According to audit and advisory firm KPMG, many CEE real estate companies will face the need to refinance a significant portion of their portfolios over the next two years. In the segment of real estate loans with short maturities, 17% of them are due within the next 12 months and 32% are due within two years. In addition, these are high-volume loans, most often taken out before the pandemic, when investment markets in the CEE region were very heated.

Could the refinancing of these loans at the current high interest rate levels shake the financial stability of borrowers? Or should we expect more so-called distressed sales? Market experts are convinced that investors hunting for such forced sales may feel disappointed.

Kevin Turpin, Regional Director of Capital Markets, CEE at Colliers advisory agency, says: “It is true that rates for refinancing are at their least favourable levels in the past 10 years and this will trigger discussions between investors and the banks where refinancing events are due. While many loans have been provided at reasonably low LTV’s of 50-65%, it is our belief that where any loan condition breaches occur, banks, and investors, will prefer to seek a workable solution, before initiating conditions that will lead to a forced or distressed sale. In addition, banks, and to some extent Investment funds - depending on their structure or governance - have stricter rules around capital reserves, designed to alleviate some of the pressures in challenging times”. His opinion is shared by Mark Richardson, Head of Investment, Savills: “Theoretically, we should expect an increase in the level of distressed sales as banks address breaches in lenders' financing covenants. While we anticipate a rise in non-performing loans coming to the market, in Poland, this process is time-consuming. Banks often show reluctance to take enforcement actions against lenders through courts. Instead, they prefer to seek solutions with lenders by exploring alternatives to enforcement, such as asset management initiatives and restructuring loans through cross-collateralization or swapping increases in contractual loan margins for breaches in LTV covenants. These solutions require time to fully explore and implement, which means the volume of distressed sales in 2024 might not be as significant as some might expect”.

While the refinancing of loans may proceed relatively smoothly in 2024, more stress may be placed on the boards of large companies in the region, especially in Poland, by the corporate bond redemption dates falling this year. Issuing debt securities has for years been a favourite form of raising funds for commercial developers by the Vistula river - especially companies such as Echo Investment, Ghelamco, Cavatina Holding or the state-owned Polski Holding Nieruchomości, but this solution has also been used by smaller players. With high interest rates, redeeming these bonds at prices that no one even imagined back in 2019-2020 could be painful. Industry analysts believe that here the emergence of distressed sales is already quite possible.“

We anticipate that for smaller real estate owners, redemption could be more challenging and may consequently increase market liquidity and transaction volume. The redemption of corporate bonds at historically lower interest rates will pressure existing lenders in corporate finance to refinance their portfolios through financing banks or structured property debt funds, likely at significantly higher rates. This situation will undoubtedly compel some real estate owners to consider selling certain assets to finance others within their portfolios”, predicts Mark Richardson of Savills. „Where possible, we expect that some of the major players will look at buying back some of that bond issuance. Some will look to refinance, despite the less favourable conditions and, depending on the level of redemption, some will potentially need to look at disposals if deferring or alternative solutions cannot be agreed upon. Investors realise that the room for negotiations with bondholders is much smaller than with financing banks and here some distressed cases might happen”, claims Mariusz Mroczek, Director, Corporate Finance, Poland at Colliers.

The need to refinance loans and redeem expensive corporate bonds may have a negative impact on the liquidity of entities still struggling with post-COVID taints. While residential, logistics and warehouse properties invariably enjoy a reputation as safe assets among investors, retail and, above all, office properties will continue to lose their appeal in 2024. Mark Richardson of Savills forecasts: “The retail sector has experienced a significant decline in transaction volumes over the past three years, primarily due to a lack of investor interest. However, liquidity is showing signs of returning, with several retail sector transactions expected to close in the CEE in Q1-Q2 2024. Meanwhile, the office sector is undergoing a structural transformation. The impact of corporate policies on hybrid working and remote work arrangements is becoming increasingly evident in the occupational market, as reflected in the take-up of office space. Investor attitudes towards the Office sector seem to align with trends in the USA and Western European markets. Consequently, we anticipate a notable decrease in liquidity within this sector in 2024. Our projections suggest that investor interest and liquidity will primarily concentrate on CBD and centrally located offices”. According to Kevin Turpin of Colliers, in the current market climate, where debt is costly, the spread to other investment strategies is far narrower and the bid/ask spread between buyers and sellers is wider, all segments of real estate can be considered as exposed to the loss of liquidity. “In the past 12 months, however, we have seen a greater number of smaller deals where no or less debt is required. This means that in the near future, large ticket transactions may be less common until markets settle. The CEE region as a whole generally has good market fundamentals and provided that we see the cost of debt slowly coming down, we believe many investors will focus on maintaining and maximising values through good asset management. As a part of this, ESG compliance and related Capex will need to be assessed and implemented to avoid any related additional challenges to asset liquidity”, comments Kevin Turpin.