In 2015, the investment transaction volume on the Polish property market hit a record high of more than EUR 4bn. Despite increased lending activity, banks are now taking a more selective approach to financing due to rising public levies on financing such as contributions to the Bank Guarantee Fund, the banking tax introduced in February 2016, and stricter capital adequacy rules for banks. Considering the impact of the quality of the loan portfolio on risk assessment costs, banks choose to finance only real estate projects that are strongly expected to be managed professionally or where the commitment is more than likely to be repaid in full.
Therefore, in addition to the property’s location, quality and performance banks also consider factors such as the investor’s standing and previous record, as well as the quality of its property and debt management. This sometimes means financing barriers for smaller investors or investors with small portfolios who lack prominence on the Polish market.
The problem of debt financing by Polish banks is also likely to hit large international funds that being new to the Polish market are often understaffed and find it hard to ensure full servicing of transactions and financing. Such difficulties can be eased by using the services of an external property manager, which is frequently standard on the market, and debt management services.
Debt management services are addressed to investors owning commercial properties acquired partially through external financing such as a bank loan, financial leasing or structured financing.
Debt financing is connected with the requirement to fulfil conditions precedent of a financing institution and to maintain specified parameters in the course of debt financing such as the debt service coverage ratio, the interest service coverage ratio, interest rate hedging or exchange rate hedging, the occupancy rate, lease boundary conditions, the equity ratio, EBIDA and so forth. Financing parameters are most often reviewed once a quarter, but some are verified every month. Some projects require on-going cooperation with a financing institution whose consent is required to sign lease agreements or their amendments, or to spend funds on repairs, upgrades and the like.
Debt management involves maintaining contact with a bank financing a property or a property portfolio, monitoring instalment and interest payments, ensuring appropriate reporting, coordination of fulfilling additional conditions under a financing agreement, as well as participation in preparation of commercial, exit or development strategies provided that there is such potential. In addition, by monitoring the property’s performance and the current situation of both the property itself and its environment the debt manager can on earlier stage identify factors that could potentially lead to a breach of financing conditions and, as a result, to a risk of agreement termination. Having identified problems, the advisor and the investor work together to design and implement preventive measures. Refinancing or exit strategies are also prepared for safe projects and, if approved, are implemented by the debt manager.
Given the above aspects, external debt management services are becoming increasingly popular in Poland too, particularly with large investment funds which, by outsourcing some tasks, can focus on strategic objectives such as property acquisitions or sales.
Author: Mira Kantor-Pikus, Director of Strategic Advisory responsible for debt financing, Capital Markets, Cushman & Wakefield Poland