HB Reavis, founded in 1993 in Bratislava, Slovakia, develops and operates office properties. It has since delivered 14 million square feet of space across Slovakia, the UK, Germany, Poland, Hungary and the Czech Republic.
In June, it sourced €230 million of development finance from German bank Helaba for the office-led DSTRCT. Berlin mixed-use scheme in the German capital.
In October, Real Estate Capital caught up with chief executive Marian Herman to discuss the future of the office and how covid-19 is affecting access to debt.
How do you expect covid-19 to change the offices you deliver?
I do not believe covid will have a significant impact on demand in the medium to long-term. Offices give a physical space to bring people together, coordinate activity and boost creativity. For employees, the office is for face-to-face interaction hardly replaceable by technology.
But, it will change office design. Offices will need to evolve from traditional workspaces to places for meeting and exchanging ideas, with more common areas and meeting rooms. This implies the operating model needs to become more flexible, allowing tenants to expand or reduce space over time, depending on changing business needs. We were providing this flexibility to occupiers before covid, so we see this crisis more as an opportunity than a challenge.
How have you incorporated flexible leasing?
Our buildings are leased to a wide range of tenants, from big corporates on traditional lease contracts, to start-ups and entrepreneurs, for which co-working and modular space is more suitable.
Most companies need 10-15 percent flexibility for their floorplates during their leases. We offer it because we are confident we can lease the rest of the space to other occupiers.
We have in-house co-working and flexible space operators: HubHub and Qubes. While most office landlords remain reluctant to run offices on an operational model, we are comfortable with the concept of workspace as a service. We have been doing it for a while. We know how to operate office space, even at times when tenants do not need it.
How do your lenders feel about this flexible leasing approach?
We build everything speculatively. So, we arrange finance before tenants have committed to schemes. When speculative development finance is not available in a market, we agree minimum pre-let levels at which a loan can be utilised. Lenders know our leasing strategy and the fact we incorporate flexible leasing. They also understand that, currently, tenants need more flexibility. We do not lease more than 20 percent of our buildings on flexible contracts, to ensure the product is suitable for financing and divestment. Lenders have therefore proved willing to finance our buildings.
How has the covid crisis affected lending market terms?
The availability and cost of debt has not changed dramatically. We have seen light downward pressure on loan-to-values. Historically, we have financed completed assets at 70 percent LTV, but it has gone down to 60-65 percent.
Development loans, pre-covid, were up to 80 percent loan-to-cost, depending on the market. Rather than decrease the loan amount, we see lenders charging higher margins and increasing pre-let requirements. Typically, lenders want to see 40 percent of a scheme pre-let before a borrower can draw down on facilities. Before covid-19, banks often did not require such a level of pre-let prior to first utilisation.
How has this crisis affected your borrowings?
We have not experienced major issues with debt availability because we sourced our current loans before this crisis. However, it does mean drawdowns on facilities may be delayed, because the ability to draw debt above certain thresholds is linked to leasing progress.
We have seen a significant impact on the capital markets side of our business. We have historically issued bonds as a complementary source of capital for our projects. Investor demand has significantly reduced in this space and there are no signs yet that it is coming back.