Market sentiment remains positive across Central and Eastern Europe, according to the RICS Commercial Property Monitor. Strong demand from tenants and investors persists in almost all market segments but the number of signs that some markets have reached their peak continues to grow.
Occupier sentiment still strong
In Q3 2018 the value of the RICS Occupier Sentiment Index (an overall measure of occupier market momentum) increased only in the Czech Republic, while it decreased in the other four markets surveyed by the RICS (Bulgaria, Croatia, Hungary and Romania). Nevertheless, the value of the index remains firmly in the positive territory for all countries, signalling that the positive momentum behind the occupier market dynamic persists.
The Czech Republic and Hungary posted the strongest readings in the region and tenant demand continued to rise across all market segments in each of the five countries. The pace of growth remained unchanged or accelerated in three of the markets (Croatia, the Czech Republic and Romania). It is worth to note that at an all-sector level, the pace of tenant demand growth in Hungary was the slowest since 2015.
Looking at supply, the availability of leasable space declined in Croatia and the Czech Republic with respondents in the Czech Republic noting the sharpest quarterly decline since 2016. In Hungary, supply remained mostly unchanged, whereas in Romania the availability of leasable space reportedly increased in the office and industrial portions of the market but remained unchanged in the retail sector. In Bulgaria, availability increased at the fastest pace since 2010 driven by strong increases in the supply of office and industrial space.
Rental projections for the coming year were little changed from the previous quarter in Bulgaria. Contributors in Croatia have upgraded their projections for the second consecutive quarter, although growth is only expected in the prime segments of the market. 12-month rental expectations were revised up in the Czech Republic with respondents projecting rental values rising by nearly 4% on average, which is the strongest annual projection since the series started in 2014. In Bulgaria, the Czech Republic and Hungary prime markets are expected to outperform their secondary counterparts in the short-to-medium term.
Contributors in Hungary and Romania revised down their rental value projections for the coming year. In Hungary, the near-term outlook still appears to be reasonably solid, while in Romania growth expectations are modest for primary markets and flat to negative for secondary markets.
The Czech market has reached the peak
The value of the RICS Investment Sentiment Index (an overall measure of the investment market) decreased Bulgaria, Croatia and Romania, remained unchanged in Hungary and increased in the Czech Republic.
The Czech Republic posted the strongest reading in the region, signalling a strongly positive trend across the investment market. Overall investment enquiries continued to rise in all areas of the market across all CEE countries surveyed by the RICS. The growth was driven by the office market in Croatia and Hungary, while in the Czech Republic respondents reported a particular uptick in investor interest for retail properties. Demand from foreign investors increased in four of the five countries. Only contributors in Bulgaria noted a pullback in foreign investor enquiries for the first time in three years.
The supply of property for investment purposes increased in Bulgaria and Romania, remained unchanged in Croatia and decreased sharply in the Czech Republic. Availability also declined in Hungary, for the first time since this series began in 2014.
“The Central and Eastern European region is as attractive as ever among property investors, reveals the most recent RICS Commercial Property Monitor. However, there are clear differences within the countries. In particular, the Czech market seems to have achieved a saturation point, while countries like Bulgaria, Croatia and Romania show more opportunities to be exploited. This suggests that investors with various risk appetite still can find the right combination of risk and rreturn across the CEE region, at least in the short run. The fundamentals of regional property markets are strong, and if funding structures will not be stretched in the future, the longer-term outlook shall remain positive. As the overall economic growth expectation across the region remains high, stable occupational demand shall be strong enough to support the sustainable development of property markets,” highlighted Péter Számely MRICS, Head of Real Estate Finance CEE at HYPO NOE.
Péter Számely
Head of Real Estate Finance CEE
HYPO NOE Landesbank für Niederösterreich und Wien AG
In Bulgaria and the Czech Republic, 12-month capital value projections were revised up from Q2 2018. Expectations were unchanged in Croatia and Romania and scaled back in Hungary. Prime areas are expected outperform secondary locations in all five countries. The difference is most evident in Croatia where secondary sub-markets are projected to see only marginal gains. Hungary was the only country where contributors envisage the gap between prime and secondary areas narrowing.
50% of respondents view the Czech market as expensive while the majority of contributors feel that the market offers fair value at present in the other four countries. The proportion of respondents stating that valuations are stretched continued to grow in Croatia, the Czech Republic and Hungary, while in Bulgaria and Romania, the share of those who believe that commercial real estate is fairly valued increased significantly.
The majority of contributors in Bulgaria, Croatia and Romania believe the market is in the early to middle stages of an upturn. The picture is more mixed in Hungary, where the majority of respondents (50%) believe that the market is close to peaking, whilst 39% see the market as in the early to middle stages of an upturn. Almost all respondents (89%) believe that the Czech Republic’s commercial property market is in the peak phase of the property cycle.
On balance, credit conditions remained unchanged in Bulgaria and improved in Croatia and Hungary. 60% of respondents in Romania reported deteriorating credit conditions. Respondents in the Czech Republic have now reported a marginal decline in credit conditions for four consecutive quarters with the highest share of respondents noting a deterioration since this indicator was introduced in 2014.
