Rates' skyrocketing did not suffocate mild optimism

In 2023, it was the sharp increase in interest rates that had the strongest effect on banks and how they finance commercial real estate, followed by a negative economic development of the country where a bank operates and, to a lesser extent, the economic situation in the entire Europe and also lack of prime reals estate and development projects. Regardless, KPMG Property Lending Barometer – a survey of 48 banks from 10 CEE countries, including Czechia – shows that the surveyed bankers in the CEE region are carefully optimistic about what’s next for the real estate market and how banks finance it.

“2023 is expected to be the weakest year since 2009 in terms of total investment volume, both in Czechia and in the entire CEE region. Due to high interest rates, Investments alternative to real estate delivered better yield. The future is now mostly dependent on what happens to interest rates, which are expected to drop and change the mood on the real estate market. The number of transactions performed under pressure is still minimal, with very different price expectations on the buyer and the seller side,” says Pavel Kliment, the KPMG Czech Republic partner in charge of real estate sector.

Financing of commercial real estate is still important for banks, though the surveyed bankers are now a bit less optimistic, with most not expecting any significant changes in their loan portfolios – except for, perhaps, a slower growth. Soon, many will be faced with having to refinance a substantial part of their portfolios within the next two years. In the soon-to-be-mature real estate loans segment, an average 15% of them are payable within 12 months, and 29% within two years. The loans granted before the covid-19 pandemic – when real estate transactions were at an all-time high – are partially responsible for the high amount of loans that will be due in the next two years. Banks in Poland and Serbia hold the highest number of such loans in their portfolios, while Croatia is at the other end of the spectrum.

No Sharp Increase in Problem Loans

Despite the major increase in interest expenses and overall negative economic development, no significant spike in problem loans has been observed by the surveyed bankers. However, the number of loans with minor problems has grown. In the long-term perspective, Czech and Serbian banks have the lowest percentage of problem loans in their portfolios, with the highest percentage of such loans found in portfolios of Bulgarian banks.

The Key Role of DSCR (Debt Service Coverage Ratio)

“Despite the minimum DSCR requirements remaining stable in the long-term perspective, the sharp increase in interest expenses means that it is DSCR that is most affected in new loans, meaning additional capital or investor resources are required to meet it. Furthermore, meeting the DSCR is important for other key criteria, like LTV, pre-letting, or pre-sale,” says Pavel Dolák, research coordinator at KPMG Czech Republic.

Interest Margins Remain Relatively Stable

Over 60% of surveyed bankers confirmed that their interest margins have grown compared to last year, however this was a much more subtle growth, unlike the spike in benchmark interest rates that caused the soar of interest expenses. Thanks to the competitive environment, the interest margins of banks still remain very stable.

As the tourism industry continues to recover, a slight drop was seen in interest margins on hotel projects, with still only some of the surveyed banks willing to provide financing for this type of real estate.

Similar to previous years, Czech and Slovak banks maintain the lowest interest margins, with most banks applying higher margins to development projects. The biggest difference in margins by project type was seen in Polish and Croatian banks.

Over 80% of surveyed bankers said their banks require variable interest rates to be secured with derivatives, and over 22% said that at least 80% of the loan value must be secured. Polish and Slovene banks are the most conservative in this respect.

Percentage of Foreign-Currency Loans Likely at an All-Time High

The growth in proportion of foreign-currency loans (e.g. loans in Euros in Czechia) slowed down this year, with non-local currency loans making up 80% of the new loans total. In many countries, proportion of such loans has likely reached the ceiling of what’s possible, especially considering the growing EURIBOR and the share of real estate that generates profit in the local currency only, like residential real estate.

Logistics Overtaking Residential

For the first time in years, logistics-related projects managed to gain a slight advantage over residential real estate in the “popularity contest” among banks, though residential projects managed to hold on to their number one spot in Serbia and Bulgaria. In Czechia, office buildings came in third, followed by retail real estate. In other countries, however, it’s retail that bested offices in terms of popularity.

Meeting ESG Criteria Now Necessary to Receive Financing

Over 80% of survey respondents confirmed having an approved strategy for ESG in commercial real estate financing. In case of Czechia, Slovakia, Hungary, and Croatia, all surveyed banks said they are ready and prepared.

Banks have made a lot of progress in terms of implementation of ESG criteria into their loan evaluation policies, internal reporting, data collection and monitoring, and other ESG-related activities. Still, the survey revealed large differences between individual banks caused by different strategies of their parent companies and by how proactive central banks of different countries are.

19% of surveyed bankers said they refused a loan specifically due to borrower’s failure to meet the ESG criteria, with 25% refusing a loan for this reason in combination with other factors. Despite the number of bankers with such an experience roughly doubled compared to last year, more than half of survey respondents have never been in a situation like that or have no binding ESG criteria for loan evaluation whatsoever.

The number of banks offering special, ESG-focused loans – mostly with lower interest margins and longer maturity – still remains low, just like last year, with not much difference between these loans and the standard offer.

About the Survey

Property Lending Barometer is a survey focusing on bank financing of commercial real estate that KPMG has been doing for 14 years now. This year, 48 banks from Bulgaria, Czechia, Croatia, Hungary, Poland, Romania, North Macedonia, Slovakia, Slovenia, and Serbia took part in the survey.