What to invest in during times of uncertainty, war, rampant inflation and soaring interest rates? Avison Young presented its CEE commercial real estate investment market overview after the first half of 2022.
According to the Avison Young report, in the first half of 2022, the value of the transaction volume in the CEE region increased by 30 percent on an annual basis, reaching €5.4 billion. This is a good result, however, 12 percent lower than €6.1 billion recorded in the first half of 2020, when the market was not yet affected by the pandemic.
"It is also worth noting that the market results of the second quarter have not been affected yet by the consequences of war in Ukraine and the record-high inflation. In addition, we observed transactions transferred from 2021 closing in the first half of the year", says Paulina Brzeszkiewicz-Kuczyńska, Research and Data Manager at Avison Young.
Poland is an undisputed leader
All the CEE countries saw an increase in volumes in the first six months of 2022. Poland remains number one in terms of transaction volume with a result of €2.9 billion, which is also the best result for the first half of the year in our country, since 2016. In 2022, this result was significantly influenced by 3 large transactions: the acquisition of the office part of The Warsaw Hub by Google (€585 million) and the sale of EPP shares in two retail property portfolios to PIMCO and I Group, for a total of approximately €654 million.
Czechia comes second – a total volume of €1.2 billion is a 30 percent increase year-on-year. The investment volume was shaped by, among others, the purchase of a shopping centres portfolio including IGY Ceske Budejovice, City Park Jihlava and OC Gecko Ceske Budejovice by the Slovak investor 365.invest (€215 million), as well as the sale of Borislavka Office & Retail Center, a mixed-use property in Prague to REICO, for an estimated value of approximately €180 million. Assets in the industrial sector continued to be popular among investors, and a great example here is the purchase of the Prague logistics property portfolio by Hines for an estimated value of around €100 million.
Slovakia achieved a result of around €620 million, which is mainly due to a large transfer (estimated €300 million) of ownership in part of Penta’s office portfolio ‑ to the newly established developer Alto Real Estate (owned by Jozef Oravkin, ex‑Partner of Penta). The portfolio sale included Jurkovičova Tepláreň, Sky Park Offices and Digital Park – one of the largest office buildings on the market. The second largest transaction in the first half of the year in Slovakia is the sale of Atrium Optima shopping centre in Košice to two Slovak private investors for €118 million.
In Hungary, the recorded volume of €619 million exceeds the result achieved in the corresponding period last year (€590 million). The largest transaction in six months involved the disposal and partial leaseback of the Tesco retail property portfolio, which was acquired by Adventum Investment Fund Management. 13 assets of the portfolio are located in Hungary and 4 in Czechia, the Hungarian assets comprised 273,000 sqm. GLA, is worth approximately €219 million. The most important transaction in the industrial sector was the acquisition of Airport City Logistic Park by WING from CPI, for the estimated value of approximately €59 million. The office segment contributed to the transaction volume with the acquisition of Akademia Business Center by Europa Capital and their local partner ConvergenCE from DWS, for approximately €49 million. In addition, the fund managed by Groupama Gan REIM entered the Hungarian market by purchasing the historic Freedom Palace from the SCC group.
Romania has also slightly raised the bar compared to the last year with a volume of approximately €320 million. The largest transaction in the Romanian office market was the disposal of Expo Business Park for approximately €110 million. The second largest transaction was the purchase of Record Park, located in Cluj Napoca, by Aya Properties Fund with the participation of Belgian partners, for approximately €35 million.
Office and retail sectors are on top
On the scale of the entire region, the office sector with a share of 36 percent and the retail sector, responsible for 32 percent of investment volume, are the new market leaders. The industrial sector has reached 20 percent share “only”, and the main factor affecting this result is the limited number of assets available on the market.
According to Avison Young, the most attractive yields in the CEE region are to be found in the retail parks sector. The lowest yields (5.25 percent) were recorded only in Czechia, while in the other countries of the region they vary from 6.50 to 7.25 percent. Industrial properties in Romania are also attractive assets, with yields in the first half of this year oscillating around 7.50 percent; however, experts are predicting their compression within the next 12 months.
