Market stalemate in CEE as re-pricing of assets takes place

The way out of the current market stalemate is more accurate valuations and a re-pricing of assets, experts agreed at Real Asset Media’s CEE Investment briefing, which was hosted recently by CMS in Warsaw.

“Values need to come down”, said Anna Duchnowska, Managing Director – Asset Management Europe, Invesco Real Estate. “CEE should be adjusting much faster to reflect the reality on the ground and get transactions up and running again”.

There is still a big gap between sellers’ and buyers’ expectations across asset classes, although it is narrower in the logistics sector. Bringing buyers and sellers closer together would lead to more transactions happening in a market which is currently at a standstill.

“No one today is willing to buy a prime office building in Warsaw at a 5.5% yield”, said Piotr Goździewicz, Head of Transactions CEE, Cromwell Property Group. The only transactions are taking place in the logistics space”.

Transactions have fallen sharply – by 61% in Q1-Q3 this year – and market weakness is expected to continue into next year, as interest rates stay high and the cost of debt is a challenge for most investors.

“Our main concern at the moment is tenant demand in all asset classes”, said Søren Rodian Olsen, MD, Logicenters Poland, NREP. “It is not an issue now, but we are mindful of the fact that trends seen in more mature Western markets then come to the CEE region with a bit of a delay”.

Classic transactions are on hold and prime deals virtually non-existent, but there is a lot of refinancing activity going on to adjust to the new market environment.

“In the last few months we have seen major refinancings of loans granted in 2018-19, which have kept everyone busy”, said Justyna Kedzierska-Klukowska, Head of Berlin Hyp Warsaw Office, Berlin Hyp.

The higher interest rate environment is also leading to more creative forms of financial engineering and restructuring deals.

“As lawyers we’re seeing a lot of refinancing but also different structures for transactions like joint ventures and forward purchases, as investment funds adjust their strategies”, said Agata Jurek-Zbrojska, Partner, Head of Real Estate and Construction, CMS.

As the cost of financing is a problem, solutions are being found with debt, mezzanine funding, preferred equity and minority stakes.

“We also see a different structuring of the deals and what we’ve been doing for the last 12-18  months is more like financial re-engineering rather than typical transactions”, said Duchnowska. “It is difficult, as many institutional investors do not see real estate as an attractive asset class these days. They prefer fixed income and would rather invest in US bonds than real assets”.

In the current stalemate international capital has stayed away and domestic CEE capital has done most of the investing, accounting for nearly 70% of volumes so far this year.

There’s likely to be a holding pattern next year, said Katarzyna Kotkowska, Associate Director, Investment, Central Europe, Segro: “Until we go back to lower interest rates people will focus on cashflow and ESG credentials. We’ll see survival strategies in place until 2025”.