Local capital emergent in CEE but seeks ‘Ukraine discount’

With rising inflation and interest rates and now a war on their collective doorstep the real estate markets of CEE are “functioning but fragile,” Cushman & Wakefield’s Jeff Alson, international partner, head of capital markets CEE , told the recent CEE Summit, which was organised by Real Asset Media and Poland Today and held in Warsaw.

Jeff Alson.

“They are functioning in the sense that transactions which were agreed are generally closing, but fragile in the sense that it’s very difficult for sellers to engage or present something to the market, and even more difficult for buyers or investors to actually underwrite their deals,” Alson explained.

That is particularly the case with funding transactions, he explained, not least because of the difficulty of building something for a specified cost.

“The five-year swap rate has been moving every week for the last six weeks. If you were in a deal six weeks ago, by the time you actually come to secure the debt or agree the remaining terms, the cost of that debt has changed dramatically.”

While there is no lack of appetite to buy central European real estate and players would even accept a slightly lower return, “if you can’t underwrite how much money you expect to make, you can’t get a deal done”.

“We genuinely felt the volumes would start climbing back towards 2019 this year; we genuinely don’t feel that’ll be the case now,” he added.

The pandemic saw a 30% increase in the cost of construction in two years, said Adrian Karczewicz, Skanska Commercial Development Europe’s Poland-based head of divestments CEE. However, to some extent, this fact is pushing occupiers to complete letting deals sooner rather than later.

“In major Polish towns such as Poznan, Krakow and Warsaw, companies are taking the opportunity to sign leases now because they see that in one or two years rents will be higher,” he said. Many occupiers are still growing and they perceive that there will be restricted supply in future. They also want to procure ESG-compliant space.

Poland is the destination for 50% to 60% of Central Europe’s investment volume according to Alson.

It is, for example, the focus of the CEE activities of German real estate Berlin Hyp.

Victor Constantinescu.

“Obviously we still think that that Poland is one of our strategic markets,” said Berlin Hyp’s Assem El Alami, head of international real estate finance. “It’s a very mature economy, it attracts a lot of intelligence and that attracts a lot of entrepreneurial energy.”

However, as Victor Constantinescu, Managing Partner, Romania & Co-Head of Real Estate, at law firm Kinstellar points out, many western cross-border investors are looking at the CEE markets as a single entity and are currently taking a wait-and-see approach.

“A lot of transactions are still happening but a lot of those transactions are being performed by those who are already in the market, particularly Austrian investors. But a lot of local capital is flexing its muscles now,” he said. “I’ve seen no slowdown in sales or transactions so people are pitching for these projects but – and I’m sorry to use this pejorative term – they’re asking for the ‘Ukraine discount’ on transactions.”