The country’s nationalist government slapped a tax on banks in February 2016. Doug Morrison investigates the effect on its real estate market.
If real estate investors are concerned about the uncertain political backdrop across western Europe, they could do worse than assess the recent track record of Poland, which has stolen a march on its neighbours with its own controversial brand of populist politics.
It is 18 months since the rise to power of the right-wing eurosceptic and nationalist Law and Justice Party, under prime minister Beata Szydło. Prior to that, in May 2015, the party’s candidate, Andrzej Duda, won the Polish presidency. In February 2016, the government implemented its Banking Tax Act, an economically risky levy on the assets of domestic banks as part of a fiscal drive intended to fund social spending.
Despite this state move against the banks, Polish real estate has remained a magnet for investors and property debt remains available. Savills research shows that, after a sluggish start to 2016, the year ended with investment volumes topping €4.5 billion. It was the second highest yearly total on record. On the debt front, Poland figured strongly in 2016’s largest single pan-European financing when, in October, P3 Logistics Parks sourced a €1.4 billion refinancing of its portfolio. More than €600 million was underwritten by Morgan Stanley on assets in western Europe and Poland. When P3 was subsequently sold to Singapore’s GIC for €2.4 billion, around €285 million was reportedly attributable to the group’s Polish assets.
However, the Polish real estate market is yet to feel the full, slow-burn impact of the banking tax, as well as reforms to VAT, which some fear will curtail property investment via special purpose vehicles. In addition, a new tax on the retail sector has been suspended pending the outcome of a European Commission investigation.
In its latest market report, BNP Paribas Real Estate suggests that “despite the unpredictability as regards the legal and tax situation and the warning signs now emerging as to the prospect of an economic slowdown”, Poland is still seen by foreign investors as a relatively attractive market, not least because cap rates are consistently 1-1.5 percent higher than those in western Europe.
The firm is nonetheless forecasting a more modest €4 billion investment total for 2017 because “confidence in the Polish market of some investors has been strained”, says the report’s author, Anna Staniszewska. “The domestic investment market is already taking a new shape,” she says, “due to the apparent discrepancies in interpretation of tax legislation and the long-term effects of social reforms, the consequence of which are delays in concluding some transactions.”
When the government introduced its tax on domestic banks in February 2016 there was an immediate outcry from some quarters that it would not just hit the banks’ profits as they slashed deposit rates but bring the writing of new loans to business to a halt and stifle economic growth.
At the time, Dr Evghenia Sleptsova, an economist at UK think-tank Oxford Economics, warned of the potential implications of the tax, which, as she points out now, remains the second highest in the European Union (see figure 2).
“Credit growth has indeed declined in line with our expectations – from 8 percent to 10 percent year-on-year before the introduction of the tax, to 5 percent by end-2016, and even lower, to an average of 2.3 percent in January and February 2017,” Sleptsova says. “So, on the whole, the Polish banking sector remains solid, but it’s been less supportive of growth than in the past.”
So far, Poland’s wider economy has emerged unscathed and, indeed, the World Bank forecasts GDP growth of 3.1 percent this year, up from 2.5 percent in 2016, although 2017 may yet prove challenging. Polish commercial banks were helped to a 24 percent rise in net profits last year by the one-off sale of their stakes in Visa Europe, according to Poland’s financial watchdog KNF. With no further extraordinary profits expected, KNF has forecast a combined 12 percent fall in earnings for 2017.
As to how this situation influences real estate lending in Poland, opinion is mixed. George Aase, P3’s chief financial officer comments: “At the time of the refinancing, a process we began in the early part of 2016, lending for Poland as a standalone country or together with other geographies, was not problematic. Pricing was competitive and better for borrowers than the previous year, so we experienced no issues at that time.
“In fact, at MIPIM this year we were approached by a number of Polish banks quite aggressively looking for business, so there didn’t seem to be an issue there locally. I would say, however, that currently some of the more traditional lenders, for example the German banks, did start to indicate reduced appetite for Poland, citing more political than market-related concerns.”
One German bank that remains optimistic is Helaba, which has been active in central and eastern Europe for a decade and whose loan book for Poland alone extends to €1.5 billion. Last month, Helaba arranged a €354 million loan for CPI Property Group to fund three Czech assets acquired from CBRE Global Investors, but also the Ogrody shopping centre in Elblag, Poland. With Helaba taking a substantial part of the loan on its own balance sheet, Michael Kröger, head of real estate finance international, says it is another sign of the bank’s faith in the strength of Polish real estate.
Kröger highlights the fact that most of the large investors in Poland are international platforms and already customers to the global banks while domestic banks have focused on smaller businesses and some construction finance. It is a “complementary rather than competitive” banking framework, which he believes will continue regardless of the government reforms.
Marek Paczuski, Savills’ Warsaw-based investment director, is more cautious about the domestic banks. “They have become more risk-averse over the last year,” he says. “Margins have gradually gone up and not every project can be financed. Banks are quite selective.”
As a result, he says, loan-to-cost ratios have shifted from 70 percent to 60-65 percent for smaller developers with riskier projects while the larger developers are relying increasingly for their debt finance by issuing commercial bonds.
So far, the global banks are not discernibly exploiting the situation by raising cheaper euro-denominated debt and undercutting their Polish counterparts, but there may yet be further twists to this tax tale.
One piece of legislation that might help rather than hinder real estate is a proposed REIT Fund Act. As BNP Paribas Real Estate’s Staniszewska says, the result of implementing new legal and tax solutions for this type of instrument could be an increased share of Polish capital in real estate acquisitions.
Despite seemingly buoyant investment activity, Savills’ Paczuski argues that volumes would be higher still but for the tax issues. “Investors would prefer to have clarity over the risk so then they can mitigate that risk and reflect it in the pricing,” he says. “The worst thing is uncertainty when it comes to the taxation of commercial real estate transactions. That’s the major challenge now.”