Despite rising operating costs, high inflation, and uncertainties related to events such as the conflict in Ukraine, Central and Eastern European markets continue to be attractive compared to Western Europe. Daniel Bienias, Managing Director in CEE at CBRE, talked to Property Forum about investment trends and the future of the advisory business in the region and beyond.
What is your overall vision for CBRE’s development across the CEE market for the next years?
Our goal for the coming years is primarily to further develop the processes we are already implementing and ensure the highest quality of services in all countries. We are committed to ensuring seamless information flow between countries so that everyone can benefit from shared experiences. Our objective is to provide customers with a comprehensive range of services and consultancy, combining knowledge about customer needs and addressing them effectively.
What are the major trends shaping the future of the advisory business right now?
The real estate market is significantly influenced by social changes, economic fluctuations, and climate protection concerns. As the world's largest company specializing in commercial real estate and investments, we must stay one step ahead in identifying these changes and finding solutions. According to our research, one of the most important trends in real estate today is sustainable development. Our analyses indicate that in 2022, 7 out of 10 property owners, tenants, and developers paid more attention to ESG aspects. This was driven by external factors such as the requirement for companies to report environmental information and higher operating costs, including rising electricity costs. It was also influenced by internal factors, including company goals, ethics, and reputation. Sustainable development encompasses many complex elements that are becoming integral to the real estate world and will be a key focus for professionals in the years ahead. That's why we've been actively expanding our strategic advisory division in this direction for some time.
Another significant trend is the increasing demand for more comfortable and flexible workplaces. Investors and tenants are constantly seeking the best solutions to meet their needs. Employers continue to see the need to streamline cost management while enhancing the quality of office spaces. According to our research, 48 percent of companies planning changes to their spaces are relocating at least some of their employees to higher-quality offices, with an additional 23 percent considering this possibility. We observe a clear shift among employers towards offices in prime locations that meet high environmental standards while also providing the utmost comfort to employees. The office sector is moving towards flexible solutions, in part because the majority of employees still prefer a hybrid work model.
The third aspect, having the most significant impact on advisory services in the commercial real estate sector, is the advancement of technology and the effective implementation of such solutions. This is driven by the need to enhance workplace comfort and increase efficiency while reducing costs. For instance, as highlighted in our 2023 Confidence Index report, produced in collaboration with Panattoni, the primary way logistics, manufacturing, and retail sectors are addressing rising operational costs, primarily driven by inflation, is through investments in technology. This approach has led to productivity and efficiency improvements for 78 percent of industry representatives.
Which service lines do you expect to drive demand for CBRE in CEE in the near future?
Regardless of the sector, there will be a significant increase in demand for sustainable development solutions and advisory services. Properties must evolve to meet new standards, and our role is to provide comprehensive support in this area. Repositioning office buildings is also a crucial matter, and it's another branch of services and inspiration that we will be focusing on. The residential sector remains highly significant in all CEE markets. We are hopeful that the investment market will start rebounding next year and serve as a driving force throughout the entire region.
How are you positioning CBRE in the competition for talent in this region?
As a market leader in the real estate industry, we have no trouble attracting talented employees. This is a demanding sector, and we are perceived as a place where individuals can acquire knowledge, and experience, and advance their careers. We continuously collaborate with universities, enabling us to offer the best possible conditions for both experienced and entry-level professionals and recruit top talents.
Commercial real estate investment contracted in CEE during H1 2023. Will we continue to see a challenging investment environment in the second half of this year?
At the beginning of this year, the entire region experienced an economic slowdown. All countries, including Poland, recorded declines. The real estate market in Europe has been continuously seeking balance in this new reality. Investors grappled with challenges such as the mismatch of price expectations between buyers and sellers, rising financing costs, more restrictive credit conditions, and concerns about a recession. However, most of them planned to remain active in the real estate market. While these challenges won't disappear overnight, investors are managing them more effectively. In our assessment, increased activity can be expected as early as the Q3 summaries. We are observing significant interest in real estate investments in Europe among investment funds, among other factors. More than half of them are optimistic about their buying and selling activity in 2023, and three-quarters anticipate that real estate investments will remain resilient to the slowdown. The number of investors favouring opportunistic and value-add strategies is greater than in previous years. Offices, particularly high-end ones, and rental apartments remain the most popular sectors in Europe. Many investors are closely monitoring the market, seeking opportunities driven, in part, by rising capitalization rates.
What are some of the medium and long-term investment trends that will manifest in the regional real estate market?
The Private Rented Sector (PRS) is experiencing rapid growth in the CEE region. In the first half of 2022 alone, 130 million euros were invested in operational PRS assets in Central and Eastern Europe, marking a 38 percent increase compared to the previous year, according to CBRE data. Poland and the Czech Republic dominate the total investment volume in operational assets, accounting for approximately 94 percent of the market since 2016. Romania captures 5 percent, while Slovakia claims 1 percent. The PRS sector is poised for growth in each of these countries, especially as economic conditions discourage individual home purchases. Developers are recognizing the potential in institutional renting as demand from individual buyers diminishes. With reduced demand from individual buyers, an increasing number of residential developers view build-to-rent as a viable alternative to for-sale housing. Examples from Western Europe demonstrate that a growing developer market lays the foundation for the institutional rental sector to flourish, highlighting substantial potential for CEE countries.
What are some of the strong points of CEE’s property sector in the eyes of investors compared to other European regions?
Despite rising operating costs, high inflation, and uncertainties related to events such as the conflict in Ukraine, Central and Eastern European markets continue to be attractive compared to Western Europe. CEE countries still maintain a competitive edge in terms of operating costs, owing to factors such as lower land prices and labour costs, while maintaining high-quality work and infrastructure that continues to evolve. The region ranks fifth among European locations where investors anticipate the highest real estate returns.
What is your outlook for CEE economies going into 2024? Will we strike a balance between inflation and interest rates? How do you expect financing conditions to change?
The sentiment around the global economy is still weak. While the US has been remarkably resilient, there are mounting signs of a looming recession there, too. Chinese economic rebound was less rampant than expected, and this has negative impacts on the export-driven European economies – like Germany. Despite all struggles, European economies have weathered the economic storm so far relatively well: larger core economies surprised on the upside in 2023. Assuming a recovery in global industrial demand, GDP in the Eurozone might expand by ca 1% in 2024, slightly up from 0.5% this year.
CEE is a region more impacted by the aftermath of the energy crisis: inflation peaked higher and has been stickier than in the Western European countries. This has muted domestic demand (in particular the retail sales) in most of the CEE countries. However, there is a clear improvement regarding inflation and this has a clearly positive impact on households’ spending in the future. Most businesses have remained solid and there hasn’t been a wave of lay-offs therefore unemployment rates remained close to their all-time lows and way below the EU average in most of the CEE countries. Once inflation is under control again, national bank policies can turn and interest rates start to decrease again – as it was demonstrated by the Polish National Bank recently. This will encourage loan activity and contribute to an economic upswing.
Forecast for CEE economies is more positive for 2024: following the weak (in sometimes recessionary) year of 2023, economic growth can accelerate to 2-3% in 2024 in the region. Poland, Hungary and Romania are likely to lead the pack in the region, but all CEE economies are likely to outperform the Eurozone and get back on track of economic convergence to the EU average.
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