In the last six months, investors from the CEE region, especially from two countries - Czechia and Hungary, were the most active in the investment markets in the analyzed countries. Their total share in the region's volume in the first half of 2022 amounted to 41 percent, and was about 10 basis points higher than in the previous year. Apart from the participation of local investors, Avison Young draws attention to a wide range of other investors with diversified origins, investing their capital in the CEE countries this year.
The war in Ukraine and high inflation replaced COVID-19 as the main drivers of uncertainty in 2022
The industry now finds itself in a difficult macroeconomic environment with record inflation levels and a looming potential energy crisis. There are huge pressures on governments to tackle rising energy costs. This presents challenges for investors and occupiers and reinforces the rationale behind the need to have an ESG strategy for real estate. ESG and energy efficiency are distinct but interrelated clearly. Energy efficiency is a must today; it is measurable and therefore it is the first port of call in the application of an ESG strategy.
The real estate sector has always been a great hedge against higher inflation as rental levels are adjusted accordingly. Next year investors will benefit from increased running yields as 2022 indexation is applied to passing income. Nevertheless, the combination of rising rents and increasing utility costs may be challenging for tenants, especially in low-margin businesses across all sectors.
This demonstrates there’s great value in older stock. Existing income-producing assets with a reasonable capital value per sqm and strong tenants will be a winner for many investors in the upcoming period. They will benefit from indexed income but also flexibility to adjust their ERV if needs be.
Increase in interest rates and higher costs of financing
High inflation has forced central banks across the globe to raise interest rates. High-interest rates in the CEE, especially in local currencies, mean significant increases in the cost of financing development projects. Combined with the inflationary environment pushing costs of materials and labour upwards, this is a particularly challenging time for developers. We are witnessing increased prudence from developers when assessing new projects or land plot acquisitions. Also, assets with local currency-denominated leases will be difficult to finance in the current environment without dramatically impacting the net returns and cash flow to investors.
The higher cost of debt (in €as well) is pushing yields up slightly, nevertheless, liquidity on the market still looks very strong and investors who can acquire with 100% equity have a significant advantage. Looking at the investment volumes, we have not seen any significant shifts so far, as there have been large transactions and portfolio sales that bolstered the H1 numbers, but we expect lower volumes and fewer assets on the market throughout H2 2022.
Changes in the investment dynamics
Logistics and industrial sector assets, sought-after by almost every institutional investor stay atop the shopping list of most in 2022, albeit recording lower investment volumes due to a lack of available products. Demand is propelled by almost zero vacancies across the region which is driving rental growth in all geographies. Yields compressed in Czechia and Slovakia, remained stable in Poland and Romania, and moved out in Hungary). Liquidity remains very strong and Romania and Hungary look particularly attractive today in terms of both yield and rental rate.
On the office market, only Romania reported yield compression y-o-y. Major institutional investors have narrowed their investment criteria as a direct result of the current cost of debt and the focus on ESG, leaving space for shrewd buyers to pick up an existing office asset at very attractive pricing. The growth in construction costs over the past years means many existing buildings are trading at or below the cost of replacement, and rental growth is forecast over the coming 12 months in most CEE office markets. Avison Young experts estimate, that these two factors offer landlords’ of existing assets a huge competitive advantage and improved returns over a new-build project when setting rental rates and leasing strategies.
In the retail sector, convenience schemes still dominate the retail investment market in Poland and investors have confidence in small retail parks. In Hungary, there was robust activity, and on the back of a large portfolio transaction, the retail sector represented 35% of the total investment volume. Investors should look towards discounters for strong performance today; when we all feel the inflation pinch the general demographic will curb unnecessary purchases and be more prudent on those that are necessary. Therefore, discounters and all those in their supply chain will typically benefit during high inflation. This means supermarkets, selected e-commerce platforms, and their supply chains. Hungary, Romania and Polska all offer very generous yields in this recession-resilient sector.
The residential segment in the CEE region is still heating up despite rising interest rates. A growing number of institutional investors view this segment as a safe bet as we enter a macroeconomic slowdown. Increased mortgage rates force a portion of the demographic to rent, driving demand for rental properties and in turn, rental rates. Many residential developers have created a second pillar of their business by keeping some projects on their books, creating special residential funds or forward selling to institutional investors.
