CONFERENCE CALL: Looking to Europe’s frontier property markets

CONFERENCE CALL: Looking to Europe’s frontier property markets
Bucharest expo and trade fair city.
By Clare Nuttall in Bucharest June 8, 2016

Amid speculation that the Polish property market is overheating, some investors are looking south to Romania and beyond to other Southeast European (SEE) countries. But there are a lot of questions about whether these relatively underdeveloped markets can provide the opportunities and liquidity required by investors – and even whether there is such a thing as an SEE property market.

The region is a mixed bag of countries, many of them tiny, at vastly different stages of development. GDP per capita is close to $24,000 in long-time EU member state Slovenia, but just $1,821 in Moldova. Populations range from almost 20mn in Romania to 610,000 in Montenegro.

“You need to look at each country on its own,” Péter Számely, head of real estate finance Central and Eastern Europe at HYPO Niederösterreich, told the “SEE Property Forum 2016” in Bucharest on June 7. “From New York or Shanghai it may look like one region, but in reality it’s a bundle of countries, each of which is at a different stage of the cycle.”

Part of the debate at the forum focused on how to define Southeast Europe vis a vis Central Europe. Should it include Hungary, for example? Or conversely, should Romania, the region’s largest economy, be lumped in with the more developed Central Europe market? David Yearn, business development manager CEE at property insurance company First Title, put this back onto the host country, saying that, “Romania could be the capital of SEE or try to compete with Poland in CEE. It’s up to Romania to decide where to position itself.” 

Clearly, Southeast Europe is well behind Central Europe in terms of development of the property market, but both rents and yields also differ widely within the two regions, according to data presented by Michaela Lashova, CEO of Forton, alliance partner of Cushman & Wakefield for Bulgaria and Macedonia.

For example, high street retail space rents range from €200 per square metre in the Czech Republic to €45/sqm in Romania and €30/sqm in Macedonia (the only Western Balkans market measured), while yields ranged from 4.25% in the Czech Republic to 9.5% in Macedonia. In the market for office space, rents were €24/sqm in Poland and €14/sqm in Macedonia, while yields ranged from 5.75% to 9.75%.

There was a consensus among panelists that Poland was the market leader in the broader CEE/SEE region, but also that it was worth looking elsewhere, with Romania being one of the obvious choices. “We have been talking about Poland overheating for the last 12 months. The volumes dwarf anything else, and more opportunistic investors are now looking at for example Hungary, Slovakia, Croatia and Romania, though Poland is still a very attractive destination,” said Yearn.

While Poland is still the destination for a lot of capital, Számely notes that the Czech Republic and Slovakia are also of interest (though the small size of the markets is a problem), and investors are looking further afield – to Hungary, Romania, Croatia and possibly Bulgaria as well. “Romania, because of its size, has a good chance to attract investors,” he says.

Secondary cities

Alex Bebov, partner at the Balkan Advisory Company, which is active across the Balkans, says he has observed the market improving in SEE. “Our region is now more active than before, there are more transactions than in previous years, though it is still smaller than CEE,” he said. Other changes include an upturn of interest from investors in secondary cities for both commercial and residential projects, he says, listing Cluj, Lasi and Timisoara in Romania, Burgas and Varna in Bulgaria, and Nis and Novi Sad in Serbia.

While Romania clearly has potential, views are mixed, with several panelists pointing to the lack of liquidity on the Romanian market. “Romania should have liquidity but for some reason it doesn't,” says Robert Neale, CEO of the Prague-based Portland Trust. However, he adds that Romania is a country where, “Planning is fair, things get done, the market matured very well over the last five to six years and good quality stock emerged. Of all the SEE markets Romania has the most potential to attract new investments.”

“Liquidity is coming; it is just a matter of time,” agrees Laurentiu Lazar, director of investment and valuation services at Colliers International, who describes himself as “an optimist”. “We have big potential on the macro side, and have seen both interest from new investors and existing investors which are reconsidering Romania.”

Romania has seen a hike in deal volumes in the past two years, with overall values pushed up by transactions such as GLL’s purchase of the Floreasca Park office project from Portland Trust and P3 Logistic Parks’ acquisition of Romania’s largest logistics park.

Panelists also believe that other countries in SEE - primarily Bulgaria, Croatia and Serbia - also have potential, with the potential riskiness of these markets at least partly offset by low prices. The expected acceleration of sales of non-performing loan portfolios by banks in Bulgaria and Serbia could provide chances to buy up land in both countries at low prices.

But while some real estate professionals are looking south from CEE, the small size and lower development level of the SEE markets means sometimes movement is in the opposite direction. Zeus Capital Management director Lila Pateraki says that while the firm started in 2007 by investing in Romania and Bulgaria, “Our focus shifted more to core product, and we realised in the last two years that available opportunities in Romania and Bulgaria are very limited, so we extended to CEE.” Hungary, she believes, is simply “more digestible” for investors than Romania.