Sylvia Gansser Potts, the EBRD's Director of Property and Tourism, speaks about the impact of the financial crisis on the property and tourism sectors of the EBRD's countries of operations.
What has the impact been so far on the property sector?
Some countries are more affected than others; Ukraine is hard hit for example. However, it is necessary to distinguish between the EBRD region and places like the US and the UK: in the EBRD region there is a fundamental gap between supply and demand. There is still a long way to go before that gap is filled. In London, lots of office blocks are built on a speculative basis, but in the region, the density is much lower and the Bank only invests in less developed markets.
The impact of the financial crisis started to show very early on: the EBRD used to syndicate all loans and of course there was a severe tightening of the debt markets in early 2008 and then a total shutdown in September. We had to reassess our structuring and involvement.
The Bank also had to look very carefully into its property and tourism portfolio. We generally have two different kinds of investment: direct loans and equity to projects, and investments in real estate funds; the funds invest in projects carrying debt. So the Property and Tourism team had to drill right down to do a thorough review of the sub-projects. The main concern was to identify any debt refinancing that might be needed over the next 12 to 18 months. On the direct lending side, EBRD has been conservative in its structures in the past, retaining its discipline throughout the boom years. Terms, pricing were not really competitive until recently, and we aren’t seeing dramatic issues with the portfolio owing to previous caution.
What has the effect been on clients and prospective clients?
EBRD-financed developments take typically two years to build. Those that are currently under development might face problems finding tenants and will have to accept much lower rent levels. Projects in our portfolio which are already occupied might face tenant default. That hasn’t had an instant impact on our existing clients yet, but we will see more of this issue as the year progresses. Devaluation will also affect our clients. They receive rents in local currencies, but these are pinned to a hard currency. The tenants take all the currency risk and the chances are that some of them won’t be able to support it, which will obviously have a knock-on effect. Looking ahead, this will have an impact on how new projects are structured.
We are getting an awful lot more telephone calls from potential clients, some who would have never needed EBRD finance before the financial crisis, but we have to be selective. I think some companies had forgotten that the risks in emerging markets are still high, in addition to the usual risks within the sector. The Bank is currently seeing more prominent sponsors and we can build relationships with clients we didn’t have before and build on that for the future. However a lot of people will wait and reflect before investing.
The amount invested in the property sector will fall, but the Bank will see a much greater proportion of it and will have to identify those clients who are prepared to accept more conservative terms and invest a greater equity share. The Bank too will have to be prepared to accept much greater risk.
What about tourism?
Tourism is riskier, there’s no two ways about it. Tenants in commercial property sign up for five to 10 years but in hotels, you take the risk every night: you don’t know from one night to the next what your prospects are.
There’s little doubt that it’s the high end of the market that’s going to suffer most. People will still go on holiday but they’re going to downgrade and fewer people will be travelling abroad; also the corporate travel and conference market has more or less dried up.
What is the outlook for property and tourism sectors?
In the medium to long term, there is a fundamental demand in the commercial property sector that has still not been met. There are no huge risks on the Bank's assets, but we and our clients are in for a tough time over the next 18 months. We won’t see the market return to the level it reached two years ago, but it will recover; we just have to be patient and help our clients to weather the storm.