Banking on Poland

Nathan North, ‘Eurobuild CEE’: We are sitting here in the first phase of Lixa in Warsaw, which was sold at the end of 2020 by its developer Yareal to Hana Investment, a South Korean consortium represented by Commerz Real, in a EUR 82.2 mln deal financed by Helaba. You obviously have confidence in the Warsaw office market and in this particular district close to Rondo Daszyńskiego, which has changed dramatically over the last decade.

Georg Blaschke, the head of real estate finance for the CEE and Benelux regions of Helaba: Yes, I remember that back in 2010 people were coming to stare at this big hole in the ground – because they couldn’t believe that a major office project was going to be built there. And this was where Warsaw Spire was eventually built. It turned out to be a genuine city-forming and changing project and we are very happy to be part of that story. The entire district has been transformed since then.

Martin Erbe, the managing director of Helaba: I can say that I’ve grown up with Warsaw since 2000. The second line of the Warsaw Metro changed the entire situation. Ghelamco bought the site for the Spire almost 20 years ago knowing that the metro was coming. It was a very wise move. Most of the iconic towers we can see from here have been built over that time. And the CBD has more-or-less shifted from the other side of the city to where we are now.

GB: This is now a completely different city to what it was ten years ago. People who visit Warsaw for the first time in a few years are often amazed by the transformation of the skyline. And Lixa is exactly the kind of product that we like to finance. It had a very good developer, a long-term tenant and – what’s becoming more and more important these days – it’s a very green building.

How busy has Helaba been in terms of financing real estate investments in the CEE region lately? Could you provide some examples?

GB: Helaba has been active in this region for more than 17 years, and our focus has always been on the markets in Poland, the Czech Republic and Slovakia. 2022 has been very busy so far, both with new business, but also with loan extensions. Why loan extensions? Real estate transactions in the CEE region were very high in 2017 and 2018 and these financings are now becoming due. We are also seeing many requests for early prolongations – extensions of loan terms before the original maturity. The increased interest rate levels and the expectation they will rise further are the rationale behind that. We have been mainly been active in four sectors. Amongst others, we have closed the refinancing of the Immofinanz’s Polish office portfolio, we have financed a logistics portfolio for a large insurance company as well as a retail property for EPP, and we have just had a first drawdown on a development in the PRS sector for Resi4Rent.

By how much was financing activity affected during the pandemic? Did deals completely dry up in some sectors, while others became much more attractive?

ME: At the beginning of the pandemic, mainly in Q3 and Q4 2020, there was a great level of uncertainty in all markets worldwide. Something happened that no one had ever experienced: entire economies went into lockdown. The insecurity in the business, but also in our private lives, reached unprecedented levels. This affected all sectors worldwide, including real estate and the banks. The capital markets were going crazy and it became uncertain how much liquidity would still be available in the market. In this difficult situation Helaba still served its customers with financing loans, but our funding costs became more expensive, which we then unfortunately had to pass on to our customers.

GB: The crisis affected all types of real estate due to the uncertainty. However, during the lockdown it turned out that online retail and, as a consequence, logistics assets were winning out, while brick-and-mortar retail was likely losing its market share. As a result, some investors actually stopped or at least postponed retail transactions until there was more clarity about how economies would perform in future.

ME: But the pandemic has not really changed the financing for offices – we’re still looking at the same quality and factors as before the pandemic for making a credit decision. The main question now is how office space should be designed for the future. Certainly, modern intelligent buildings with break-out rooms and open-spaces are important, but what about future pandemic situations? Which technical requirements should new buildings have? Additionally, companies will need less space in the future – the days are over when 100 pct of employees are in the office at the same time. So companies will have the same amount of people, but reduced areas.

GB: And the space you have needs to be even more attractive – everyone we’ve been talking to on this market has been telling us that they need this to attract the best talent, as there is virtually no unemployment here.

ME: The pandemic taught us one other thing: we need to take another step towards improving the work-life balance. Avoiding long travelling times in the morning and evening are one reason for working from home and spending fewer hours in the office. But we also learned to enjoy being in the office. You simply cannot substitute face-to-face meetings and social interaction – that sense of being together with your colleagues. Moreover, it’s not just about communicating and meeting with your colleagues, but with your clients, too.

GB: A lot of offices are now offering flex space, which was not so much the case before the pandemic. But now this kind of space is fully-occupied. Space for bikes has become very important as well. This is all part of the green story that’s unfolding. Developers are now thinking in a totally different way, because the culture and lifestyle of people has changed.

ME: This reminds me of what my father used to say to me: “If you want to buy an apartment to rent out, always ask yourself if you’d like to live there yourself.” It’s the same with office buildings – ask yourself would I like to work there?

But have things got back to normal now?

ME: Back to normal? There will be a “new normal” in real estate after the pandemic. Although the retail sector has recovered somewhat, investors are now generally preferring convenience retail formats with food anchors or small retail parks in the vicinity of larger residential areas, rather than large shopping centres. Logistics continues to be the most sought-after asset class, with most investors assuming that online retail will continue to grow. In the office sector, the jury is still out, but in some areas the trend towards working from home will continue and companies might therefore need less office space per employee. However, due to the higher inflation, landlords with existing buildings will definitely benefit from higher rents in the future which will make their investment more profitable. This is one of the reasons why PRS has taken off so strongly in the past two years. During the pandemic, many people became even more aware of how important their own private place is and that working from home might be very convenient, at least for one or two days per week. In addition, with interest rates going up, it’s becoming increasingly difficult for many to afford their own property, so renting is the new normal now.

