Banks maintain high interest in financing commercial real estate despite economic uncertainty

Surveyed banks are still very much interested in providing financing to commercial real estate, despite current economic precariousness, with 56% of surveyed bankers in the CEE region expecting growth of their real estate credit portfolio in the following year. However, according to KPMG’s Property Landing Barometer survey of 40+ banks from the CEE region, including Czech Republic, current situation does force banks to increase interest rates and be more selective when approving new loans.

Large investments were poured into the real estate market in the first two quarters of 2022, but a steep drop followed in the second half of the year, with investors now waiting to see how the situation develops.

“Current economic conditions – double-digit inflation levels, growing interest costs, lower performance of the economy and high levels of uncertainty – have especially  a strong effect on new construction projects that are now often postponed, with the logistics-related projects being the only exception,” says Pavel Kliment, partner responsible for the real estate sector at KPMG Czech Republic.

An overall decrease in the number of problematic loans can be seen across the entire region compared to last year, with Czech banks having the lowest amounts of such loans in the long-term.

Despite the negative effect of the war in Ukraine on economy in general, none of the surveyed bankers have noted a significant direct impact of the conflict on their loan portfolio. The survey also showed no significant changes or tightening of bank rules on loan issuing compared to last year.

“For new loans, meeting covenants required by the banks, like DSCR and LTV indexes, will become more difficult due to an overall growth of interest and construction costs. Additional requirements in terms of equity or other funds from investors are to be expected as well,” explains Pavel Dolák, survey coordinator at KPMG Czech Republic.

Just like last year, the lowest interest margins of the region were those of Czech and Slovak banks, despite a slight increase.

In some countries, variable interest rates must be hedged with derivative instruments at a value of over 50% of the total loan volume. All surveyed bankers from Czech Republic, Hungary, Poland, and Croatia confirmed this to be the case, with Poland and Croatia mandating hedged value exceeding 80% of total loan volume. On the other hand, Bulgaria, North Macedonia, and Albania require either very low or zero loan value to be hedged.

The number of loans provided in foreign currency, most often in Euros, continued to grow this year as well, making up over 70% of loans according to most surveyed bankers across the region and in Czech Republic.

Residential real estate projects remain the most popular according to surveyed bankers, with logistics-related projects following closely behind and being the favourite among Czech bankers.

However, the survey also shows respondents’ increased aspirations to have all categories of commercial real estate represented in the portfolio compared to previous years. Hotels are the only exception, despite gradual recovery of tourism – over 30% of bankers are currently not willing to finance or invest into hotels, with the majority of them based in Czech Republic, Poland, and Slovakia.

Apart from senior loans, the survey also explored other types of financing, like mezzanine loans, that come with much higher interest margins. Still, banks are not keen on providing them, with their reluctance only increasing this year, most notably in Czech, Slovak, and Hungarian banks. 

Two thirds of surveyed banks already have an ESG strategy for financing of commercial real estate. Nearly one third of bankers surveyed have seen loans rejected due to failure to meet several different conditions, with ESG criteria being among them. More than half of surveyed bankers confirmed their banks have either created or are working on introducing special products aimed at sustainable financing, allowing them to offer lower interest margins, longer maturity, or lower amortization to projects that meet ESG criteria.

Property Lending Barometer is a survey focused on bank financing of commercial real estate projects that has been carried out by KPMG for 13 years now. This year, data was collected in June and July, with 41 banks participating from the Czech Republic, Poland, Hungary, Slovakia, Serbia, Croatia, Bulgaria, Romania, North Macedonia and Albania.