The key to protecting the interests of the banks and the detection of potential failure of the project is its early and rigorous monitoring, according to the RICS report "Project Monitoring in Property: a key risk-management tool for banks.” It is addressed to all parties of the real estate industry, applying for financing their investments. It underlines the need to adapt measures to regulate banks introduced by Basel III. This is due to the requirement of minimizing the investment risk.
Problems with financing investments
RICS report shows the most important aspects of investment and stresses the need to monitor the project.
"In 2012 Basel Committee on Banking Supervision announced a package of regulations Basel III. It should lead to strengthen the stability of the banks and increase security of resources. The regulations introduce restrictions in the current policy of lending to new investments. These regulations are associated with higher costs of financing projects with a higher degree of risk. The result is a more caution in lending money by the banks.
How should investors react? According to the RICS report, they should pay particular attention to the monitoring of the project. Precise determination of risks and appropriate control measures can prevent the failure of the project and at the same time protect the interests of the banks.
In the words of Peter Maitland, FRICS, RICS in Poland, partner of EC Harris: In our experience, many banks will require monitoring of the project, which is a condition of the loan to finance the property. Banks usually refrain from the disposition of the loan until the independent report prepared by a qualified inspector of the project is created. The detail of the provisions relating to the obligation to monitor the investments has improved in recent years, but as the developers are obliged to cover the costs of monitoring, they are reluctant to agree to the fee, the amount of which is determined by experts, adequately to the risk. The auditor performing the monitoring, is obliged to be solicitous in relation to the client, which is bank but also the developer.
Iain Leyden FRICS, Chairman of the Built Environment Working Group, RICS in Poland, adds: Integrated risk management strategy and sales organization is extremely important, regardless of whether you're a developer, consultant, financial institution or fund. The aim of the RICS report is to highlight that the monitoring of the progress of construction is critical to protect the bank's financing of the project and detect its potential failure. Practice shows that when the granting the loan, a so-called LTV ratio (Lean to Value) and the size of the surface on which there were preliminary lease agreements signed are taken into account. The balance between the risk incurred and real estate sales opportunities, determined in the strategy, tactics and details of the program or project.
The authors also point to the need of appointing the experts. With and expert it is more likely to complete the project successfully through quicker detection of the threats.
At a time when banks are under increasing pressure from regulators and market conditions have increased pressure on general contractors, the importance of a reliable monitoring of projects is important. An independent expert can detect risk early enough so that you can avoid major problems at a later stage of implementation of the agreement. The appraiser provides security for financial institutions to the benefit of the developers - said Peter Maitland.