CEE: Alternative sectors in demand

As the region looks to 2021, investors are eyeing niche sectors, reports Nicol Dynes.

Transaction volumes have picked up pace since the lows of the first lockdown, delegates heard at the CEE Summit.

“We were expecting a real slowdown like in April and May, but the second wave of the virus hasn’t affected the market at all,” said Jean-Bernard Wurm, head of business development Europe at Secure Legal Title, part of insurance company AXA. “We’ve seen a 20% increase in the number of transactions we insure and the volume of deals we underwrite. It has been a very pleasant surprise.”

Activity has not been limited to Poland, he added: “Even in Romania, which was a distressed market earlier in the year, we’re now doing the biggest transaction ever. I believe we haven’t seen the end of it.”

What has changed in the market is the type of investor. International investors have been kept away by travel restrictions, caution, their own problems or a wait-and-see attitude, while local capital has come to the fore looking for opportunities. “There has been a real shift in the market with a lot more local deals,” Wurm said. “It’s Polish investors buying Polish assets now.” 

‘We’ve seen a 20% increase in the number of transactions we insure and the volume of deals we underwrite.’

Jean-Bernard Wurm, Secure Legal Title

Even South African capital, which has been so active in CEE in the past few years, is largely absent. “South Africa has had a tough time with the pandemic and this has put pressure on the balance sheets of REIT-like listed property companies, so there is little appetite for expansion,” said Craig Smith, head of research and property at Anchor Stockbrokers. “Capital is scarce and raising fresh equity for new ventures is unlikely, but South African companies will not dispose of the assets they own in CEE.”

In fact, there are new players exploring opportunities in the region, he said, but not in the retail sector where South Africans have invested the most in the past and which is now facing macro headwinds. “SA capital has been investing in the logistics sector in the last 12 months,” said Smith.

Retail reduced 

Other long-standing investors have made the same choice. “We have a new name but a very long history in CEE,” said Herman Kok, head of research at MARK, formerly Meyer Bergman. “Our retail investment component has been drastically reduced in favour of last-mile logistics.” 

Meanwhile, investors’ interest in alternative sectors in the CEE region appears undimmed, experts agreed. “There’s a South African family office putting together a big pool of capital with a pension fund to invest in PBSA in Poland,” said Douglas Edwards, head of group equity raising & client services at Corestate Capital Investors. “Investors are increasingly differentiating between asset classes.” 

“Investor demand has increased by 30% this year, focusing especially on Poland, Budapest and Prague,” said Samuel Vetrak, CEO of Bonard. “We have more work in CEE than ever, with companies assessing opportunities and wanting information, detailed reports, macro and micro analysis and performance data on the sector.”

‘Investors are looking at alternatives to logistics, like life sciences and data centres. There’s great potential there, but supply is limited.’

Herman Kok, MARK

Poland has attracted a lot of interest because it offers scale, giving international investors the opportunity to build a portfolio, he added. The country has 1.3 million students, many excellent universities and a provision rate of 9%, with the public sector providing most student accommodation. There is considerable demand for high-quality PBSA. 

“Poland for us has been a logical extension of our pan-European PBSA portfolio,” said Edwards. “Our strategy is city driven and Poland has the advantage of having many dynamic cities.”

The one challenge to the growth of the sector, he said, is the banking sector, which could be more supportive.

“It’s not easy to get deals financed in alternative sectors like PBSA, because it’s too early, we always need a track record,” said Justyna Kedzierska-Klukowska, head of Warsaw Office at Berlin Hyp. “But we’re monitoring the student housing sector very closely. Banks follow clients, so the more transactions there are, the more liquid the market becomes, the more financing will be available.”

‘It’s not easy to get deals financed in alternative sectors like PBSA, because it’s too early.’

Justyna Kedzierska-Klukowska, Berlin Hyp

When a new asset class comes to the market local banks often are resistant and extra-cautious because they don’t understand it. “We’ve seen this happen in Spain and in the Netherlands,” said Vetrak. “We need the foreign banks to lead the way and step in with confidence because they know the success student housing has had in other countries. They should educate the local banks and speed up the growth of the sector.”

Student accommodation is just one of the sectors with growth potential in CEE. “We’re focusing on PBSA but we see Poland as more than one sector,” said Edwards. “In future senior living will be very interesting. It has great potential but it’s still in its infancy.”

Investors are re-assessing their strategies and priorities and trying to spot which sectors will be the winners in the post-pandemic ‘new normal’ next year. “Investors are now looking at alternatives to logistics, like life sciences and data centres,” said Kok. “There’s great potential there, but supply is limited and so are investment opportunities. We need more information and knowledge in order to tailor a profitable strategy.”

South African capital has turned to the logistics sector over the last 12 months