Zbigniew Korba, Partner and Attorney at Law at TaylorWessing has talked to Property Forum about sustainability-liked loans, current financing conditions and the incoming changes in the spatial planning and construction law in Poland.
A few months ago, Taylor Wessing advised Jastrzębska Spółka Węglowa on an innovative financing in the formula - "Sustainability Linked Loan" worth PLN 1.65 billion. Please tell us about this deal. Why can it be considered innovative in our domestic backyard?
Yes, in April this year, Jastrzębska Spółka Węglowa S.A. signed a PLN 1.65 billion Sustainability Linked Loan (SLL) financing agreement with a consortium of eight financial institutions, which were represented by the Taylor Wessing team. SLL is a loan where part of the cost is linked to the borrower's ability to meet sustainability targets, encouraging companies to meet these targets in order to reduce margins and debt servicing costs.
This is the first financing of its kind in the coal mining sector in Central and Eastern Europe. Due to the company's business profile, it took several months to secure the financing. The borrower committed to specific targets over a period of time: a reduction in greenhouse gas emissions and an increase in the level of coal bed methane capture and utilisation. These were written into the loan agreement and will be reviewed annually by an external auditor. If any of the targets are not met, the loan margin will be adjusted upwards and additional funds will be provided to non-profit organisations working in the areas of climate change, sustainability, environmental education or social responsibility.
There is an increasing awareness and emphasis on sustainability and environmental responsibility in Poland. SLLs provide a novel financing mechanism that aligns with climate goals and transitions towards a greener economy. The innovative nature of SLLs lies in their focus on incentivizing and rewarding sustainable practices. SLLs offer an opportunity for businesses in Poland to differentiate themselves in the market. By securing financing linked to sustainability performance, companies can demonstrate their commitment to sustainable development and responsible business practices. This can enhance their brand image, attract environmentally conscious investors, and potentially gain a competitive edge over their competitors.
SLLs also foster collaboration between lenders and borrowers to achieve sustainability goals. The loan terms are mutually agreed upon, and the parties work together to monitor and measure the borrower's sustainability performance. This collaborative approach promotes transparency and accountability, and creates a framework for ongoing dialogue and continuous improvement in sustainability practices.
By embracing SLLs, businesses in Poland can not only access capital but also drive positive environmental change, improve their market positioning, and contribute to the country's sustainable development goals. The innovative nature of SLLs lies in their ability to align financial incentives with sustainability performance, creating a win-win situation for borrowers, lenders, and the environment.
In the Polish financial sector, do banks already make the granting of financing conditional on the implementation of an ESG strategy by the borrower, or is this still something of a novelty?
New regulations on the EU and domestic level increasingly demand that banks address social and environmental issues. The sector is thus becoming a promoter of pro-environmental, pro-ESG change. The role of banks is therefore not only to organise and provide finance but also to stimulate the market and create mechanisms that create demand for green financial products. On the one hand, banks encourage their clients to make climate-compatible investments through various incentive mechanisms, such as more favourable financing conditions. On the other hand, they restrict financing for projects that do not comply.
Banks in Poland have recognised the importance of environmental, social and governance (ESG) factors in their lending practices. All major banks operating in Poland have already implemented strategies that integrate sustainability goals on an equal footing with their business objectives. The goals which they have set for themselves are being monitored, reported and updated, and have a real impact on all areas of banking activities.
For which assets available on the Polish commercial real estate market are banks most willing to lend money?
Not surprisingly, banks in the Polish commercial real estate market generally show a greater willingness to lend money for assets that are perceived as less risky and have a higher potential for generating stable income and value. Needles also to say that financing follows the transactions. And at the commercial real estate market there are fewer closed deals than a year ago or earlier. The reasons are high-interest rates, inflation and a clash in expectations between sellers and buyers awaiting discounts. They focus on Warsaw (in office) and the western part of Poland (logistics) whereas in retail they are to a large extent opportunistic.
Nevertheless, what we can say is that, while each bank's lending preferences may vary, there are several asset types that attract lending most often.
Logistics and industrial properties have gained increased attention from banks due to the growing demand for warehousing and distribution facilities, driven by the rise of e-commerce. Banks may be more open to financing logistics assets with modern infrastructure and long-term lease agreements, considering them as lower risk.
Prime office buildings located in central business districts or established business hubs are still perceived well by banks. These properties, known for their strong income potential and reliable tenant base, are considered relatively secure investments.
Additionally, shopping centres or retail complexes, with a high occupancy rate and well-established anchor tenants are gaining renewed importance among funding banks after recent years of slowdown. More and more popular are smaller formats such as retail parks and convenience retail schemes.
Only some banks are interested in financing the development of residential assets, and they remain selective as regards other classes of assets such as hotels.
While these asset types are generally more favourable for lending, it is important to note that banks assess each project individually, taking into account various factors such as the sponsor (borrower's shareholder) financial strength, track record, location, project feasibility (quality of tenants, occupancy rate etc.), market conditions.
