Banks are increasingly focusing on sustainability by aligning their operations with current regulations and market expectations. KPMG "Property Lending Barometer 2023" presents the findings of a survey on banks' approach to real estate loan financing in Central and Eastern Europe in 2023, and takes a closer look at the most important industry trends predicted for the near future.
The real estate market and the economy
High interest rates, inflation, and economic stagnation are all key factors behind a drop in total volume of bank loans taken out by both businesses and individuals. Market development largely depends on the level of the aforementioned interest rates – their expected reductions could significantly boost real estate investment.
Financing of commercial real estate remains very important for banks, although surveyed bankers are currently less optimistic , with most of them not expecting any significant change in the sector, save for maybe some small growth.
Poland, with the result of 47%, accounted for the largest share of all real estate transactions in the CEE region during the first three quarters of 2023. The Czech market ranked second, accounting for 27% of investments. It is worth noting that Poland's position in this regard has not changed despite the reported decline in transaction volume across the region.
Year 2023 saw a visible slowdown in investment activity in the Polish commercial real estate market due to the higher financing costs, changing market sentiment, and a gap in price expectations between asset sellers and buyers. Among entities actively operating in the local market, investors from the CEE region play a crucial role. Warehouse assets are attracting the greatest attention from investors as the logistics market conditions remain favorable, despite slight decreases in both demand and supply. The retail sector is regaining interest from investors post-pandemic, focusing mainly on smaller retail properties. However, 2023 proves to be challenging for the office sector due to the investors’ cautious approach towards office properties amid the evolution of work models and reduced demand for office space.
Real estate lending in Central and Eastern Europe
Most bankers from non-EUR countries reported an average of 80% of loans provided in foreign currency (EUR). Continuing growth in the share of foreign currency loans matches the difference between benchmark rates of individual countries and EURIBOR. Now, the share of foreign currency loans stopped growing, likely reaching its maximum – this is partially due to the share of assets generating income in local currencies and growing EURIBOR rates in 2023.
Financing of new development within CEE, on average, stayed proportionally stable compared to the last year. In countries like Croatia and Serbia, financing of new development has gone up while Slovakia, Poland and Hungary shifted their focus on income generating projects.
Compared to last year, the surveyed banks require borrowers to have more of their own capital for new loans, meaning lower LTV and LTC rates. They are in turn closely related to borrowers being required to meet the DSCR.
ESG from the perspective of lenders
Over 75%
of surveyed bankers said their institution has incorporated ESG criteria into real estate loan evaluation.
44%
surveyed bankers acknowledge that failure to meet ESG-related criteria can be a reason for rejecting a loan application.
82%
of bankers confirmed having an approved ESG strategy for the real estate financing sector with Croatian, Czech, Hungarian, North Macedonian, and Slovak banks being 100% ready.
Interviews with bank representatives in CEE suggest that financial institutions are paying increasing attention to ESG issues in their lending activities. More than 90% of the banks surveyed, reported an increase or significant increase in the relevance of non-financial reporting issues in their lending policies compared to the previous year, while only a few reported no change. On the other hand, there is still a noticeable gap in the financial products offered by banks in CEE that are tailored to the challenges of financing the transformation of the real estate sector in terms of energy efficiency and decarbonisation of buildings.
Raport: Property Lending Barometer 2023
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