Real estate portfolios of banks: industry wins, non-green projects lose

Banks in Central and Eastern Europe (CEE) have not lost their appetite for the financing of commercial real estate, especially when it comes to industrial and logistics projects. Most of the surveyed bankers believe that their real estate portfolio will grow next year. Banks in the Czech Republic and Serbia still have the lowest share of impaired loans. For Czech, Polish, and Hungarian banks, a failure to meet ESG criteria is a red flag when deciding whether to provide a loan. These are among others the results of the 15th annual survey involving 43 finance houses from nine CEE countries, organised by KPMG.

Banks in the region remain highly interested in commercial real estate financing. For 25% of the respondents, this interest is even higher than last year, while the increase in the interest of Polish banks was the highest it has ever been.

“The increasing willingness of banks to finance commercial real estate in 2024 was supported by significant growth in the volume of real estate transactions. The real estate market in the Czech Republic and the CEE region demonstrated its stability, especially when compared to Western Europe. The CEE region has been spared decreases in the value of commercial real estate, mainly due to rental growth largely offsetting the impact of rising yields,“ summarises Pavel Kliment, Partner in charge of the real estate sector at KPMG Czech Republic.

As for the financing of new projects, as in previous years, banks prefer logistics and industrial properties, followed by new residential buildings by a small margin. Retail properties came in third place by a wider margin.

Hotels are still the least preferred real estate type despite the recovery of tourism, as significant number of the banks surveyed are still unwilling to finance hotels.

One piece of positive news is the growth of the share of development loans in the total volume of commercial real estate loans. The ratio of development loans to completed projects is about 50/50 on average across all countries surveyed but country differences are significant. Financing of new development projects has the largest share in Slovakia (66%) and the lowest in the Czech Republic (29%).

“At the same time, more than 58 percent of bankers believe their real estate portfolios will increase over the next 12 to 18 months. Bankers in the Czech Republic are the most optimistic, with all banks surveyed expecting their real estate portfolios to grow,” says Pavel Dolák, KPMG Czech Republic’s real estate expert and the survey’s lead coordinator.

As in the past, interest margins for new development projects are on average 10 basis points higher across the region compared to the margins on loans for completed and leased projects.

The survey did not identify any significant changes in loan terms and conditions or in the basic requirements on debt service coverage ratio (DSCR), loan-to-value ratio (LTV), and occupancy rates or pre-sales ratio. Banks typically have the lowest DSCR requirements on industrial and logistics properties, while the highest DSCR is required for hotel projects.

The willingness of banks to finance commercial real properties is supported by the persistently low share of impaired loans in the region, where on average only one and a half percent of the total volume of loans shows significant problems. "However, there are still significant differences between countries, with Czech and Serbian banks on one side with the lowest share of impaired loans, and Bulgarian and Hungarian banks on the other side with the highest share of such loans,” says Pavel Dolák.

Many bankers from countries outside the eurozone provided an average of three-fourths of their loans in euros in the past year and a half (74% in the Czech Republic). Nonetheless, the share of local currency denominated loans (mainly in Romania) slightly increased compared to last year by an average of 12 percentage points.

Compared to last year, (especially in Poland, Slovakia, and Croatia) are a bit more willing to engage in club or syndicated loans. At the same time, however, more than 92 percent of the bankers do not at all favour junior or mezzanine loans. Banks in the Czech Republic, Hungary and Romania have the most negative attitude towards junior and mezzanine loans.

ESG-related criteria have been incorporated into their real estate lending practices by 40 of the 43 surveyed finance houses. For almost one fifth of the banks, the failure to meet the ESG criteria is alone sufficient to deny a loan. Deficiencies in ESG combined with some other criterion would be grounds for loan refusal for almost half of the finance houses. Czech, Polish, and Hungarian banks are the most stringent, as all of them declared failure to meet ESG criteria a deal breaker.

Finance houses in the region have also been extending their offer of ESG advice and special products to finance commercial real estate retrofits. In addition, they are partnering with sustainable building developers and builders.

The attention paid to ESG is about to increase even more, among others because of the new EBA guidelines that may take effect in the Czech Republic perhaps as early as of the end of next year. Domestic banks will then have to assess ESG-related risks even more thoroughly, e.g. by mandatorily scoring ESG criteria in lending, securities purchases, and their own operations. This may also lead to more expensive loans to companies with non-green activities, including those operating in the real estate sector.

This year, the survey also explored the impact of artificial intelligence and digital tools. In commercial real estate financing, their role is still limited - only 7 percent of the surveyed banks have partially implemented similar tools and 8 percent are in the implementation phase.

Obviously, the banks are nonetheless gradually starting to digitise their approval processes for large loans. While these still require a lot of manual assessment and thorough vetting, digitisation has already simplified and streamlined some phases.

Currently, technological tools are mostly applied in the initial assessment (preliminary analysis, creditworthiness assessment, etc.) of loan cases. For banks that have been digitising and automating or plan to do so soon, it makes the most sense to focus on digitising and automating the processes associated with monitoring (the granting of loans and their repayment).

New technologies are used the least in due diligence (screening investment opportunities before providing the financing), with 56 percent of the respondents relying primarily on traditional methods. Any heightened application of state-of-the-art technologies is also hampered by the strict regulations associated with GDPR and the AI Act.

Property Lending Barometer is a survey focusing on bank financing of commercial real estate that KPMG has been doing for 15 years now. This year, 43 prominent banks from Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia, Slovenia, and Serbia took part in the survey.

KPMG offices collected the data primarily through online questionnaires and in-depth interviews with representatives of banks. The data collection took place in October and November.