The idea was applauded, but the terms and conditions raised doubts. This is how developers welcome the Prolog vehicle, which was launched by five Luxembourg banks to support the residential property market and .
At the instigation of the finance ministry, five banks--Spuerkeess, Banque Internationale à Luxembourg (Bil), Banque Raiffeisen, the Société Nationale de Crédit et d’Investissement (SNCI) and Banque de Luxembourg--have committed €250m to a special purpose vehicle (SPV), Prolog SA. The aim is to facilitate the marketing of properties that are already under construction but have been held up due to a lack of pre-sales. Developers now have the option of presenting their project to one of Prolog’s partner banks, which will then undertake to purchase the unsold properties, applying a discount.
The scheme will take time to become fully operational.
“We welcome any initiative aimed at revitalising the property sector, especially at a time when the market is experiencing difficulties,” commented the CEO of developer Iko Real Estate, . “We believe that such an initiative could be perceived positively by potential buyers, boost confidence in the sector and offer more options on the market.”
However, the developer is cautious: “The scheme will take time to become fully operational, and we will need to accurately assess the discount applied, as developers need to be able to maintain their economic viability. What’s more, achieving 50% pre-sales remains a challenge in the current climate.”
The 50% pre-sales requirement…is difficult to achieve within a timeframe acceptable to customers.
Also welcoming the banks’ initiative, Thomas & Piron CEO Louis-Marie Piron does not rule out using the SPV “if the proposal is financially viable.” “Everything will depend on the conditions under which unsold properties are released. We’ll be keeping a close eye on these factors over the next few days/weeks,” he says cautiously. He also points to the eligibility conditions, “in particular the 50% pre-sales requirement which, in the current market, is difficult to achieve within a timeframe acceptable to customers.”
This 50% threshold is Prolog’s Achilles heel, according to the CEO of broker Eurocaution, : “No promoter is currently managing to achieve 50% pre-sales. The reality is that buyers are afraid to buy off-plan. There are plenty of reasons for this, starting with the time involved and the impossibility of obtaining a bridging loan. These days, people prefer to buy a new property that’s almost finished, where they can go and live straight away.”
The banks could have used that money to help private individuals obtain finance.
With the 50% pre-sales requirement, the Prolog mechanism is of little use, says the specialist. He advocates a threshold of 30%: “This is the standard applied by banks in Belgium and France when granting a construction loan. In Luxembourg too, developers can obtain such loans from foreign banks without reaching the 50% pre-marketing threshold.” Among the players in this market is BGL BNP Paribas, whose .
Rizzo is also critical of the ‘discount’ that would allow the SPV to acquire unsold properties at up to 20% below the sale price. “There are two losers here: the buyer, who buys a home for 100 while Prolog buys the same property for 80 and resells it for less on the market; and the developer, who loses his margin by selling the property to Prolog. Today, a developer needs a gross margin of 15 to 20% to be able to cover any problems that may arise during construction.”
The CEO of Eurocaution agrees with the developers: Prolog is a laudable initiative, but its parameters need to be reviewed. “What the market wants are construction loans with a pre-sale rate of less than 50%.” And the buyer? “What matters to them is knowing the start and end dates of the project. And to obtain a bank loan, which is not--or no longer--a matter of course these days. Instead of putting €250m into Prolog, the banks could have used that money to help private individuals obtain bridging loans and financing.”
This article was originally published in .