Chamber of Commerce Swiss - Israel Financing Swiss Commercial Properties Changing Environment

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1 Chamber of Commerce Swiss - Israel Financing Swiss Commercial Properties Changing Environment Daniel Ph. Niggli, Real Estate Lending EMEA March 29, 2012

2 Real Estate Investments in Switzerland Real Estate Buyers in Switzerland Swiss nationals No restrictions to buy real estate in Switzerland Foreign nationals According to the Lex Koller legislation Foreign operating companies (legal entities with foreign domicile) are usually not accepted by Credit Suisse as mortgage borrowers SIPL 3/ March 29,

3 Real Estate Financing of CS PB EMEA in Switzerland Key Parameters Borrower Purchaser Properties Locations Client booked in EMEA, APAC and/or Americas Foreign nationals Residential (primary and vacation), office-, commercial- and industrial properties All locations in Switzerland Minimum loan amount CHF 500,000 Loan to value (LTV) Max 50% 80%, depending on property, with additional collateral up to 100% Amortization Conditions Maturity Products Documents (Borrower an Property) Depending on property and LTV Private banking story is essential. Assets must be in a reasonable relation to the loan amount years Flex-Rollover Mortgage with Framework Agreement 1 10 years: Tranche 3 12 months. Fix-Mortgage 1 15 years. Adjustable Rate Mortgage Borrower: full disclosure and transparency of the economic situation Property: official and individual documents depending on property (checklist) SIPL 3/ March 29,

4 Property Type Overview and Loan to Value Ratios for Mortgages of CS PB EMEA in Switzerland First mortgage Second mortgage Developed building land Residential properties 1 Luxury and character properties 1 Vacation properties 1 Luxury vacation properties 1 Apartment buildings Office buildings Commercial properties Max. 50% 66% 50% 50% Max. 50% 66% 50% Max. 50% 80% 66% 66% 80% 66% Industrial properties Max. 50% Loans up to 100% with additional collateral might be possible. Ask your Lending Specialist. 1 Houses and freehold apartments SIPL 3/ March 29,

5 Loan to Value Ratio for a Standard Office Building 100% market value SIPL 3/ March 29,

6 Equity Instruments The equity portion needs to be deposited on the client s current account with the Bank, at the latest on the day of issuing a promise of payment and/or paying out the mortgage, taking into consideration any pre-paid amounts Accounts balance(s) Funds from selling assets (securities, etc.) Cash value of life assurances Other properties pledged to the bank 1 Only possible for self-occupied home financings (primary residence) SIPL 3/ March 29,

7 Additional Collateral The additional collateral will be pledged in favor of Credit Suisse and will be taken into account on the basis of its actual collateral value Account balance(s) Securities (shares, bonds, etc.) Cash value of life assurances Other properties located in Switzerland 1 Only possible for self-occupied home financings (primary residence) SIPL 3/ March 29,

8 Development of Vacant Office Space in Switzerland SIPL 3/ March 29,

9 Development of Vacant Retail Space in Switzerland SIPL 3/ March 29,

10 Changing Environment: What is it about? Basel III: A global regulatory framework for more resilient banks and banking systems with two major topics: Strengthening the global capital framework Introducing a global liquidity standard Too big to fail (TBTF) regulation, a Swiss framework also known as Swiss Finish, to protect the financial system in case of failure of systemically important banks with four major topics: Increasing minimum equity capital to 19% Contingency planning Liquidity Risk diversification SIPL 3/ March 29,

11 Too Big to Fail Regulation 1. Equity capital 19% Basic requirement as per Basel III 4.5% Loss-absorbing cushion 8.5% Progressive component 6% Key measures 2. Organization of contingency planning Secure the continuation of systemically important functions Ensure restructuring or winding down of bank s residual operations Tough, but feasible solution to the Too Big to Fail problem that does not unduly impair competitiveness Implementation of the measures requires great effort and discipline from the major banks 3. Liquidity Stress scenario Cover outflows from own liquidity for a month Anticyclical set-up of liquidity cushions in good times 4. Risk diversification Reduce dependence of other banks on systemically important banks Limit counterparty risks and risk concentration Procure services from more than one systemically important party Balanced package of measures Very strict on an international comparison and ahead of its time SIPL 3/ March 29,