How will the high inflation levels and interest rates affect the rest of the real estate sector – as well as other unwelcome factors, such as the war, the prospect of a recession and the possibility that the pandemic isn’t over?

ME: Economy-wise, we will definitely have some tough times ahead of us. High interest rates and construction costs have put a temporary brake on development. There are many fewer cranes to be seen on the city’s skyline. This is a chance for landlords to increase rents and we are definitely seeing them going up already. But I don’t see that as a general risk to the market, especially if you compare rents in Warsaw with other European capitals where rents are much higher.

GB: During the pandemic, only a handful of building permits were issued in the Warsaw CBD. But this could make it good for the market, giving it a breather and allowing for rent rises. From a bankers’ point of view, we are not worried. We continued our business almost undisturbed through the pandemic and remain positive…

ME: … until something proves otherwise. As for the war, this is not a major factor on the office market just yet in terms of any direct impact. Co-working space is benefiting, as it is being taken up by a number of Ukrainian companies who are uncertain about their future.

GB: PRS is a sector that has been boosted by the high interest rates and the cost of mortgages. People have to live somewhere if they can no longer afford to buy a flat. All the building projects we have financed lately and that are completed were fully rented out in a very short period of time. And as this is a very competitive market due to the limited supply of quality space, rents have gone up by 50–80 pct for this segment during this time. Since mortgages are more expensive than six months ago, many resi-projects are being converted to PRS. This is still a new sector in Poland, but it has been big for some time in Germany. German companies are coming here and if they can’t find plots for new projects, they will buy existing developments and convert them to PRS. Now there are only 20–30,000 institutional quality apartments in Poland, but there will be over 50,000 in the medium term. So the potential for further growth is huge. Rentals have always existed in Poland – there are currently 1.2 mln of these – but the sector was never institutionalised. With institutional PRS you have a clean, modern and reliable product. Helaba was the first international bank to finance the development of PRS projects in Poland, together with a Polish bank.

ME: In two to three years’ time, we will be seeing major international companies owning 20–30,000 PRS apartments here. During the pandemic people realised how important quality apartments are. And with more flexible working, people will appreciate quality living space even more.

Since Lixa is, as you pointed out, a very green building, I’d like to ask you why green financing and green bonds have been in the headlines so much recently. How do these differ from “normal” ways of raising finance? Is all real estate finance going to be green in the future?

ME: ESG – these are three simple letters that are changing the world. Real estate is largely responsible for the emission of polluting greenhouse gases. Many countries around the world have committed to reduce harmful CO2 emissions and the real estate sector must accept its responsibility in this area. All parties involved in the real estate sector, from developers to equity investors to banks, have therefore committed themselves to act in a more environmentally-conscious way in their field of business. Investors issue green bonds that are linked to the fulfilment of certain key performance indicators, such as the company’s CO2 emissions. The banks, in turn, like to finance new and modern buildings that emit fewer pollutants and to refinance these transactions through green covered bonds. These bonds or covered bonds bring only a small financing advantage, if any at all. However, in the future, older, less green buildings will most likely be “penalised”, with a margin premium and, in extreme cases, banks will hardly finance them at all. Helaba has also committed itself to filling a large part of its real estate loan portfolio with green properties within a certain time frame. And, yes, the entire real estate, not just the financing, must become greener.

GB: But the S – the social – in ESG is also becoming an increasingly important factor. In terms of social factors, it’s human rights, diversity and data protection that are at the top of the list, and, of course – driven by the pandemic – labour relations, health and safety. How will the buildings we work and live in be in the future? At the moment, however, there is one big question: what exactly is green, which property data will be collected and evaluated to make buildings comparable and how will this be done? To help the market achieve CO2 neutrality, Helaba is supporting ECORE, an initiative to establish a scoring standard to make sustainability in real estate portfolios transparent, measurable and comparable.

Coming back to the future of the Polish real estate market, it seems that you’ve got no shortage of confidence in it. Will you continue to support its growth, even in these troubled times?

ME: We are confident and Helaba has a long-term relationship approach in general. Real estate is usually said to be a good hedge against inflation. There will be some troubles ahead for sure – we just have to adapt to this. We still have high inflation, interest rates and construction costs, as well as the pandemic, supply chain disruption and the war – we know these things and just have to deal with them. Just like we always say to tenants: we just have to talk about this and we’ll work out a solution. Because there’s always a solution.

GB: We have been active in Poland for almost 20 years now. With a loan book of almost EUR 1.6 bln we are one of the largest international real estate lenders in Poland and provide finance not just in the major cities but also all across the country in certain cases. The investment and construction loans we provide show how much confidence we continue to have in this market.

ME: We love Poland and the Polish people. They are very open-minded to new things and creative. There is a very positive entrepreneurial spirit here and still many sites and areas left to develop, in contrast to cities like Frankfurt or Prague. Now the tallest building in the EU, Varso Tower, has just been completed here, also with our support. What a statement for Warsaw and Poland!