China’s economic slowdown may have fuelled a lot of anxieties about emerging markets recently. The concerns are, however, largely unjustified when it comes to Central and Eastern Europe (CEE), where growth appears here to stay, driving investment – at least in the real estate segment – at a scale unseen since the pre-Lehman Brothers peak of 2006.
In Poland and other CEE countries, healthy economic growth is largely driven by consumption, which triggers developers to build retail and logistics projects that are in turn coveted by investment funds. Economic growth is also behind demand for office space, although office properties are largely the domain of capital cities, with the exception of Poland, which has been seeing investment funds snap up properties in regional cities on a regular basis. “Macroeconomics are at the foundation of real estate investor interest in the region,” says Omar Sattar, who heads the Prague office of real estate agency Colliers International. “In the last 10 years, the regional economies have proved they carry low to mid risks, and there is a great variety of stock available.”
The data on the region’s economy in the fourth quarter of 2015 suggests the CEE region grew by about 4% for the year, with the region’s main real estate market of Poland growing at a better-than-expected 3.9%. That is encouraging investment funds to allocate capital to the region, which is set to drive yield compression, according to a recent report on the global real estate investment market by Colliers. “Benchmark yields in CEE are likely to be achieved in the final quarter of 2015 and early 2016, with core markets achieving sub-6% for quality offices and sub-4% for prime retail. Modern distribution centres are also moving towards sub-6%, but still represent a discount to the best western European logistics pricing,” according to Colliers.
In the report, Poland was chosen as a primary target for real estate investors by 16% of surveyed fund managers, the sixth most popular target in Europe, the Middle East and Africa (EMEA). Investors also put Warsaw, Prague and Budapest in the top 25 target cities in the region. “As investment in equities or bonds do not yield good enough returns, investors are looking at real estate in CEE to secure proper returns. Also, banks compete really aggressively when it comes to offering financing terms for good assets,” Sattar says.
With the perception of the real estate market as offering good returns on invested capital and financing widely available, there are investors circling around any good asset that is up for sale. The market is crowded and investors are being pushed to seek acquisitions of non-core assets. “There are not enough core assets available and many funds are looking elsewhere, as they know they will be outbid by big funds,” Sattar says.
That means the chances are good for developers to sell their retail or logistics projects, as consumption and manufacturing are also doing well across the region. Offices are slightly more difficult, with most CEE countries offering quality stock in their capital cities only, with the exception of Poland, which has enough large cities to have investment funds eye opportunities outside of Warsaw.
A recent example is the acquisition of a Polish office portfolio by Swedish investment fund manager NIAM. The fund bought the properties – the company’s first acquisition in Poland – from the Polish arm of Swedish developer Skanska in a PLN160mn ($40mn) deal announced in October. That was the biggest office investment deal in the CEE in 2015. “It’s not that we didn’t look at Warsaw at all. We did, but the deals are to be had in regional cities which are still undersupplied in terms of office property,” says Johan Bergman, CEO of NIAM. “That said, we did not look at any other CEE country, as we think Poland has good enough quality and enough stock available for investors that want to go into the office segment.”
Another recent deal came in Wroclaw in November, where an office building was purchased by a German fund Warburg HIH Invest Real Estate for about €21mn.
No politics, please
Does the ongoing turmoil in Europe, including the controversial governments in Warsaw and Budapest, bother investors? Not really, in the opinion of Michael Kroger, head of international real estate finance at German bank Helaba. Helaba financed the NIAM deal as well as being one of the prime financing banks for investors looking to buy real estate assets in Poland and the CEE. “The dynamics of the economy aren’t changing much,” Kroger says, referring to recent growth figures from across the CEE region. “I would say the best [for the CEE] region is yet to come. Poland has an extra advantage because of its polycentric growth pattern.”
The ripple effect of what looks like an investment boom in the making has reached peripheral CEE markets as well, such the Baltic states, claims Andris Rengitis of the Latvian bank Citadele’s asset management firm, CBL Asset Management.
There are limitations to the Baltic real estate sector’s attractiveness, such as the size of the stock, which means big-ticket investors tend not to see the region on their radars unless it is part of a larger portfolio deal. An example could be last year’s acquisition of a real estate portfolio in Norway, Sweden, Finland, Germany and Latvia by The Blackstone Group, a US investment powerhouse.
But the yield compression trend is bound to manifest itself in the Baltics as well, Rengitis forecasts. “While Poland or the Czech Republic are at 5-6% for quality assets, we are at about 7%,” Rengitis says. “But two or three more years and the decrease will be evident as the interest of investors – more niche ones because of the market size – will lead to that.”