COVID-19 related impairment losses on property-related corporate loan portfolios are estimated to stay under 10% in total, as per survey results
Banks in Europe are expecting a slow economic recovery in the wake of the COVID-19 pandemic. While they forecast that hotel and retail loan portfolios will likely be hit more considerably than office and other real estate asset classes, most of them believe that the impairment losses will be in the range of a few percentage points up to 10% in total. These are some of the early findings from the COVID-specific section of this year’s edition of KPMG Property Lending Barometer, due to be published in autumn 2020.
The Property Lending Barometer (PLB) is a survey of the real estate financing environment, conducted among banking professionals and regularly published by KPMG for the past 10 years. This year, some 60 European banks from 11 countries participated in the survey, which took place between the end of May and early June. The 2020 edition includes a special section on the COVID-19 impact on property financing.
KPMG asked PLB respondents to forecast how they expect the COVID-19 pandemic to affect the local economy and what form the recession and subsequent recovery are expected to take in their corresponding economies (e.g. “U-”, “V-”, “W-” shaped, etc.). A clear indication of the prevailing uncertainty is that 90% of respondents gave credence to at least two possible scenarios. Respondents across Europe agreed that the “U-shaped” (sharp economic decline which remains in place for some time before the economy bounces back equally sharp) and “Nike-swoosh” (a hard, fast drop in the economy, with a longer and slower recovery) curves are the most likely (each at 27%). Responses from Cyprus were also geared towards the “U-shaped” form of economic recovery (32,8%), followed by “Nike-swoosh” (27,8%).
The COVID-specific questions in the PLD also examined the outlook for property-related corporate loan portfolios. Regarding the impact of the pandemic on the quality of real estate loan portfolios, a majority of respondents considers that more than 5% impairment losses may be required for hotel loans (78%) and retail property loans (60%), while a majority is also convinced that the impairment losses on industrial and logistics property loans (77%), office building loans (67%) and alternative asset loans (57%) will not be more than 5%. It is, nevertheless, noteworthy that one third of the respondents considers an impairment loss of more than 20% to be probable for hotel loans, whereas office building loans was the only asset class where none of the respondents expected an impairment of more than 20%.
Responses to the question as to whether central bank and governmental policy decisions have helped decrease the negative impact of the pandemic on real estate financing, revealed a split in opinions. 35% of respondents believe that measures implemented so far have significantly reduced the negative impact, while 25% believe that they have had no effect. A large percentage (40%) believes that central bank and governmental actions have not been sufficient. In Cyprus, 37,5% of the respondents agree or strongly agree that policy decisions have significantly reduced the negative impact of the pandemic on real estate financing.
On being asked about the most important factor in making a positive financing decision in the aftermath of the pandemic, there was a significant consensus amongst respondents (77% in Europe and 75% in Cyprus), indicating that potential borrowers’ business strategy and operational model should be conducive and well-equipped to handling the effects of a pandemic crisis.
Andrea Sartori, Head of Real Estate, Leisure and Tourism in KPMG Central Eastern Europe and coordinator of the annual survey, stated: “I believe that a long-standing global economic recession, accompanied by a decreasing consumer purchasing power and a number of businesses facing ‘choppy waters’, will impact all asset classes and might lead to a significantly higher level of impairment in the next 12-18 months than the percentage – not more than 10% – estimated by the banks in our survey.”
Christophoros Anayiotos, Board Member and Head of Deal Advisory at KPMG in Cyprus said: “For yet another year, the KPMG Property Lending Barometer provides valuable insights of what is happening in a number of European countries in terms of real estate loan portfolios. As regards to Cyprus, the results confirm our understanding of a more cautious lending approach by financiers and also divulge useful insights for borrowers, lenders and analysts”.
For more information on a local level, access the full analysis of the Cypriot results.