CEE, domestic investors step in as investment volumes fall 61%

Domestic investors are stepping in as international capital pauses because of the market slowdown, delegates heard at Real Asset Media’s CEE Investment briefing, which took place yesterday at CMS’s offices in Warsaw.

Marek Paczuzki, Senior Director Investment Services, Colliers

“Investment volumes in Q1-Q3 this year are €3 billion, down 61% YoY, which is the lowest result since 2012,” said Marek Paczuzki, senior director investment services, Colliers. “The market is expected to continue slowing down into 2024.”

This year has seen a steep decline from 2022, when CEE volumes were on a par with the 10-year average at €10.7 billion.

“Macroeconomic factors are creating a slowing, negative impact on our markets, industries and key trading partners,” said Paczuzki. “Perceived liquidity issues on exit remain a concern for many investors, quoting the size of smaller, developing markets in CEE amongst other factors relating to perceived risk.”

This year liquidity has been provided by a growing number of CEE domestic and cross-border investors. In Q1-Q3 2023, the share of CEE capital has reached around 60%, which is a marked uptick from the past few years, when international capital has accounted for 67% of investment volumes, with domestic capital stuck at 33%.

Source: Colliers

However, “CEE domestic investors do not have the capital to fully replace international capital,” said Paczuzki. “Family offices, private wealthy individuals and domestic funds are currently the more active buyers, with their attention looking predominantly at value-add and opportunistic opportunities.”

This has led to fewer larger ticket deals in the short term, and to investors looking for sale-and-leaseback deals and joint venture structures.

“The pricing gap between sellers’ expectations and buyers’ capabilities remains a significant barrier to returning to the five-year and ten-year average volumes of €10-11billion,” said Paczuzki. “Many potential sellers, if they are in a position to do so, are reassessing their strategies and business plans in order to ‘survive’ until 2025.”

Some buyers are simply waiting for opportunities from forced or distressed sales due to declining valuations, elevated interest rates and debt rollovers. There have already been greater corrections in other parts of Europe but, so far, no major signs of distress.

“Real estate fundamentals remain fairly strong in CEE, despite negative news from elsewhere,” Paczuzki said. “The next 12-18 months will be a great time to acquire real estate, yet challenges remain with international institutional capital applying caution in general, not just towards CEE.”

On the positive side, banks are still keen to lend money and ESG compliance is becoming the market norm, reflecting a commitment to sustainability  from developers, owners, investors, lenders and occupiers.

“However, given the current economic environment, timing in terms of costs is not ideal,” said Paczuzki. “Many owners do not have the resources to upgrade their buildings.”