Global real estate services firm Cushman & Wakefield has published its opinion on the commercial property lending market in Poland.
In 2017, real estate transactions hit a record-breaking volume of EUR 5 bln, up by nearly 10% on the previous year. Bank financing for properties remained unchanged, averaging approximately 60% of each property’s value.
- The high volume of bank loans was fuelled by low borrowing costs and Poland’s strong economic fundamentals, but property lending clearly depends on asset class and investor standing.
- Banks are keen to finance development projects along with increased interest in hotel and alternative projects, including apartments for rent, private residence halls and nursing homes.
- The anticipated gradual growth in loan interest rates is likely to slightly curb appetite for borrowing on the Polish market in the long-term.
- An amendment to the Corporate Income Tax (CIT) Act may have an impact on the Polish lending market in 2018.
- Debt advisory, debt management and financial restructuring support services are becoming increasingly popular with Polish investors, but still account for a very small percentage of all financing transactions compared to the UK or US.
The volume of bank loans rose over the last two years. Sustained low borrowing costs and strong economic fundamentals drove investor activity, as easy access to cheap money enabled them to expand at a rapid pace. This was reflected in both the number and size of development projects. This situation also benefited financing providers which capitalized on strong borrower activity, granted low-risk loans and broadened their client base.
The range of assets financed by banks also appears interesting. In addition to traditional financing of existing office, industrial and retail properties, they become increasingly involved in development projects, including residential and hotel schemes. Banks are beginning to offer financing of alternative investments, including apartments for rent, private residence halls, student homes and – for now to a limited extent - nursing homes run by specialised operators.
Interest rates not only on USD but also on EUR and PLN loans are expected to edge up in the long term, which may slightly curb the appetite for borrowing on the Polish market.
In 2017, banks varied their approach to lending, depending on asset class. Banks have traditionally been interested in granting loans at a relatively low margin of around 2% p.a. for acquisition or refinancing of new or recently-completed commercial buildings in prime locations let to prestigious tenants under relatively long average-term leases. Other important factors considered in lending include an investor’s reputation, performance and experience in asset management in a particular market and capacity to acquire real estate projects. Despite opportunities to charge much higher margins, banks were less interested in aging or underperforming commercial properties, especially when buyers were investment funds operating on a small scale, having little experience in active asset management or just entering the market.
Some older properties were acquired prior to the global crisis when property prices were peaking, the debt ratio was relatively high and accounted for up to 90% of market values, and the minimum repayment was at about 1-2% annually. Nowadays, ten years later, the debt ratio for such properties, considering the proportion of the current outstanding debt to the current market value, remains at more than 80% or even 90%. In this case, refinancing at a similar debt ratio is now virtually impossible.
In 2018, the Polish lending market will be impacted on, to a certain extent, by the amendment to the Corporate Tax Income (CIT) Act which came into force in early January. Under the new regulation, advance income tax payments must be paid monthly on commercial properties valued at more than PLN 10m, such payments to amount to 0.035% of their initial book value. Income tax due on gross income in the amount equal to the paid advance will be compensated, meaning that it will be neutral for firms generating sufficiently high gross income. This will not be the case with companies that pay no income tax or pay income tax that is lower than advance taxes paid on property value. Such companies will need to pay additional public impositions, leading to a decrease in available cash at hand and, consequently, to a lower debt service ratio. This change will mainly affect businesses owning office or retail buildings with average management quality, low profitability and recurrently high vacancy rates.
Another factor that may have an impact on available cash at hand and, subsequently, on creditworthiness is the limit introduced in the amendment of the CIT Act on inclusion of financial costs in deductible costs of up to 30% of EBIDTA. In the case of well-performing properties and well-managed companies where financial costs constitute a small percentage of the net operating profit, this limitation will have no adverse effect. The limitation will affect companies with vacant buildings and low EBIDTA as an increase in income tax may lead to lower creditworthiness. For banks, these changes mean a much higher credit risk, which may lead to higher margins for averagely performing properties.
Due to public impositions on non-state-owned banks registered in Poland in the form of a bank tax of 0.44% p.a. on their asset value and administrative charges paid to the Bank Guarantee Fund, there is intense competition between them and banks that have only representative offices or branches in Poland and are not subject to such impositions. Some banks with a large retail component in their property portfolios are becoming increasingly focused on the growing concentration of retail space in some cities which may adversely affect leasing income in the long term. Banks will closely monitor any potential turnover decline due to the Sunday trade ban as retailers may begin to demand rent reductions to compensate any losses due to lower sales revenues.
In addition to bank financing, corporate bonds are playing an increasingly important role, especially in the case of development projects. Issue of corporate bonds, along debt financing, is another way to improve the issuer’s standing and often precedes a debut on the stock exchange. Mezzanine financing remains relatively unpopular in Poland, mainly because of the limited number of active debt funds and the requirement to ensure a significant minimal payment.
The markets of bank financing, corporate bonds and mezzanine financing is expected to continue to grow. However, before making any lending decisions, financing providers will more carefully look into financial analyses, capacity to generate cash and the quality of asset management.
*Within the Capital Markets Group of Cushman & Wakefield there is a dedicated team providing equity, debt and structured finance advisory services.
As part of debt advisory services, in 2017, the team took part in arranging financing of EUR 32m, advised on exiting from structured financing amounting to EUR 16m and on financial restructuring amounting to PLN 25m. It also managed a debt of approximately EUR 40m comprising a portfolio of diversified properties.
With Cushman & Wakefield’s debt management services what is important is not only ensuring performance of loan contracts, the monitoring of payments or preparing interim reports for lenders with financial ratio calculations, but all measures to maximise property efficiency and performance, support owners during lease negotiations, including preparation and implementation of investment strategies. Advisory services also include preparing and executing exit or sale strategies and disposal of portfolio properties . It is also a debt advisor’s task to propose adequate actions in case of a crisis to avoid income or liquidity loss.
Debt advisory services involving some administrative and coordination activities and provided by a professional and committed external team are equally important to both investors who can then focus on strategic goals of funds and financial institutions attaching growing importance to monitoring.
Mira Kantor-Pikus, Partner, Equity, Debt & Structured Finance, Capital Markets at Cushman & Wakefield, Poland