12 International Basel III Versus Swiss Too Big to Fail Functioning of the Solution Swiss Capital Guidelines Substantially Higher Than International Norm Basel II Basel III Countercyclical buffer Countercyclical buffer Maximum Tier 2 4.0% Countercyclical buffer G-SIFI 2 Surcharge 1% 2.5% Tier 2:2.0% Additional Tier 1:1.5% Conservation buffer 2.5% Bail-In Bonds 4% 7% Non-equity capital (add. T1 and T2) 3.5% Minimum 9.5% Low-trigger CoCos (conversion at 5%) 6.0% High-trigger CoCos (conversion at 7%) 3.0% Conservation buffer 5.5% Component III: Progression Component II: Puffer CoCo-Mandatory convertible capital/loss-absorbing Tier 2 capital Can be additional hybrid capital but loss-absorbing in crises Common equity Tier 1 capital (eligible equity capital) Minimum Tier 1 (Common Equity) 4.0% Minimum 4.5% Minimum 4.5% Component I: Basis 8.0% 10.5% 4.0% 7.0% +G-SIFI % 9.5% 19.0% 10.0% Total Capital Common Equity SIPL 3/ March 29,

13 Overview of the Costs of a Loan The pricing for a credit is strongly correlated with the type of collateral: The higher the risk, the higher the price Client Perspective Credit Suisse Perspective Cost Allocation Comments/specification Gross Margin Net Margin Gross Margin: bps, depending on client rating, property type, LTV, affordability and additional securities. Net Margin: effective net revenue Operational costs (calculated on an overall portfolio approach) need to be covered CoC TFB (True and Fair) Business Level Cost of Capital; costs for the equity required by the regulator for a loan; basis for calculation are Risk Weighted Assets (RWA) which are mainly determined by type of collateral, borrower and booking location; capital costs cover the unexpected loss of a transaction ACP RM Annual Credit Provision; insurance premium to cover potential losses; determined by the probability of default (PD) multiplied by loss given default (LGD); ACP cover the expected loss of a transaction Term Spread RM Term Spread is Credit Suisse s cost for long-term refinancing in the capital market (on average for 4.5 years for a diversified funding structure) Reference Rate Reference Rate Treasury Reference Rate (e.g. overnight rate, LIBOR, EURIBOR, Swap Rate) covers Treasury s costs to manage the interest rate risk SIPL 3/ March 29,

14 Example of Changement in Cost (ERC vs. RWA) ERC RWA ERC = Economic Risk Capital Net Margin RWA = Risk Weighted Assets Net Margin CoC ACP Term Spread Reference Rate CoC +20% ACP Term Spread Reference Rate Key Parameters: Office Building CHF 50m market value CHF 30m mortgage (LTV 60%) Commercial client Increase of Cost of Capital by approx. 20% as impact of the new regulation Basel III and Too Big to Fail (Swiss Finish) 1 1 Indicative, simulated assumptions SIPL 3/ March 29,

15 Mortgage Rates and Forecast until 2013 Source: Credit Suisse Mortgage Interest Forecast, 15th February, 2012 SIPL 3/ March 29,

16 Some think everything has been said. We think you might have some questions. SIPL 3/ March 29,

17 This document was produced by Credit Suisse AG and/or its affiliates (hereafter "CS") with the greatest of care and to the best of its knowledge and belief. However, CS provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. The opinions expressed in this document are those of CS at the time of writing and are subject to change at any time without notice. If nothing is indicated to the contrary, all figures are unaudited. This document is provided for information purposes only and is for the exclusive use of the recipient. It does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. The recipient is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary with the help of a professional advisor. This document may not be reproduced either in part or in full without the written permission of CS. It is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Neither this document nor any copy thereof may be sent, taken into or distributed in the United States or to any U. S. person (within the meaning of Regulation S under the US Securities Act of 1933, as amended). Every investment involves risk, especially with regard to fluctuations in value and return. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor's reference currency. It should be noted that historical returns and financial market scenarios are no guarantee of future performance. Copyright 2012 Credit Suisse Group AG and/or its affiliates. All rights reserved. SIPL 3/ March 29,