The banks screwed up the commercial real estate loan tap

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Bank financing is the most popular and available form of financing commercial property in Poland. Due to the pandemic and economic slowdown, the credit tap was screwed down. The greatest difficulties in obtaining funds have hotel and commercial properties. Banks are still open for financing warehouse, office and residential investments, but the possible parameters are more conservative. CBRE experts indicate that this may be an impulse for investors to look for alternative ways of financing, whose availability in Poland is still limited. The current situation shows, however, that dependence on one form and lack of diversification of financing sources for commercial properties is a problem. 

– In recent months, banks have been taking a selective approach to commercial property financing. Warehouse, office and residential investments are of greatest interest. Financing of commercial real estate is limited to the best facilities and only by some banks, while obtaining funds for hotels is practically impossible. The banks have also tightened the criteria for granting financing and currently offer lower LTV and LTC parameters, while expecting higher levels of pre-let and pre-sale for residential projects. We are also observing an increase in credit margins by 0.3-0.6% and longer application processing time,” says Adam Łuciuk, head of CBRE’s investment financing department.

The banks’ approach varies by sector

The most affected sector is hotel property. Temporary closure of these facilities, travel restrictions, closed borders and tighter sanitary standards will continue to resonate in hotel operating results for a long time to come. The banks, with decisions on their financing, will hold off until they are informed of the operating results after the reopening. However, it will take at least six months for reliable data. It will be difficult to obtain financing until then, although there may be exceptions for the best projects.

The situation is slightly better in the commercial sector. Shopping malls are in the most difficult situation, with a wide range of offers that have been most affected by trade restrictions. This translates into operating activity (decrease in turnover and visits) in recent months, which for the bank is one of the determinants of granting a loan. Uncertainty about the level of rents, the timeliness of their payment and the liquidity on the investment market, in turn, has a bearing on the value of real estate. Until these risks are reduced, less interest in financing shopping malls should be expected. Banks are still open for financing retail parks and convenience facilities. These are places where we have only a few tenants, most often with a dominant component of a grocery store, and the offer responds directly to the purchase needs of residents in the vicinity.

The banks still declare their willingness to finance offices. Such aspects as location, lease level, history of cooperation with the bank are important, but special attention is now focused on the analysis of tenants and industries in which they operate. Investors also have to take into account more conservative conditions – the level of LTV and LTC has dropped to about 60-65%. Additionally, due to the uncertainty concerning the demand for office space, banks require a higher level of pre-leasing for development projects – even above 50% of the space. This is a big problem for developers, because such a level of pre-leasing was usually achieved at the stage of obtaining a permit to use rather than construction.

In residential projects, the best locations and well-established developers who can obtain financing more easily still defend themselves. As in the case of offices, the required levels of pre-sales have increased, while the requirement for own contribution has increased.

Warehouse projects are by far the most popular among banks. There is currently 2.1 million sq.m of space under construction and it is much easier to obtain credit here. Already before the outbreak of the coronavirus epidemic, warehouses were the most willingly financed sector, and after the outbreak of the epidemic this sentiment has strengthened. Of course, banks pay special attention to the tenants of these facilities and prefer multilet tupu facilities, but also large e-commerce facilities relatively easily obtain bank financing. This trend should continue in the coming months. Warehouse properties have largely benefited from the pandemic and the effects of “freezing” the economy, which is also noticed by banks.

Diversification of financing methods

In Poland, the market for commercial real estate financing is poorly diversified compared to Western European countries. The vast majority of debt capital comes from banks, which in the current situation of limited credit supply, suspends some projects and directly affects the liquidity of developers. Investors who cannot count on bank financing must look for alternatives.

– Private non-banking debt financing, which is becoming increasingly bold in Poland, may gain in importance. Strategies of investing in debt in the current market situation are becoming increasingly popular. Admittedly, this type of financing is more expensive than bank financing, but it is more flexible, it can be obtained faster and more difficult projects can be financed. If the limitation in the availability of bank loans continues in the nearest future, non-bank financing may become more widespread. This will ensure greater diversification on the Polish market, which is very desirable,” concludes Adam Łuciuk.

Source: CBRE