Q&A: Furga
By : Bogda Zukowska
Mortgage bank HypoVereinsbank Bank Hipoteczny (Hypo) is confident that the commercial real estate market has investment potential. Hypo has the financial clout to sign off on loans exceeding $100 million and has the backing of Bank Przemyslowo Handlowy Group (BPH), which is a member of Bayrische Hypo-und Vereinsbank, a Munich-based group and the largest mortgage bank in Europe. The bank has now taken advantage of the regulations liberalizing the domestic mortgage market and in December last year issued its first mortgage bonds, totaling E3.6 million. In 2001, Hypo plans to issue bonds totaling zl. 180 million ($43.9 million). In March, new regulations will allow investment funds to include mortgage bonds in their portfolios, just as other major commercial investors such as pension funds and insurance companies have been doing since last August. Jacek Furga, 42, was promoted to president of HypoVereinsbank Bank Hipoteczny in February and has served as a board member since 1999. His brief has been to change Hypo's profile into that of a specialized mortgage bank. A graduate of the Warsaw Polytechnical Institute, Furga attended postgraduate studies in banking and finance at Warsaw University in 1992 and 1993. He started his banking career in 1991 with Bausparkasse Schwaebisch Hall, a German building society, and later worked as an adviser on the draft of the building societies' law. Furga recently talked to the WBJ's Bogda Zukowska. The following is a translated and edited version of their conversation.
Q: The boom in commercial real estate seems to be over. How does it affect Hypo's activity?
A: We don't think the mortgage loan market for commercial real estate is slowing down. On the contrary, our clients' credit needs exceed the bank's lending capacity. Alone, Hypo would only be able to provide $8 million in loans for a single client. But because it's a member of the capital group HypoVereinsbank-Bank Przemyslowo-Handlowy we can meet clients' needs and negotiate mortgage loans exceeding $100 million. Backed by our parent company, we can be a major player in real estate and develop stable business despite the volatile market.
Q: What is the outlook for the market in the next two to three years?
A: The general business climate will be positive. But on the commercial real estate market, it's up to (particular) segments. The market boomed two years ago and now it's maturing. We see rents dropping in the A-class offices. We hope the rates will stabilize within a year, though. So this segment of the market will become more attractive for investors again. We noticed a similar situation for shopping centers and malls, particularly in Warsaw. However, the market here varies dramatically from the rest of the country. In some cities there is an oversupply of space, for example in Gdynia and Gdansk.
Q: So what segment of the commercial real estate market looks most promising from the bank's perspective for 2003?
A: The demand for loans for B-class offices is likely to perform well, but in two or three years the A-class buildings are expected to bounce back. In 2001, we plan to conclude a couple of large-scale projects in Warsaw and then we might expand (and) finance projects in other cities. From our perspective, we also see a growing demand for mixed-use space. As for hotels, we consider it a higher risk product. And this segment will not be dominant in our portfolio.
Q: And what about the regional breakdown?
A: Warsaw and major cities such as Poznan, Wroclaw, Katowice and Szczecin are dominating commercial real estate projects. And this is unlikely to change in the future. We'll be looking at these cities for new businesses.
Q: Commercial real estate projects have been financed by normal credit so far. Why should investors switch to mortgage loans?
A: A mortgage loan is less expensive for a borrower. And cost savings will be even more evident for our clients once we have implemented our full-scale mortgage bonds program aimed at refinancing our lending activity.
Q: RheinHyp-BRE mortgage bank was the first to launch zl. 5 million ($1.2 million) in mortgage bonds last June. Why has Hypo delayed issuing its mortgage bonds?
A: The rule is that a mortgage bank first has to extend mortgage loans to issue mortgage bonds. When RheinHyp-BRE issued its papers, the market wasn't mature and the papers had debuted before some major changes in legislation took place. Our E3.6 million issue was designed for a given project, which had been under BPH Bank management. What marks Hypo's papers is that they are denominated in euros. In our view, this limits the long-term risk of exchange rate volatility. We have also offered a fixed interest rate at 5.95% p.a., setting a kind of benchmark for Poland's emerging mortgage bonds market.
