CEE offers a rich green tapestry of investment opportunities

Multinational companies capitalise on modern office infrastructure and lower refurbishment costs in the region. By Adrian Karczewicz.

The Central and Eastern Europe (CEE) region, which includes several dynamic economies, has emerged as a thriving hub for commercial real estate investments. Against the backdrop of global challenges such as the Covid-19 pandemic, the region’s economy has continued to demonstrate growth and resilience.

I often field questions from institutional investors about allocating capital to the region. Even with the impact of Covid-19 and the war in Ukraine, my mantra is: the overall investment case for CEE commercial real estate remains compelling.

Resilient economies and rapid growth

The CEE region proved more economically resilient than Western Europe during the global pandemic, with GDP here declining just 4.5% in 2020, compared with more than 6% in the Eurozone, according to Eurostat.

Countries like Poland and the Czech Republic were able to weather the storm relatively well. Competitive advantages, such as a young and skilled workforce and strong export sectors, make CEE economies more flexible and able to withstand shocks.

CEE countries are projected to experience faster economic growth over 2022-2027 than Western Europe.

The 2023 edition of PwC’s Emerging Trends in Real Estate: Europe report forecasts average GDP growth of 3%-4% annually across CEE, versus just 1.5%-2% in Eurozone economies such as Germany, France and Italy.

This faster growth will be fuelled by manufacturing, exports and consumer spending, according to the report.

EU funding will further aid public investment in areas such as infrastructure, digitisation and the green transition.

Faster economic expansion bodes well for occupier demand and property returns. Strong tenant demand will support rising rents and asset values, creating appreciation potential for investors.

Real estate investors and brokers have been used to financial analysis that looks at 10-year cash flows with entry and exit yields that assumes yields will decrease over time. Usually, the rent factor has been constant in these analyses.

We are witnessing a structural change now, with yields being more stable while rents are on the rise. Investors’ attention will naturally be drawn to countries and cities where rents are rising. Warsaw is a prime example of such a location.

Limited impact of remote-working trend

Unlike in Western Europe and the US, the shift to remote working has had less impact on office demand in CEE markets such as Poland.

Companies here continue to value workplaces for collaboration, training and corporate culture. Technology, consulting and shared-services firms drive demand for modern office space across the region’s big cities.

At Skanska, we have been experiencing exceptionally high demand from tenants in CEE in 2023, showcasing the resilience and potential of local economies.

The deal with BNY Mellon is a prime example. In May, the international banking and finance company leased 20,000 sq m in our newest building in the Centrum Południe complex in Wrocław, Poland. BNY Mellon occupied all the office space in the complex’s second phase.

Overall, the first half of the year has been the best in several years for Skanska, in terms of leased space in the region.

The region’s strategic geographical location and burgeoning economy have attracted a broad spectrum of multinational companies, resulting in a surge in tenant demand. Moreover, the culture in the region is more favourable for office-based work.

In some countries in CEE, there is a strong emphasis on face-to-face interaction and collaboration.

This may make businesses in these countries more reluctant to adopt a fully remote-working model.

This strong demand ensures sustained rental incomes and enhances the overall investment appeal for investors.

Sustainability and innovation

The push towards sustainability is palpable in the CEE region. Many commercial buildings are aligning with international green standards, driving interest in sustainable investments.

Cities like Prague and Warsaw have become leaders in green building certifications, reflecting a broader regional commitment to environmental responsibility. Developing projects on brownfield sites, cutting waste to landfill by 95%, using low-emission and recycled materials and applying energy and water-saving solutions are only some examples of the actions we take to make our projects climate-smart.

Simultaneously, the rise of innovation hubs is fostering a culture of technology-driven growth. Visa recently announced plans for a new global innovation hub in Warsaw, focused on cybersecurity and digital payments. The company plans to hire 1,500 specialists.

Intel is investing $4 billion to expand its semiconductor fabrication plant in Wrocław. This is expected to create 2,000 high-tech jobs.

‘There is a strong emphasis on face-to-face interaction, making businesses more reluctant to adopt a fully remote-working model.’

Adrian Karczewicz, Skanska

The commitment to sustainability and innovation opens new avenues for investment, aligned with global trends related to ESG factors.

In addition to strong demand fundamentals, the existing office stock in CEE is of top quality, closely aligning it with the current needs of tenants and regulatory requirements in terms of energy efficiency, or the safety of the materials used in terms of their impact on users’ health.

According to research by Cushman & Wakefield, the weighted average age of offices in major CEE cities is 16 years, versus 33 years in Western European hubs like Paris. Alignment with the newest building standards and later development cycles mean obsolescence rates for CEE offices are under 10%, far lower than the nearly 30% observed in some Western cities.

Investors can capitalise on modern office infrastructure and lower refurbishment costs in the region.

Strong fundamentals buffer headwinds

While the Russia-Ukraine conflict has created significant geopolitical uncertainty, CEE real estate markets have proven relatively resilient thus far.

Poland and Romania have received an influx of companies and workers relocating away from Ukraine, fuelling office demand in cities like Warsaw and Bucharest.

This demonstrates how CEE markets are benefitting from intraregional relocations as businesses seek stability. With higher yields, constrained supply fundamentals and a strong demand outlook, commercial real estate in CEE can offer portfolio diversification and stability amid current geopolitical risks.

The CEE region’s commercial real estate market offers a rich tapestry of investment opportunities. Its economic resilience, vibrant market, strong tenant demand, commitment to infrastructure and focus on sustainability and innovation craft an enticing prospect for institutional investors.

As the world navigates an era of uncertainty and transformation, the CEE region stands out as a promising prospect for growth, diversification and success.

Adrian Karczewicz is head of divestment at Skanska’s office development unit in CEE