How do you assess the current investment climate in our country? Is the conflict in Ukraine still considered to be a factor that raises the risk when it comes to investing in Poland?
In these very challenging circumstances of economies recovering from the pandemic turmoil, an outbreak of the war in Ukraine, inflation, increased interest rates, energy crisis, disrupted supply chains, and other “black swans”, the Polish economy is doing surprisingly well.
Poland has proved to have one of the most slowdown-resistant economies in the European Union and is a leading recipient of global foreign direct investment. By playing a vital role in political, military and humanitarian aid to Ukraine, we are also becoming a key link between Eastern and Western Europe. In addition, investors are currently reconfiguring global supply chains. Poland is one of the beneficiaries of this trend, given its location in the centre of Europe and the combination of attractive investment costs and a highly skilled workforce.
An example of this approach is Intel's recently announced plans to build a semiconductor integration and testing facility in Poland. The investment is expected to cost $4.6 billion and create around two thousand jobs.
Relocation of businesses from Ukraine and Belarus to Poland should also be noted. All co-working places are busy and a lot of free office space has disappeared. The question is whether this shift is of a more permanent nature or just temporary, but it has some positive impact on the market.
No doubt, some “big money” was put on hold directly after the outbreak of the war, but after a while local investors and new investors from the region became much more active and willing to profit out of the situation. However, property prices have not fallen and opportunistic investors haven’t bagged their dream bargains on the real estate market.
Generally speaking, it seems that the war in Ukraine is no longer perceived as a risk to investment in Poland by major international players. Moreover, many investors are searching for new prospects here. Poland remains an attractive place to develop investment activity in the e-mobility, business services BSS-IT, research and development (R&D), food, machinery and automotive sectors.
Or are inflation and persistently high-interest rates in the eurozone a bigger problem?
Yes, that is the point undoubtedly. Yes, this is a problem and a bigger problem indeed.
High inflation and interest rates have brought significant challenges for the real estate industry from an investment standpoint. Firstly, inflation erodes the purchasing power of investors, reducing the overall return on investment. As prices of goods and services rise, the value of rental income and property appreciation decline, impacting the profitability of real estate investment.
Secondly, the high-interest rates make borrowing more expensive for real estate investors. This increases the cost of capital and reduces the potential return on investment. Higher borrowing costs can discourage investors from pursuing new acquisitions or undertaking development projects, limiting the growth and expansion of their real estate portfolios.
Moreover, these conditions may lead to a decrease in investment activity within the real estate market. Investors seeking higher yields may explore alternative investment options with more favourable risk-adjusted returns, diverting capital away from real estate. This reduced investment activity creates challenges in funding new projects and can potentially impact property valuations.
Additionally, high borrowing costs and inflationary pressures can negatively impact the feasibility and profitability of real estate development ventures. Developers may face difficulties in securing financing or may experience increased construction costs, reducing the attractiveness of new development projects.
However, it is important to note that the impact of high inflation and interest rates on the real estate investment landscape can vary depending on market conditions and the specific property sectors. Certain sectors, such as industrial and logistics properties driven by the growth of e-commerce, may be more resilient to these challenges.
What are the main legislative changes that real estate investors and developers in Poland are likely to face in the nearest future?
The Polish market will see two major changes in both spatial planning and construction law this year.
The planned changes to the Construction Law can be considered pro-investor, as they are intended to speed up and digitise the process of obtaining construction permits.
However, there are more concerns about the changes to the Spatial Planning Law which may make it more difficult to obtain planning permission for areas not covered by local plans. As a general rule, planning permission will only be granted for land identified as infill in the master plan. The amendment is intended to prevent the process of uncontrolled suburban sprawl.
What are the most significant changes from the developers' perspective? The master plan will replace the study of land use conditions and directions. The master plan will be the basis for the adoption of local spatial development plans (LSDP). It will also apply to decisions on land development and management conditions (LDMC decisions). As a matter of principle, LDMC decisions will only be obtainable for land that will be designated in the master plan as a development replenishment area. However, not every site will be able to be designated as such an area - the starting point will be a grouping of at least five buildings no more than 100 m apart. The idea is to prevent undeveloped land from being developed and to focus on densifying development. LDMC decisions are to be valid for a period of five years from the date they become legally valid. The investor will have to obtain a building permit within this period. There will also be restrictions on the allocation of new land for housing. An integrated investment plan will be introduced, which will be a special type of LSDP, adopted at the request of the developer after negotiation and conclusion of an urban planning agreement, which will specify the conditions of investment implementation and the obligations of the developer and the municipality. The adoption of such a plan will entail additional costs at the level of the planning process on the part of the developer, and will also require the municipality to be open to the implementation of the project in question.
As you can see, we are facing very big changes in this area, which need to be taken into account by developers planning their investment in Poland.
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