At the end of the road, there has to be cashflow

Opening the panel, its moderator, Monika Dębska-Pastakia FRICS, Associate Partner at KPMG pointed out that both the investment and development markets are experiencing a slowdown. „We have to bear in mind that both investment and development markets are slightly subdued at the moment. We need to remember that there's still a huge number of buildings which are standing, and they're required to be refinanced at some point in the future. Some of the assets are no longer financeable. We also have to deal with new climate legislation, which has been accelerating over the last couple of years. The markets are also facing some limitations in the banking sector”, stated Dębska-Pastakia.

In such an uncertain environment, is there an asset class that is favoured by banks when providing financing? According to Péter Számely MRICS, Head of Real Estate Finance CEE at HYPO NOE Landesbank, there is not. “Nowadays it's difficult to say, which asset classes are preferred. Some people would say that logistics is probably still in the lead, but our approach is more project-driven, we have to look at the project itself. Office building? If it’s not centrally located, without a significant pre-lease, we probably wouldn`t finance it.  But you always have to look at the details and what is actually in demand. What counts, is the product itself, its location, its age, all the usual fundamentals which you normally check as an investor”, said Számely. Maciej Zawiła, Real Estate Finance Director at BNP Paribas Bank Polska added, that banks pay more attention to the ESG-related parameters of the buildings. “ESG is coming. Of course, we're also looking at location, cashflow, and income, but the sustainability aspect is, I would say, now the pivot of all decisions and strategy. Because we're looking at the transition into the circular economy and 80% of the buildings today are completely not ready for it. To find the good assets, safe for the banks would be to find those that are either thinking about ESG and already have capex plans or have already been developed as net-zero buildings”, explained Zawiła.

The property owners are aware, that not all projects can be grated with financing in the current market conditions. However, that situation seems not to be permanent to them. “As we all know, the market is cyclical. And at some point, each industry has to become persona non grata. Some time ago, we were saying that retail is not financeable, and e-commerce is going to kill us all. I approached banks, and they said, ‘No, no, we only do offices and warehouses’. And sometime later, the cycle has changed. The PRS properties came to our region. It took some time until both we and the banks learned that business, but then we could actually find the proper financing. The function of the property is not that crucial  - what counts, is the location and the performance of the projects”, said Anna Dafna, Group CFO at AFI Properties.

Will banks be more eager to finance the brown assets in the near future? ”You have to show that you can convert the building and there is a transition plan for it, from a brown asset into a green one. You can do technical due diligence - it will show you how much investment is needed in order to convert a building. Then you will see whether it is financeable or not. You need to have a plan that shows that this conversion makes sense. A bank can only finance if there is a robust hope for a cashflow”, commented Peter Számely. His opinions were shared by Maciej Zawiła: “I don't see any difference if it's a brownfield financing or greenfield financing. Because at the end of the road, there has to be a cashflow, which will be needed to repay the loan. If there's too much risk involved or too many uncertainties, which cannot be quantified, then banks are not the proper vehicles to finance the early stage of the development. Nowadays, even when a developer comes with a logistics project. If there's no pre-lease, it would be very tough to obtain financing. I would say that the proportion of debt financing to own capital would definitely differ from 50/50, more investment on the investor side or maybe some mezzanine or other financing sources will be required”, said the expert.

However, the developers and property owners count on the help of banks during the “green transition”. “I totally agree that there is the equity part which needs to be brought by the investor. I'm not anticipating the financial institution to take the full risk. But this investment is so huge that we need to get some kind of help that makes sense from the banking sector. It's not that we're going now demolish all the cities and everything which was built in the past and build something new and green from scratch.   That's simply not possible”, said Anna Dafna.