Banks in Europe are expecting a slow recovery in the wake of the COVID-19 pandemic, and while they forecast that hotel and retail loan portfolios will likely be hit more considerably than office and other real estate asset classes, the majority of them believes that the impairment 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's Property Lending Barometer, due to be published in autumn 2020. 

The Property Lending Barometer (PLB) is a survey of real estate financing, conducted 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 June, with a majority of participating banks from countries in Central and Eastern Europe. The 2020 edition also includes a special section on the impact the virus has had on property financing. 

KPMG's survey coordinators made the assumption that PLB respondents wouldn’t be confident enough to select a single vision for recovery, which is why they offered participants the chance to assess the probability of some potential scenarios for future recovery: “L-”, “U-”, “V-”, “W-” or “saxophone-shaped”, or a “Nike-swoosh” curve. 

The U-shaped and Nike-swoosh curves proved to be the most popular, in a neck-and-neck finish (27-27%). What they have in common is that they plot any potential recovery to be slower at the beginning and to take a longer time before economic performance improves significantly. The V- and W-shaped curves tallied 13% and 17% respectively, while the most pessimistic, L-shaped and saxophone curves – which predict extended stagnation – both received less than 10%. An indication of the uncertainty is that 90% of respondents gave credence to at least two possible scenarios.

While in most countries the banks surveyed had mixed expectations on the economic outlook and shared no predominant view, in the Netherlands the Nike-swoosh curve (a slow and steady growth after reaching the bottom) achieved a relatively high, 63% vote from bank representatives.

The COVID-specific questions in the Property Lending Barometer also examined the future outlooks of property loan portfolios. Here, survey coordinators asked respondents about their estimates regarding potential impairments of real estate loan portfolios in their respective countries. Regarding the impact of the pandemic on the quality of loan portfolios, a majority of respondents considers that more than 5% impairment may be required for hotels (78%) and retail properties (60%), while a majority is also convinced that industrial and logistics properties (77%), office buildings (67%) and alternative assets (57%) will not be hit worse than 5%. 

It is noteworthy that one-third of the respondents consider an impairment loss of more than 20% to be probable for hotels, while office was the only asset class where none of the respondents expected an impairment loss of more than 20%. Almost two-thirds of the respondents expect the level of retail portfolio provisions to be in the 3-10% interval, while every fourth respondent singled out a level exceeding 10%. Banks in Poland are the most pessimistic about retail property loans, as survey participants believe that retail property loans will need an impairment of more than 14% on average.

A relative majority of respondents (39%) are of the opinion that the overall effects of the pandemic (like distancing rules or home office policies) will not change (or even increase) the demand for office space, while 31% see a decreasing demand and 30% are unsure. A majority of bank representatives in Cyprus and the Czech Republic believes that there will be no decrease in demand, or that demand will even increase, while most of the respondents in Bulgaria, the Netherlands and Hungary forecast a decreasing demand.

Responses to the question as to whether central banks’ and governments’ decisions had helped decrease the negative impact of the pandemic on real estate financing revealed a similar split. Thirty-five per cent of respondents believe that measures communicated so far have significantly reduced the negative impact, while 25% of participants believe that they have not done so. Another 40% of those surveyed believe that governments’ and central banks’ actions have not been sufficient. Over 60% of the banks surveyed in Romania, Finland and the Netherlands believe that their respective governments’ and central banks’ measures communicated up until the survey was conducted have significantly reduced the negative impact of the pandemic on real estate financing.

Of all the COVID-related questions, the greatest consensus was evident for a query about the business strategy of potential borrowers after the pandemic: 77% of those surveyed indicated that the way a potential borrower’s business model handles a pandemic will play a major role in making financing decisions in the future.

Andrea Sartori, Head of Real Estate, Leisure and Tourism in CEE and coordinator of the annual survey, concludes: “I believe that a long-standing global economic recession, accompanied by 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 current percentage – not more than 10% – estimated by the banks in our survey.”

Main Highlights for Bulgaria

Seven Bulgarian banks took part in KPMG's Property Lending Barometer 2020 and shared their opinion on the effects caused by the COVID-19 crisis, as well as on a number of other topics which will be included in the publication this autumn.

The majority of the participating banks expressed a positive attitude about the economic recovery of Bulgaria with ¾ of them expecting one of the “U-”, “V-”, “W-”  or a “Nike-swoosh” curve as a possible scenario.

Much like their European colleagues, Bulgarian bankers expect significant impairments of real estate loan portfolios in hotels and retail properties, for which 86% and 58% respectively, expect 10% or higher impairment, while 43% and 29% respectively, expect it to be higher than 20%.

Office properties are the only asset class where the impairment loss is expected to be significantly lower – 29% expect a decrease between 11-20% and no one expects the decrease to be higher than 20% - despite the expectations of the participating banks that remote work will have a negative impact on the demand for office space.

Zdravko Moskov, Director, Deal Advisory, at KPMG in Bulgaria, Albania, North Macedonia and Kosovo, shares: “Banks in Bulgaria are moderate optimists regarding the economic recovery after the COVID-19 situation. At the same time they share the opinion of their colleagues from European retail banks that the loan portfolios in hotels and retail properties are to be most affected by the crisis.”