whether the crisis does not end as early as 2010 or 2011. However, for banks it means that they will virtually become developers and property managers for some time. ČSOB has admitted it might happen – the bank participates in a number of development projects and would establish its own property management company if necessary. Komerční banka would also seek an agreement with the developer rather than resorting to forced sales, Monika Klucová said.

The biggest developer experiencing problems at the moment is Orco, quoted on the Prague, Warsaw and London stock exchanges. The company has postponed the release of its 2008 economic results several times, and asked for court protection from creditors in France. However, some experts say that many developers are able to withstand the current crisis – providing they have good-quality projects and no big debts.

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