Real estate finance in the middle of a corona crisis


As with all other sectors, the financial sector's priority is to secure its operations

Banks – just like other companies – have focused on safeguarding their employees and operations as well as the operations of their customers since the beginning of the COVID-19 crisis. The focus has, justifiably, been on creating a view of the situation and monitoring the market and their own loan portfolios as any outlook concerning the future is extremely slight amid the continuous change.

No long-term changes in the target profiles of real estate financing

Banks are focusing on their on-going financing projects, existing customers and current loan portfolios. Cautiousness has been seen in the cooperation between banks, at least momentarily, as large joint financing efforts, known as syndicated loans, have decreased. Increased risks have also been priced in inter-bank lending.

The situation also means that new real estate investments will temporarily decline. Even though the focus of banks is momentarily on safeguarding their operations, new lending has not ceased completely. From the point of view of the financing of real estate investments, long-term changes in financing target profiles are not expected.

Shopping centres were considered to be challenging even before the crisis, and the impact of the restrictive measures on retail is not making the situation easier. The grocery sector, however, is successful also during the crisis. The hotel sector was extremely active before the crisis peaked, but the hotel industry will suffer severely due to the restrictions, at least temporarily, in addition to the retail sector. Housing, care facilities, public-sector properties, logistics and offices in which all of the fundamentals of investments are in great order (location, tenant, condition of the building etc.) continue to be interesting.

Pricing new loans is difficult

With regard to new lending, banks are facing the challenge of rapid changes in their capital cost in the current market situation. In recent weeks, the costs have varied each day, which translates into difficulties in pricing lending. As is the case with other markets, efforts have been made to price the increased risk, which has been reflected in new loan offers; in general, new financing is taking place very cautiously and selectively.

The greatest turbulence has been seen in the equity market due to the transparency and quick reaction of stock markets. Many listed real estate investment companies have experienced swift share price changes, just like other equities. In Sweden, the real estate company share index (Fastighetsbolags–index) decreased more strongly in comparison with the Swedish equity market (OMXS 30), and it has not recovered for the time being.

The corporate bond market was momentarily almost shut down with regard to issues. Activity in the debt market has begun to grow, and strong companies are again able to fund their operations through the bond market. In early April, the residential investor Sato issued a three-year bond of EUR 300 million with an annual interest rate of 2.25 per cent. In May 2019, Sato issued a five-year bond of EUR 350 million with an annual interest rate of 1.375 per cent. In the light of the above example, it seems that the price of funding has gone up while the maturities of loans have become shorter. A few weeks ago in late March, another residential investor, Kojamo, also announced it would establish an EMTN bond program.

The higher-risk "high-yield" market still faces uncertainties and, in practice, this market is closed. Banks also believe that the high-yield market will return to normal over time. The market is still in a fragile state, and its recovery is in its infancy. This also means that the market is particularly vulnerable to shocks, even minor ones.

Over the longer term, banks believe that the financial market will return to normal; after all, the financial market has seen several other crises as well. Many believe in a rapid recovery from the crisis. The Finnish financial sector, for example, was in a good position before the crisis. Banks have good solvency ratios, and their lending capacity has been increased by both the ECB and the Finnish Financial Supervisory Authority. It is considerably more difficult to predict how the real economy will recover from the crisis.