Commercial real estate financing - how does it work?

Service Business

The beginning of the Polish market of modern commercial space falls on the 1990s. The development of the free market economy resulted in increased interest in the Polish market on the part of foreign investors. In the beginning, they only had a few modern office buildings at their disposal. Typical offices were mainly located in administrative buildings or tenement houses. In the 1990s, official general trade took place in department stores, which function to this day in a changed format and character. The first modern shopping center was opened in Warsaw in 1993 Panorama. Other centers started to appear quickly: Promenada (1996 - phase I, 1999 - phase II, 2005 - phase III), Land, Galeria Mokotów (2000, extension 2002 and 2006), Wola Park, Blue City, Arkadia and Złote Tarasy. In line with global trends, the share of large commercial facilities in the trade structure was constantly increasing.The real sensation on the market was the opening of the first IKEA store in Poland. In the food sector, Billa entered the Polish supermarket market. The economic changes have opened up new development opportunities also in the warehouse and industrial sector. Rapidly filling shelves and store facilities meant an increase in the demand for goods warehousing and logistics services. The market was driven by the availability of goods and services, the opening of the consumer market, and the development of information and telecommunications technologies. What does the Polish commercial real estate market look like today? What are the "rules of the game"? Is it a profitable business? How does commercial real estate financing work today? We will answer these and other questions in this article.

What does the Polish commercial real estate market look like today?

Currently, on the investment market, Warsaw is at the forefront of European cities perceived by investors as an attractive location for future expansion of companies. Central Poland is the most desirable location for the development of logistics centers in Central and Eastern Europe. Our capital city ranks high in the ranking in terms of low employment costs, low costs and availability of office space as well as a friendly business climate. Office space commissioned for use in the last 10 years is one of the most modern in Europe in terms of standard and technical solutions. The Polish retail market is mature, attractive to institutional investors, developers, retail chains and customers. Currently, there are over 380 shopping centers in Poland, with a total area of ​​over 7.2 million m2, 56.5% of which are located in major urban agglomerations. Office space is being created newer and higher standard. The largest of them have over 100,000 m2 of space, such as Arkadia in Warsaw, Manufaktura in Łódź and Port Łódź. The main centers of building commercial real estate in Poland are Warsaw, Kraków, Wrocław and the Tri-City. There are professional international and domestic developers and investors on the market, and well-known retail chains (domestic and foreign) are the tenants of commercial premises. The major players in the food market include hypermarkets such as Auchan, Kaufland, Tesco, Carrefour and E.Leclerc. The DIY store sector is represented by Castorama, OBI, Leroy Merlin and the PSB Group.

What are the "rules of the game"?

Along with technological progress and the related development of mobile technology, the employers' approach to the issue of the working environment, the growing popularity of working from home or anywhere else is changing. The offices will continue to be a place for meetings, presentations and the so-called quiet work. Lifestyle changes are reflected in the offer of shopping centers. More and more emphasis is placed on the expansion of the gastronomic and entertainment area. The rapid development of e-commerce, the so-called e-tailing may contribute to limiting the offer of commercial facilities, especially in the food and multimedia sectors. You can already notice the emergence of new distribution channels, such as online galleries or business concepts implemented through social networks. The opportunities for market development include:

  • Increasing investors' interest in smaller cities, not saturated with modern retail space;

  • Improving financing conditions for new commercial investment transactions;

  • The emergence of new brands and the development of existing large retail chains.

A threat to the development of the market may be:

  • Existing risk related to the economic situation, the impact of turmoil on the European market;

  • Significant increase in interest rates for the main rental currency, EUR;

  • Difficulties of smaller tenants.

Commercial real estate aims to bring profits to its owner, i.e. generate rental income. Commercial facilities may include office, commercial (including commercial and service premises, shopping centers, supermarkets), warehouses and logistics and distribution facilities. These facilities are most often located in the center of large cities or large housing estates and have a high standard of finish. The tenants are large, reliable companies, mainly chain companies. Commercial real estate projects are often built for a specific tenant. Commercial real estate financing is primarily carried out with bank loans and loans granted by project sponsors. If a company wants to invest in a commercial property for rent (office building, store, shopping center, warehouse, logistics and distribution) or land for the construction of a commercial property, it chooses a loan for financing commercial real estate. This loan may be used, for example, for the purchase of commercial real estate commissioned for use or for financing the VAT paid by the company during the construction period or when purchasing a commercial real estate. The beneficiaries of this financing may be newly established special purpose vehicles in the form of limited liability companies or joint-stock companies established solely for the purpose of implementing, owning and managing a given facility or medium-sized companies in the so-called "full accounting". The bank analyzes investment projects in several stages. Starting from the economic and financial analysis, through the analysis of investment documentation, and ending with the analysis of investment effectiveness. Using the methods of quantitative analysis, he studies the structure and dynamics of individual economic categories and the relationships between them. As part of the qualitative assessment, it assesses the internal and external characteristics of the borrower, its management and the environment that cannot be expressed in indicators. Analysis, like any cognitive process, is a conscious, purposeful and deliberate activity of the analyst.

Commercial real estate financing - is this business profitable?

As research and statistics show, the rental prices of commercial real estate are constantly growing. There can be many reasons for this. From the fact that we are in the European Union, to the opening of borders and high competitiveness. Many entrepreneurs believe that building commercial real estate can be a great idea for their own business. Shopping centers, restaurants, hotels, industrial buildings and modern logistics centers can be a good offer. Currently, loans for financing the construction of commercial real estate bear relatively low interest rates, and the investor obtains two types of profits. The first comes from rental and the second from the increase in property value. Entrepreneurs undertaking the construction of a commercial building choose the appropriate construction company that will implement the project, the so-called general contractor. At the stage of commencement of construction, you should also look for potential tenants so that you can start earning immediately after obtaining the occupancy permit. However, we must know that the first years of the SPV's operation are usually unprofitable. The company incurs large costs related to the purchase of land, construction and loan service. Profits come only in the second or third year of operation, when income from lease contracts is stable, debt servicing costs are slowly falling, and the level of profitability increases. We can consider that a decision on a business like commercial real estate is a profitable business.

No payment from the tenant - and then what?

As long as our tenants pay monthly rent on a regular basis, the costs of maintaining the property are usually passed on to the tenants, and it is the entrepreneur who achieves the expected benefits. What if one or more of our tenants stop paying us? We have to bear the debt servicing costs, and the revenues are temporarily lacking. From a practical point of view, the most convenient solutions are often sought during individual consultations with entrepreneurs. Finding a new tenant seems to be the easiest solution. If it is a relatively small area in the entire property, then finding a replacement should not be a problem. Most often, such premises are rented for service points. The problem arises when one of the main tenants begins to have trouble maintaining financial liquidity. Then our rental income drastically deteriorates, and finding a new tenant may be time-consuming. It is a good idea to negotiate with such a tenant. Perhaps the problems are temporary, and if not, at least we will have time to find a new one. Remember to diversify our tenants' portfolio. Let us locate the space in the real estate in such a way as to have premises with large and small areas. We choose proven tenants, they can often be large retail chains of well-known brands. Then we have a better chance for the proper functioning of our business.