100
A RT I C L E
petition, funding for projects with relatively lower risk has become available at a level of 10%
a year with a strong downward pressure.
A standard procedure in the case of mezzanine is for the entity providing financing to safeguard
itself with shares or stocks of the entity financed. It is the main difference and advantage in rela-
tion to loan financing, where the bank safeguards itself with assets, e.g. mortgage. Mezzanine
is often used as a bank loan supplement.
Repayment of debt and interest is made in full upon completion of the project, i.e. its com-
mercialization or sale. If debt repayment is not possible, the financing provider takes over the
safeguards, which in many cases means taking control of the company, or de facto the property.
In the case of mezzanine, the structure of financing, safeguards, costs and settlements, in
contrast to the formalized loans and the regulated bond market, is flexible and can be fully
tailored to an individual project.
The relatively high cost of mezzanine financing, determined by increased risk, makes it neces-
sary for the owner to thoroughly examine the project.
Bonds
The market value of bonds issued in Polish złoty was over PLN 559 billion at the end of March
2015.
The Treasury and its government bonds accounted for more than PLN 500 billion or
90%
of the market. The constant rise in state spending and chronic budget deficits do not
herald a change in this situation.
Corporate bonds, despite so much competition, have found buyers to the considerable total
of PLN 50 billion (9% of the market).
Corporate bonds are increasingly considered as a source of funding for business activities or
individual projects by real estate developers. Cheaper than mezzanine financing, providing
more leeway than a bank loan and not resulting in reduced control in contrast to a stock sale,
they offer an interesting alternative. Real estate companies most appreciate the flexibility of
this form of raising funds, at a competitive cost and with a relatively short time needed to ob-
tain them. Flexibility primarily means the possibility of issuance without collateral. In the case
of financing development projects, it allows for free use of bank loans that require first mort-
gage. Skillful combination of bonds and loans, with very limited own contribution, allows for
acquisitions of income-generating properties. Smaller properties seem ideal here, as the rent
is calculated in złoty and thus they are off the radar of foreign institutional investors, while not
generating any currency mismatch risk.
In the past four years, euro-denominated bonds worth more than EUR 2 billion have been
placed in the market, mostly corporate bonds. These securities have been issued primarily by
financial institutions (PKO BP, PZU, mBank). But there is a rarity from the real estate industry
among them – Ghelamco Invest, which in November 2014 found buyers for its bonds worth
EUR 6.3 million, a modest amount in the context of the entire bond market, dominated by
issuances in złoty.
Traded corporate bonds issued by real estate companies are currently worth PLN 3.6 billion
(
as of end of March 2015). The largest issuers are developers like Echo Investment (PLN
766
million) or Ghelamco (PLN 547 million). Both companies are developing their flagship
skyscraper projects in Warsaw – Q22 by Echo Investment with a leasable area of more than
50,000
sq.m, Warsaw Spire by Ghelamco with a total leasable area of around 100,000 sq.m.
The interest in such securities is high. In October 2014, Echo Investment equalled Orlen’s bond
issue placement record, as on the first day of subscription investors acquired all the securities
offered in the issue worth PLN 50 million. The interest rate was based on the WIBOR 6M rate
plus a margin of 3.15%.
Buyers of bonds most often choose those based on fixed interest rates (64% of issued bonds),
primarily government bonds. But if we analyze only corporate bonds from real estate com-
panies, variable interest rates dominate with 96% of issuances. Bonds are also chosen by de-
velopers due to the possibility to adapt the repayment period to a specific project. In the case
of real estate, the repayment period for the bonds currently placed in the market is slightly
below 4 years. Considerably important is the issuer’s freedom to set interest payment periods,
which can be tailored to the character of the financial stream. This has a direct impact on the
liquidity of a project. Also of considerable importance is a possible rollover of bonds, i.e. an
extension of the repayment period.
Analyzing all the costs of bond financing, the issuer has to take into account the cost of interest
(
fixed margin + WIBOR) and the cost of the issuance itself. Low issuance and interest costs are
reserved for entities in good and very good financial condition with a credible business track
record and accomplishments. Issuance cost is directly related to the credibility of the issuer and
the size of the issuance and it averages a few percent of its value. It includes, among others, the
offering agent’s pay, legal services and the costs of marketing and promotion.
The overall bond interest rate in the real estate sector (margin + WIBOR) currently ranges
from 3.90 to 12.00% (average 6.3%). Many companies from the real estate sector, like Grupa
Emmerson, Czerwona Torebka or Włodarzewska SA, are in the top list of bonds with highest
yields.
As for the risks associated with this form of financing, the most important ones include the
risk of changes in interest rates and limited hedging possibilities in this field. Another aspect to
take into account is the regulations of the Financial Supervision Authority (Komisja Nadzoru
Finansowego) on the information obligations of issuers and potential fines for failure to comply.
What to choose?
The upbeat economic situation and the large inflow of capital to Poland and the real estate
sector allow for an optimistic look at the development of sources of financing other than loans.
In particular, the market of corporate bonds listed on Catalyst has a high growth potential.
Further education of the market and individual investors seems to be a significant issue here.
The supply of bonds from developers, who need a stable and regulated source of capital can
be expected to rise, while this type of security may become an increasingly important addition
to the banking offer for investors.
Krzysztof Cipiur
Manager at the Capital Markets Department, Knight Frank
The largest bond issuers from the real estate industry
(31
March 2015)
Issuer
PLN million
Share in the sector (%)
ECHO INVESTMENT
766
21
GHELAMCO INVEST
547
15
GTC
494
14
ROBYG
195
5
DOM DEVELOPMENT
170
5
LC CORP
165
5
RONSON EUROPE
149
4
RANK PROGRESS
131
4
WARIMPEX
119
3
CAPITAL PARK
119
3
