Banks in Central and Eastern Europe (CEE) remain eager to finance commercial real estate projects, particularly in the warehousing and logistics sectors. Poland continues to lead the CEE region in terms of investment market volume, with real estate financing holding the highest strategic importance for Polish banks compared to the rest of the region. Credit strategies are evolving – particularly in Poland, the Czech Republic, and Hungary, where failure to meet ESG criteria can lead to loan refusals, according to the latest KPMG report titled “Property Lending Barometer 2024,” which surveyed 43 financial institutions from nine CEE countries.
Positive Economic Sentiment Despite Challenges
The economic sentiment index for most CEE countries remained above the EU average this year, reflecting a more optimistic outlook for the region. While caution persists due to geopolitical risks and the ongoing war in Ukraine, over €5 billion was invested in CEE commercial real estate in the first three quarters of 2024, representing a 25% year-on-year increase.
Nearly 60% of surveyed banks reported no changes in their approach to real estate financing over the past year, while 25% noted increased interest compared to the previous year. Poland stands out particularly positively in this context. Among respondents, Polish banks ranked real estate financing as the most strategically important sector.
Shifts in Key Determinants of Bank Lending Strategies
A survey conducted in November 2024 indicates that local macroeconomic conditions are currently the most influential factor in banks’ approach to commercial real estate financing, followed by Europe’s broader macroeconomic outlook due to less optimistic forecasts for the European economy.
Compared to last year, the importance of rising financing costs has diminished. While this factor was considered paramount in 2023, it has receded as inflation stabilized and interest rates began to decline across many European markets in 2024. Consequently, central bank policies now have a smaller impact on bank decisions than they did a year ago.
ESG Considerations and New Strategic Priorities
ESG issues and new strategic priorities play a crucial role for banks this year. These factors have gained importance due to approaching regulatory deadlines, including Basel IV and increasing requirements from ESG regulations like the EU Taxonomy, SFDR, and CSRD.
These considerations influence the criteria for project assessments in loan approvals. As in previous years, banks confirmed that high asset quality and a robust business model remain key factors in securing financing. These criteria emphasize banks’ focus on risk minimization and long-term project profitability.
The developer’s market position, reputation, and financial standing remain critical to evaluation criteria. Additional factors include project lease rates, equity levels, and ESG compliance.
Growth in Transaction Volume in the Polish Market
The second half of 2024 saw improved investment market sentiment, increased activity across all sectors, and growing interest in office assets in regional cities and shopping centers. This shift in investor sentiment is reflected in capitalization rates, which have stabilized after significant increases last year. Despite these positive developments, Poland remains a relatively small market for real estate investments compared to the rest of Europe, representing just 2% of total transaction volume in the first three quarters of 2024.
Despite limited investment activity in Europe, Poland shows clear signs of improving investor sentiment and growing demand for commercial real estate. Due to a saturated market, banks remain cautious about financing new investments, placing greater emphasis on ESG criteria during project evaluations. Financial institutions are systematically adjusting credit risk models to align with Basel IV requirements and evolving EU legislation.
“The outlook for 2025 is positive, driven by anticipated increases in investment activity following interest rate cuts by the ECB and the FED,” says Katarzyna Nosal, Partner in the Tax Advisory Department and Head of Real Estate and Construction Advisory at KPMG in Poland.
Stable Approach to Real Estate Investment Financing
Most respondents reported unchanged attitudes toward financing new projects compared to last year, indicating that CEE banks remain open to new investments despite market fluctuations. The ratio of development loans to income-generating projects averages around 50/50 across the CEE region. However, Polish banks are more cautious, with a 40/60 ratio in the domestic market.
As in previous years, interest rate margins for new development projects are, on average, 10 basis points higher compared to margins for completed and leased projects.
ESG Compliance Increasingly Important for Financing
The changing regulatory environment requires banks to expand the scope of ESG criteria in commercial real estate evaluations. Compliance with sustainability standards has become a key element of project assessments, affecting all aspects of lending.
Seventy-five percent of the 43 surveyed banks from nine CEE countries reported adopting ESG strategies and integrating sustainability criteria into loan approvals. Compared to last year’s results, there is a noticeable increase in banks participating in green bond issuances or offering green financing, such as loans with reduced margins for energy-efficient projects. However, only 11% of banks offer products for financing the modernization of existing buildings.
Given market needs, one of the most anticipated changes is the introduction of financing products for older property renovations.
Banks are compelled to adopt stricter ESG compliance measures due to regulatory changes. While there hasn’t been a significant shift in the number of banks refusing financing due to ESG non-compliance (either alone or in combination with other factors), the stance of local central banks in CEE is crucial for promoting sustainable financial practices.
“Investors in Poland, the Czech Republic, and Hungary are increasingly encountering loan refusals if they fail to meet ESG expectations,” says Monika Dębska-Pastakia, Associate Partner and Head of Real Estate in Deal Advisory at KPMG in Poland.
Gradual Digitalization of Bank Processes
For the first time, the report examined the impact of new technologies and artificial intelligence on real estate financing. The KPMG survey found that only 7% of banks currently partially digitalize credit processes, while 8% are in the implementation phase. New technologies are least utilized in the due diligence process, with 56% of respondents still relying on traditional methods.
Banks are gradually digitalizing approval processes for large loans. Although these processes still require extensive evaluation, digitalization has simplified and accelerated some stages. Banks that have adopted or plan to adopt digital solutions focus on automating loan monitoring and repayment processes.
About the Report
The KPMG “Property Lending Barometer 2024” report is based on a survey of commercial real estate financing by banks in the CEE region. This year’s survey included 43 banks from Bulgaria, Croatia, the Czech Republic, Poland, Romania, Serbia, Slovakia, Slovenia, and Hungary. The survey was conducted in November 2024 and included an online questionnaire and in-depth interviews with bank representatives.
