RATING OF REAL ESTATE FINANCING - APPROACHES FOR REAL ESTATE DEVELOPERS FOR A TARGETED RATING PREPARATION

Stephan Fleischer

ERES from European Real Estate Society (ERES)

Abstract: The commencement of the New Basle Capital Accord (Basle II) has changed the business environment of real estate financing basically. Contemporaneous the risks of investments in residential and commercial property are risen as a result of the increasing complexity of the real estate business. The consequence is that banks have to analyze the risks of real estate investments more detailed as in the past. The risk analyze of real estate developer companies includes not only the financing of the proposed project but all business activities. Banks are using internal rating approaches which allow on the one hand an exact risk classification concerning the company and the proposed real estate project and on the other hand the appraisal of the particular probability of default. Banks decide on the approval or the refusal of a credit placing on the basis of this information. In addition banks peg the level of the interest rate and their risk premiums to the risk classification (risk a djusted pricing). Therefore the rating has an important influence of the economic situation of each real estate project. A good rating grade can lead to decreasing finance costs - a bad rating can lead to increasing finance costs and can be the reason for a refusal of a credit placing. These effects could have negative implications for real estate developers. Real estate developments are characterized by a high number of stakeholders, the particular characteristics of properties as assets and higher default risks compared to other investments. The consequences could be increasing risk premiums as a part of credit terms and decreasing development profits. That means real estate projects which are classified by banks as high-risky could be unrealisable. The first section of this paper includes a description of the structure, the function and the effects of rating approaches for real estate development financing against the background of the changed business environment. On thi s basis in the second section approaches for real estate developers are deducted to optimize their targeted rating preparation and to reduce the default risks from the banks point of view.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2008-01-01
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