Banks' appetite for lending to commercial real estate has increased

Banks in Central and Eastern Europe (CEE) have become more willing to finance commercial real estate year-on-year. Over 66% of bankers expect their real estate loan portfolios to grow next year. When financing new construction, banks prefer residential housing, rather than industrial and logistics properties as they did before. This is according to KPMG’s 16th annual survey, which involved 47 financial institutions from nine CEE countries and, for the first time, Austria.

According to the Property Lending Barometer survey, interest in financing commercial real estate has increased noticeably among the surveyed CEE banks. The share of banks for which lending in this segment is more important than in the previous year rose to 36%. Last year, 25% of financial institutions expressed this view.

Over the past year, the differences in the importance attached to the segment in individual countries have also narrowed. In most of them, banks now consider it a strategically important part of their business.

"The increased willingness of banks to finance commercial real estate in the region is also supported by this year's significant revival in transaction activity. Year-on-year, we are again seeing an increase in investment in commercial real estate in CEE, and Czech capital has maintained the strongest share of these investments for several years in a row," said Pavel Kliment, partner at KPMG Czech Republic in charge of the real estate sector.

In the first three quarters of this year, the volume of investment in commercial real estate in CEE reached approximately EUR 7 billion. According to forecasts, the total volume for this year could exceed last year's EUR 8.8 billion by the end of the year, mainly thanks to developments in the Czech Republic and Poland.

An increase in the average amount of loans provided was reported by 59% of banks. The most conservative are financial institutions in Austria, where only 30% of banks confirmed an increase in the average loan amount.

At the same time, more than 66% of all bankers surveyed believe that their commercial real estate loan portfolio will grow further in the coming year. This is a more optimistic outlook than last year, as 58% of respondents shared this view in 2024.

The ratio between bank financing of new construction and completed (income-generating) real estate projects is balanced across the region and has not changed significantly compared to last year. A certain strengthening of the share of financing for new construction is evident mainly in Bulgaria and Slovakia, where this trend continues from the previous year. In contrast, in Poland and Hungary, the share of loans for new construction in the total bank portfolio continues to decline. Czechia remains the CEE country with the lowest volume of financing for new construction, despite a slight year-on-year increase, while new construction financing was even lower in Austria.

At the CEE level, banks prefer residential buildings when financing new construction, whereas previously it was industrial and logistics properties. For retail projects, financial institutions prefer retail parks to large shopping centres. Hotels and resorts attract the least interest across the region. Many banks report that they do not finance such construction projects at all.

Fifty-one per cent of financial institutions report the same interest margins as last year, while just over 40% of banks report lower margins. Financial institutions in the Czech Republic and Slovakia have the lowest margins on loans for new construction and completed projects, while those in Serbia, Bulgaria and Romania have the highest.

“Credit conditions remain stable, especially the requirements for the debt service coverage ratio (DSCR) and the loan-to-value ratio (LTV or LTC). Although there has been a slight easing of LTC conditions in the Czech Republic and Poland, it is too early to talk about a trend. Similarly, there has been no significant change in occupancy or pre-letting/pre-sale requirements. Banks continue to assess these mainly in terms of how they affect DSCR, LTV and LTC," explains Pavel Dolák, the survey’s guarantor at KPMG Czech Republic.

The loan portfolios of the surveyed banks remain in very good condition overall. The average share of problem-free loans rose from 91% last year to 93% at the regional level. At the same time, the average share of loans with minor problems (such as technical breaches of banking covenants) fell from 8% to 6%.

Czechia stands out with its nearly 100% share of problem-free loans. Financial institutions in Poland, Slovakia, Slovenia, Serbia and Croatia also report very high-quality portfolios (with more than 90% of non-problematic loans and only a negligible share of impaired exposures). Bulgarian banks are continuously reducing the share of non-performing loans (from 18% to 16%), yet they remain the ones with the highest share in CEE. However, according to the survey, Austria has even more of them.

The use of AI in real estate lending activities has clearly expanded this year but remains largely cautious, as banks are still testing the AI waters. The share of banks without any AI deployment fell from 69% last year to 49%. Minimal use of AI is reported by 22% (compared to 14% last year) and moderate use by 14% (last year, this answer was not among the options) of financial institutions. The remaining 15% of banks are implementing AI or preparing to do so.

The surveyed bankers identified Hungary and Poland as leaders in AI. Czechia, Croatia and Slovenia are opting for a more gradual and limited adoption. They use AI most often to boost productivity and for support functions (Excel, initial text drafts, document summaries), less so as a tool in the credit process itself. In general, the implementation of AI is also slowed down by the heavy workload of IT teams, which simultaneously must deal with stricter cybersecurity regulations (DORA and NIS2 standards).

Approximately half of banks report a growing focus on ESG, but at the same time, the proportion of responses stating that the attention paid to ESG has remained unchanged has doubled. The dynamic growth in interest in ESG typical of previous years has thus entered a phase of stabilisation – many financial institutions already have processes related to ESG, which is becoming a standard part of risk management and lending, but this usually no longer leads to the introduction of entirely new requirements.

Austria stands out for its much stricter consideration of ESG. In CEE, just over 40% of banks have refused financing due to non-compliance with ESG in the last 12 months, but in Austria this figure is over 80%. Compared to the CEE average, Austrian financial institutions also place significantly greater emphasis on working with data on energy and water efficiency, physical risks, the use of CRREM, biodiversity impact assessments, and routine carbon footprint calculations.

KPMG has been conducting the Property Lending Barometer survey on commercial real estate financing annually since 2010. This year, 47 leading financial institutions from Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia and, newly Austria, included as a benchmark market for the CEE region, took part. KPMG offices in these countries conducted online surveys and personal interviews. Data collection took place in October and November.