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CEE welcomes post-pandemic return of overseas investors

Savills Investment Management, on behalf of Vestas Investment Management, has acquired 7R Park Beskid II in Czechowice-Dziedzice in southern Poland from Polish developer 7R and VRE for €101 million

CEE has been hit by the pandemic, but experts say prospects for 2022 look positive as international capital returns to the region. Transaction volumes had reached €7.3 billion in Q1-Q3 2021, with a forecast of €11 billion for the year. This is still a far cry from the €14.4 billion recorded in 2018, but a definite improvement on last year.

“CEE volumes were down 20% compared with 2019 figures, but it’s better than the -25% recorded in 2020,” says Kevin Turpin, regional director of research, CEE, at Colliers. “Considering that shopping centres and hospitality venues were not trading and that investors were not able to travel to see assets,
it is not a bad result.”

‘The CEE region is attractive because of the yield premium. The yield of an office in Warsaw is 4.7%, in Paris or Milan it is less than 3%.’

Anna Duchnowska, Invesco Real Estate

Poland continues to be by far the biggest market in the region and has the most product available. Last year it represented 51% of the whole CEE market, accounting for €29.9 billion, followed by the Czech Republic with €13.3 billion, Hungary with €6.8 billion and Romania with €4 billion. Slovakia and Bulgaria recorded €2.8 billion and €2 billion respectively.

Turpin adds that in the context of Europe as a whole, CEE volumes are five to six times smaller than a country like Germany or the UK “Poland is similar to Norway or Switzerland,” he says. Nonetheless, investors looking for sizeable tickets head to Poland, which has become almost completely reliant on overseas capital. Across the CEE region the average is 76% versus 24% domestic, but percentages vary from a high of 98% in Poland to a low of 54% in Hungary (see chart below).

“Hungary and the Czech Republic have a strong base of domestic capital that has become increasingly active in recent years and has been investing across borders in CEE as well as in their home market,” notes Turpin. “We expect this trend to continue.”

End of travel restrictions boost

European investors comprise the majority, accounting for 33% of all sources of capital, followed by intra-regional CEE capital with 26%. “Middle Eastern, Asia-Pacific, South African and North American capital has dropped off significantly recently, but we expect these investors to come back when travel restrictions are lifted,” says Turpin. “They tend to look for scale and sometimes they cannot find the ticket sizes available, or the teams on the ground to follow the deal through.”

The competitive yield spread is one of the attractions of the CEE market for international investors. “We see great appetite from retail as well as institutional investors for CEE real estate,” says Anna Duchnowska, managing director, asset management Europe, at Invesco Real Estate. “The CEE region is attractive because of the yield premium compared to mature European markets. The yield of an
office in Warsaw is 4.7%, in Paris or Milan it is less than 3%.”

Skanska has sold two office projects in Poland to Stena Real Estate, an international property company that is part of the privately owned Swedish Stena Group. The deal includes the final building of the High5ive complex in Krakow (pictured), which has a leasable area of 11,250 sq m and is 99% leased.


In Q3 2021, prime office yields were 4.25% in Prague, 4.7% in Warsaw, 5.25% in Budapest, 5.50% in Bratislava, 6.75% in Bucharest and 8% in Sofia, according to Colliers figures (see chart, page 49).

Offices have remained largely stable, but in the industrial and logistics sector yields have compressed to an unprecedented degree. “Around 70% of the logistics market is controlled by long-term holders who do not intend to sell, so the 30% that is on the market is being chased by a lot of people,” says Turpin. “Since Q1 2020 industrial and logistics yields compressed by almost 100bps on average in CEE and by a phenomenal 180bps in Poland and they are coming down further.”

Demand is such that there is speculation in the market that yields could fall as low as 2%. “It would be record-breaking but it’s not inconceivable,” concedes Turpin.

“I thought we had reached maximum yield compression but the demand from occupiers keeps rising and it’s difficult to tell where we’ll get to,” adds Duchnowska. “I think the downward trend will continue for another two or three years. We’re still developing product and still making money, but we need rental growth for it to work.”

That is already on the cards. Demand for logistics assets is so high that the few developers who control the market will demand and achieve higher rents.

“We like logistics everywhere,” says Petra Blazkova, senior strategist, European research and strategy, at LaSalle Investment Management. “Going forward good locations close to consumers, like urban fulfilment centres, can demand low yields, but we’ll definitely see substantial rental growth.”

The industrial and logistics sector has also been helped by the fact that the quality of the product is on a par with Germany or the UK. Many assets have been built recently and meet current sustainability criteria, which makes them even more attractive to investors.

But it is not all about e-commerce or urban logistics, because the industrial side is also very strong. Even the automotive industry, which has been going through challenging times, has adapted as demand for electric cars and batteries has grown.

There are a few clouds on the horizon for the sector, but experts agree that it will continue its positive trajectory for a few years yet. “The concern is costs rising, from rent to energy to labour, costs which ultimately will be borne by the tenants and the customers, pushing inflation up even further,” says Turpin. “So there are some concerns over the future, but things look pretty healthy at the moment.”

The return of retail

The logistics sector has sucked all the air out of the room recently, but there are signs that investors’ outlook may be beginning to broaden to other sectors.

“It is not all about logistics,” says Duchnowska. “Food-anchored retail parks are coming back on investors’ radar screens. The only problem is scale, as you’d have to buy a portfolio of five or 10.”

New food-anchored developments are expected to lead the return of bricks-and-mortar retail across CEE. “Our strategy is to expand our stores, new food anchors are needed in new schemes and we’re ready to step in,” says Angelus Bernreuther, head of investor relationship management at Kaufland Stiftung. “We see a great opportunity to create new places and bring a new tenant mix to big retail parks or regenerated city areas.”

Mixed-use assets give more flexibility to investors and are good for operators but above all they are important for cities, making them better places to live in he adds.

Best of both worlds

The digitalisation trend and the transition to online shopping are a challenge, but they can also be seen as opportunities to offer customers the best of both worlds, online and offline.

“The good news is that digitalisation enriches our business rather than replacing it,” says Bernreuther. “The main market share of food will remain in bricks-and-mortar stores but it’s all about the interaction with our clients. We now have click & collect and we cooperate with delivery services in CEE countries as well as in Germany. The new normal will be overlapping trends.”

The retail sector has had such a bad press that institutional investors continue to avoid it, but they are also beginning to differentiate between sub-sectors and niches within retail that look more promising.

“Our appetite for retail has been limited in the last couple of years but activity has been limited and we lend to liquid parts of the market,” says Justyna Kedzierska-Klukowska, head of Berlin Hyp’s Warsaw office. “Things may change, and we are certainly seeing more local schemes, especially in Poland, and more activity in retail parks, as well as convenience stores portfolios being traded.”

Investors are noticing the resilience that food-anchored retail parks and local convenience stores have shown during the pandemic.

“There are important changes happening in the retail sector, focused on local convenience stores,” says Monika Rajska-Wolinska, chief executive officer, CEE, Colliers Poland. “It is one of the big new trends along with ESG. They present new challenges, but international investors are interested in our markets and we’re looking at 2022 with renewed confidence.”

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