Property operations policy

At the end of 2000, the Bank’s cumulative commitments to the Property Sector in the Bank’s countries of operation totalled Euro 450 million, supporting investments of Euro 1.5bn. Through its activities in these sectors, the Bank contributes to the development of markets which form part of the basic business infrastructure expected by foreign investors as a prerequisite to their investment in a particular country and for the sustained expansion of their business overtime. The property operations policy was approved by the EBRD board on 11 December 2001.

Further, the Bank’s engagement in policy dialogue especially with regard to property rights and mortgages contributes to the advancement of the institutional framework that is a prerequisite to a proper development of the property markets. Additionally, through its investments and the backwards and forward linkages they create to related economic sectors, the Bank also helps in the development of the local construction markets and relevant property and tourism service sectors thus contributing to the shift of local economies from industry to services over time.

The success of the Bank’s involvement in the development of local real estate markets is likely to be more pronounced in the next few years in the Advanced Countries in particular where diversity of activities and instruments will be the focus. In these countries, significant developments have already taken place in capital cities, many with the Bank playing a leading role as a catalyst for cofinancing. For the real estate markets in these countries to develop further and the developers and financiers to be incentivised to move into the provinces (and to Early/Intermediate countries as well as Russia), the entirety of the property markets in the Advanced Countries need to function properly. The Bank therefore has a leading role to play in developing the depth of the secondary property markets in the Advanced Countries mainly through the introduction of new instruments which will target both domestic and international investors.

Finally, in the regional centres the Bank has a key role to play as a risk taker in the development of the primary property and hotel markets by being a catalyst for the development of institutional quality real estate of local proportions. By being flexible and innovative the Bank is in a position to promote transition effectively in the property and hotel markets of its Countries of Operation and in parallel remain highly additional by introducing new types of investors, both local and domestic, which contribute to the increase in scope of financial sources available for the development of the sector and thus promoting transition further.

In the financing of operations in these sectors the Bank has the following objectives:

1. Promoting private sector investment through equity and debt financing and creating long term investment vehicles and new products for local and foreign investors in order to promote both the primary hotel and property markets as well as the secondary markets.
2. Participating in smaller projects through direct sector specific investment funds and credit lines aimed at supporting SMEs.
3. Supporting projects that transfer technology, knowledge and management skills to the property and tourism markets.
4. Developing the local construction and building materials sectors.
5. Supporting environmentally sustainable development projects including projects that support urban regeneration.

The implementation of these objectives will depend on the transition stage of a particular country. The legacy left by communist countries was one of state or cooperative ownership of property facilities and typically low standards of service and maintenance. Property development and pricing bore little relation to economic opportunity costs. There was a lack of international standard hotels and office space, housing was highly subsidised and supply driven, warehouses were inadequate for proper storage and development. In property, transition must be seen as a process in which different elements of the business environment progress jointly and reinforce each other, primarily as a function of business volume. In a simplified manner one could depict the transition process as typically starting with the creation of hotels and office space in capital cities, then extending to include warehousing and logistics and finally moving to retail, mixed use, leisure and residential and also to regional centres as GDP levels rise.

In response to progress in economic transition and the impact (very reduced FDI) of the Russian crisis of 1998 on the property markets of Russia and the region, commitments and pipeline development have recently focused on the Advanced Countries. At the end of 1998 44% of the Bank’s portfolio in the Sector was in Advanced Countries and 16% in Russia compared to the end of 2000 when the relevant figures are 54% and 9%. The product split has also changed dramatically; at the end of 1998 the Bank’s portfolio in the Sector had 10% of equity in commitments compared to 47% at the end of 2000.

For the medium term the target is to rebalance the geographical distribution of commitments away from the Advanced Countries while continuing to address the transition needs and market demand for EBRD’s presence in those markets. The Bank has been highly additional in the Sector as can be seen from its mobilisation ratio of 3:1. Commercial banks, in particular, are either not able to extend term loans in some of the Bank’s countries of operations or are limited in the tenor they can provide without the Bank’s involvement. Property investments due to their capital intensive nature and the return requirements of developers and financial investors require long term debt financing in order to be successful.

Since 1995, the time of the last strategy paper for the Property Sector, the Bank has played a catalytic role in supporting the development of the Sector by providing mainly project financing in the form of secured senior debt financing to local/foreign joint ventures. The main sectors financed over this period have been city centre hotels, offices and warehousing in response to the transition needs of the economies where little commercial property infrastructure existed in the early 1990s of a standard acceptable to foreign investors. Since that time, however, there have been significant developments in the property markets in the Bank’s countries of operation. The degree of change has varied from country to country and has been a function mainly of the level of foreign direct investment, the improvement of GDP per capita and the influx of world class developers. This changing environment necessitates more flexibility and imagination on the part of the Bank to develop appropriate products to meet the increased demand in primary markets as well as to support the development of secondary property markets which will increase market depth.

In response to market changes, equity products are likely to be more appropriate in the Advanced Countries as well as debt with longer maturities. In Russia and the Early Intermediate countries focus will remain on senior loans; equity may be considered only in selective cases where the risk/return considerations justify it. In terms of subsectors the Bank will continue working on developing office and hotel infrastructure in capital and major regional cities and warehousing in the Early/Intermediate countries and Russia as well as in the regional centres of the Advanced Countries. In addition to the sub sectors financed to date, the Bank will develop its activities in residential, retail/mixed use and leisure tourism depending on the transition demands of the Bank’s countries of operation. In parallel with implementing projects according to the priorities stated above, the Bank will continue a policy dialogue on institutional reform which is a necessity for well functioning property markets.

The policy proposes a flexible approach to financing the Property sector depending on the transition stage of the relevant countries and the Bank’s ability to be a catalyst in moving the transition of the property markets further.