Will the commercial property crisis hit Poland's banks?
Deutsche Bank CEO Christian Sewing expects the commercial real estate crisis to continue this year. In the US, Moody's has downgraded New York Community Bancorp's regional rating to 'junk' due to its problems in the commercial real estate market. "Concerns about the health of commercial real estate are nothing new, they are now starting to affect only selected banking entities," says Dr Jan Gąsiorowski of the Warsaw office of law firm Wolf Theiss.
Pessimistic news regarding commercial real estate and the banking sector is coming to us especially from the US. In March this year, the bank term funding programme (BTFP), which was an important tool to support the US banking system and was launched in response to the collapse of Signature, Silvergate and Silicon Valley banks, came to an end. Regional banks in particular - including New York Community Bancorp - came under pressure. It appears that Japanese bank Aozora and Germany's Deutsche Pfandbriefbank, both involved in the US commercial real estate sector, may also be in trouble.
"In the big picture, this is the result of rising interest rates in the US, which we haven't seen in 23 years, but also structurally, the lack of return to the offices of employees after the pandemic and the spread of the remote working model. As a result, there are even such cassandric visions as rallying the biggest real estate crisis since the 2008 financial crisis. On the other hand, some analysts are more positive - which, from the perspective of European assets, we are happy to lean towards," says Dr Jan Gąsiorowski of Wolf Theiss.
Playing the role of Cassandra is Fitch, among others, which expects the loan default rate to rise above the peak reached after the global financial crisis in 2008. According to the agency, the rate will rise from 3.6 per cent this year and then reach 9.9 per cent in 2025. Falling property values and rising financing costs are expected to stimulate negotiations on extending loan maturities. There is plenty to fight for, as Goldman Sachs analysts forecast an accumulation of USD 2.2 billion in repayments in the US for 2027 on this account.
In contrast, according to international media publication, The Conversation, analysts believe that the closure of the BTFP programme will not necessarily lead to trouble for regional banks in the US, as they have had enough time to adjust to higher interest rates. The Fed's instruments, such as the so-called discount window, are also available to them.
"Developments there are, of course, important for the global banking sector and the global commercial real estate market, but looking from the perspective of Central and Eastern Europe we find it difficult to accept a scenario even close to 2008. In Poland, there is talk of a 20-30% drop in the average lease size in the office sector. However, it is noticeable that companies are more willing to secure office space for a longer period of time or take cost optimisation measures. Developers are also adjusting their activity and suspending projects, which keeps vacancy levels fairly low. The condition of the industry is therefore relatively good and we cannot compare it to that in the US. What may worry, of course, is the lower activity in the transaction market, which remains very low in the commercial sector as a whole. In recent weeks, the optimism has also been overshadowed by the situation in the German market - which for us could be much more threatening than the situation in the US," notes Dr Jan Gąsiorowski.
Reuters reports that in the last quarter of 2023, commercial property prices in Germany fell by 12.1 per cent year-on-year, the strongest on record. For the past few months, news has also been coming in about the troubles of European real estate giant Signa Group, which has declared its key companies bankrupt, with liabilities valued at €13 billion.
"There are headlines in the media about a creeping meltdown in Germany's commercial property market, but looking at the figures - these are voices not yet reflected in the facts. It must of course be acknowledged that German banks have the largest number of commercial property loans in the European Union, but only a small proportion of these are at risk. Also, the scale of involvement and the size of the market compared to, for example, the residential sector is incomparable," reassures Dr. Jan Gąsiorowski.
However, what impact will this international situation have on the commercial property market in Poland, where investment market activity, last year, reached its lowest level since 2009? The volume of transactions amounted to around EUR 2 billion in our market, with a large share of warehouse space. Declines also affected the entire region, ranging from 27 per cent in the Czech Republic to as much as 60 per cent in Romania. In Poland, the total investment volume in 2023 represented only 33 per cent of the 2022 result. However, as market analysts emphasise, there has been an increase in activity in the transaction market since the beginning of this year, which provides a great deal of room for optimism for the coming quarters.
The recovery in the commercial property transaction market depends in the first step on price stabilisation and cheaper money. A drop in interest rates, would certainly help to find a level of equilibrium for offers to buy and sell, but will not result in an increase in investor activity in the face of global concerns about increased risk between banks and the commercial property market. A certain solution - something the banking sector is increasingly vocal about - could be the activation of domestic capital. Exorbitant requirements for obtaining financing for new projects will limit speculative investments. Paradoxically - the effect of the crisis on the banking and commercial real estate market may therefore be an acceleration of work in Poland on solutions supporting the so-called Real Estate Investment Trust (REIT), which would allow individual and institutional investors to invest capital in commercial real estate to a greater extent , concludes Dr. Jan Gąsiorowski.
In the Czech Republic, domestic investors have a 60 per cent share of the commercial real estate market. In Poland, this percentage is a mere 2 per cent. This could change with the introduction of legislation on, i.e., funds allowing individuals to invest in commercial real estate, which guarantee a share of the rents paid by tenants.
