Geopolitical concerns trump strong fundamentals in CEE

Despite its strong fundamentals CEE is “a hard sell” at the moment because of its proximity to the war in Ukraine and geopolitical concerns, experts agreed at Real Asset Media’s Trends 2023 – CEE Investment briefing, which took place this week in London at the City of London office of CMS.

Photo: @Karla Gowlett

“The war is scaring a lot of investors away even though it doesn’t really affect the market,” said Robert Martin, partner, head of investments, Europa Capital. “But the perception of risk is there and sentiment is all about perception. The market has gone beyond its tipping point and now it’s time to sit back and see what is happening.”

Looking at the figures, CEE is in a better position than other European countries. Inflation is high (over 16% in Poland and Czech Republic) and so are interest rates (6.5% in Poland and 13% in Hungary), but economic growth is stronger than in the Eurozone. The forecast for year-on-year GDP growth is +6.3% in Romania, +5.8% in Hungary and +4.4% in Poland.

“Looking at the fundamentals, the market is doing really well, but CEE is a really hard sell at the moment,” said Simon Wallace, global co-head of alternatives research and strategy, DWS Group. “Investment committees are likely to be against. I was in Singapore recently and people just smiled politely at the mention of CEE and gently ushered me out of the door.”

Perceptions vary depending if you are an investor who knows the market and has people on the ground, or someone looking at CEE from Asia or the US.

“Non-European capital is being very cautious now and will need to see a real price differential in the market to change stance,” said Wallace. “But people in CEE realise that there are economic benefits from the war, that is helping the economy by fuelling demand.”

Some investors’ reluctance could open up opportunities for cash buyers and European capital that knows the market well.

“There will be deals done, people with equity and no debt will buy assets at a good price, but they shouldn’t act in haste because prices are falling so they might make mistakes if they are too quick,” said Martin. “So I expect there’ll be nothing happening for a while.”

The period of stagnation will last until the end of 2022 and beyond but may end in the new year because of redemptions and refinancing issues that will shake up the market.

“Financing structures need to be adapted to the new circumstances, but investors don’t seem to be aware of this yet,” said Justyna Kedzierska-Klukowska, head of Warsaw office, Berlin Hyp. “There’s the issue of refinancing of loans that will be maturing in the next few months, that were agreed a few years ago in a totally different interest rate environment.”

Cash buyers who have a good eye and are quick on their feet will be able to grab the opportunities in the market.

“We’re location-agnostic, but we scan the whole market looking at yields and CEE is still an attractive region to invest in,” said Karolis Adlis, executive director, European investments, WP Carey. “As an equity player we plan to be active. In Q1 next year we’ll take a larger share of a small market.”