Q: Why did the bank choose the euro for its first issue of mortgage bonds?
A: For several reasons. First, we have to be in line with legislation about mortgage banks, which commits the institutions to act according to the so-called "prudent-man rule" meant to limit risks connected to volatility in exchange rates. We noticed that investors are increasingly favoring euro-based loans over dollar financing. From a commercial point of view, hedging against this risk is quite expensive, so choosing the euro is a cost-saving decision. Last, but not least, as a mortgage bank, we think long-term. The day when Poland joins the euro-zone is not that far away.
Q: Why isn't the zloty attractive for lenders and borrowers from the real estate sector?
A: The zloty may become more attractive when the economy matures, with inflation as well as interest rates dropping below the current level, thus making long-term investments more predictable. Customers, mainly foreign developers and construction firms, are not seeking zloty-based loans. Out of more than 50 credit applications being considered, one could find only one or two for zloty-based loans. It results from project financing in the real estate sector being dominated by currency-based loans. As the major source for debt servicing and credit repayment, rents are also currency based therefore it makes no sense to seek loans in zlotys.
Q: The bank wants to launch zl. 1 billion ($243.9 million) in mortgage bonds by 2003. Will it be able to keep up with this schedule, which means expanding its lending business and launching its next issue soon?
A: As for lending, which determines the level of mortgage bonds issuance, we are positive about the prospects for 2001-2003. If our lending activity continues at such a fast pace as it has so far, we would be able to exceed zl. 1 billion by the end of 2003. As for 2001, the bank envisages several issuances totaling zl. 180 million ($43.9 million). One of them will be publicly traded.
Q: Does it mean that Hypo is targeting investment funds for its mortgage bonds?
A: Starting March 1, investment funds will be allowed to purchase this type of financial tool. However, they should be publicly traded. Investment funds can now join insurance companies and pension funds. This group of institutional investors is a natural client for mortgage bonds worldwide. With long-term maturity and (with a reputation for being) very safe assets, mortgage bonds perfectly fit the long-term oriented portfolios of funds and insurance companies. In Poland, there is also a prospective market for such papers. After the first issue was launched, we were approached by some institutional investors seeking tailor-made mortgage bond issues. So far, there are some provisions to limit these types of financial vehicles. But I hope as the market matures regulations will change (and) adjust to investors' needs.
Q: What is the demand for tailor-made mortgage bond issues?
A: With major institutional investors, such as pension funds, insurance companies and investment funds, the sky's the limit.
Q: So far you haven't mentioned any major barriers that face Polish real estate. What about bureaucracy?
A: It is, indeed, a bottleneck for the expanding real estate market. Mortgage registry courts are very inefficient and jammed with applications. It's notorious for investors to have to wait months to get the necessary documents filed, although according to the regulations the courts have 30 days to note the loan in the mortgage books. The foundation for mortgage loans is very concerned about this as it may help create possibilities for corruption.
Q: What is the solution?
A: The solution seems simple: Courts need money to buy computer systems to speed up the job. According to the foundation's estimates, it needs only zl. 90 million-zl. 100 million ($22 million-$24.4 million) to ease the congestion and run the courts' activities smoothly and without delays. This amount is not overwhelming compared to the zl. 300 million ($73.2 million) in annual revenue from the mortgage registry courts. In this respect, it is a profitable business and it should be used to set up an efficient legal system for the mortgage market and to bring even more revenue into the budget. The interested parties, such as mortgage banks and investors, would be ready to raise the money. However, courts are independent and they must not accept financing from external sources, only from the Justice Ministry. Meanwhile, the foundation, together with the central bank, plans to urge the Justice Ministry to make the system more efficient.
