War in Ukraine generates nearshoring surge in CEE

“Nearshoring” – the process of bringing outsourced business operations physically closer to point of demand – was a trend benefitting the industrial and logistics real estate sector in CEE before Russia invaded Ukraine.

But since the invasion, enquiries from companies with existing industrial operations in Russia and Ukraine have increased, Victor Constantinescu, Managing Partner, Romania & Co-Head of Real Estate told the recent CEE Summit, which was organised by Real Asset Media and Poland Today and held in Warsaw.

The effect is particularly noticeable in Romania, Slovakia and Bulgaria said Constantinescu. “Less so in Hungary just because it is seen as a bit too close to Putin,” he added.

The logistics and industrial sector has the least to worry about even if the war, inflation and interest rate create less certainty of demand in other types of property. The sector in CEE, as elsewhere, thrived during the covid pandemic. But while demand from both investors and occupiers has persisted, construction-cost inflation is “a huge issue,” says Robert Dobrzycki, CEO & Co-owner Europe, Panattoni.

“What is good about logistics is that there is definitely tenant demand, so you have a way to recover cost inflation and we feel there is plenty of room for rental growth,” Dobrzycki said. “I would think that over the next 12 months, logistics rents will increase by 20-30%, easily.”

But Markus Leininger, Principal, SIMRES Real Estate Sarl, Luxembourg questioned whether this will be quite so easy. “I think we missed one point here which is the economic growth needed to be able to pay the increased rent. I would put a bit of a question mark over whether this is going to happen.”

But he added: “We are 30 years behind where Germany is from a GDP perspective. I believe in the next five years we’re going to be on 15 years behind and that is the message I think we need to focus on.

However, another segment that could benefit from the movement in central Europe is serviced offices as there are now are enquiries from IT companies wanting to bring engineers from Ukraine and Russia Constantinescu said.

Robert Martin, Partner, Head of Investments, Europa Capital agreed that serviced offices may noqw come into their own.

“I was a sceptic before the pandemic about the serviced office sector but post pandemic it’s proved its business case and I think office occupiers are going to want that sort of flexibility.”

Adrian Karczewicz, Skanska Commercial Development Europe’s Poland-based head of divestments CEE agreed that serviced offices have large potential, but probably as part of mixed-use developments that put offices adjacent to private rented sector residential.

A similar mixing of uses could be the way forward for CEE retail.

Angelus Bernreuther, Head of Investor Relationship Management, of German hypermarket chain Kaufland emphasised that, despite the growing significance of online sales, physical retail is not dead.

“We will see a new type of retail park, we will see new types of shopping centres in terms of the mix – perhaps less fashion dominated. In CEE that’s still very dominant but I think in three to seven years we will see more mixed use. Many existing retail assets will have a new food or near-food oriented footfall anchor.”

Bernreuther also foresees a restructuring of cities. “We will see more e-commerce but we will also see a new retail landscape and I guess food will play one of the major roles in that.”