London, 6 April 2017 – 2016’s record-breaking EUR12.2bn investment in the real estate sector in the CEE region is likely to be surpassed in 2017 – this is according to CEE Real Estate Investment Compass 2017 published by Colliers International, a global leader in commercial real estate services, and international law firm CMS. The sources of investment flows into the CEE region are also expected to remain diverse in 2017, with Asian and CEE investors becoming increasingly active in the real estate market.
The CEE Real Estate Investment Compass 2017 examines key trends in the real estate market in six Central Eastern European countries (Bulgaria, Czech Republic, Hungary, Poland, Slovakia and Romania) over the last five years, and takes a look at what is on the horizon for 2017.
In the first quarter of 2017, preliminary real estate investment in the CEE-6 markets stands at EUR 2.3bn, representing a 41% and 45% increase compared with Q1 2016 and Q1 2015 respectively. Based on the estimated Q1 2017 figures, Czech Republic has received 62% of the total real estate investment in CEE. Preliminary indications from the first quarter of 2017 also suggest continued significant local investor activity in Hungary and the Czech Republic and the entry of Thai investors into the latter and Poland.
Looking at trends in 2017 in the CEE, the increased returns via lower yields are predicted in Budapest and Bucharest (all 3 segments of real estate market: office, retail and industrial), Prague (in office and industrial) while in Bratislava (all sectors), Warsaw (industrial and retail) and Sofia (office and industrial) similar market situation is expected.
“The growing maturity of the CEE region may help combat the specific risks affecting Western Europe, that of “Brexit” and its reverberations, which may unfold further in 2017. Brexit’s full consequences are not yet known and some might even end up as a positive for CEE,” says Mark Robinson, senior researcher, CEE, Colliers.
CEE on the radar for Western Europe and US capital
According to the report, higher returns and solid prospects for rental growth in CEE are likely to encourage Western Europe and US capital flows to continue at a similar level to the EUR 4.9bn reached in 2016.
Western Europe remained the main source of investment in the CEE real estate market last year but the inflow of South African (20%) and Asian (16%) capital reduced its share to 22% of total investment into CEE real estate compared to 44% in 2011. Meanwhile, UK activity is predicted to remain at around 7-9% of total investment into CEE real estate sector in 2017.
“At this stage any negative effects of Brexit upon general M&A activity in CEE appear negligible and there is nothing to suggest that UK companies looking to make investments in the region have put plans on hold as a result of the referendum. However, the outcome of the referendum, and the uncertainty that stems from it, has led some London-based companies to announce that they would reconsider alternative locations outside of the UK for some parts of their operations. Brexit therefore may have some positive effects on the investment volume in real estate in Central and Western Europe, in particular in Germany, Belgium, France, Poland and non-Eurozone Nordics” – says Mark Heighton, Head of the UK Real Estate, CMS.
An important market shift
A marked shift took place in 2016 with South African, Asian and CEE investments surpassing those from the G10. 2017’s flows from these regions are predicted to continue this year, with Asian and domestic/CEE sources continuing to drive new investment in the region, the report reveals.
Large portfolio-type deals involving Asian investors may become more common in CEE’s real estate sector, resulting in deal values matching or even exceeding last year’s results, given the large number of potential capital sources. Interest from Asian investors in the region, particularly in Poland and Hungary, has grown considerably over the last three years, with total investments reaching EUR 2bn in 2016.
South Africa’s activity meanwhile reached a record level of EUR 2.4bn in 2016. While its activity in 2017 might not match that of last year, with over 10 of the domestic REITs committed to the CEE region either directly or indirectly, deals should still be executed.
“If oil and commodity prices sustain at present levels, we should also expect to see more interest from Turkey, Brazil, Russia and MENA countries in 2017,” said Luke Dawson, Managing Director and Head of Capital Markets, CEE from Colliers.
Growth of CEE domestic investors
Cross-border and domestic flows have more than doubled in last five years, reaching EUR 2.6bn in 2016, a strong sign of maturity in the region. The Slovak and Czech markets were both the largest origins and destinations of CEE cross-border flow in 2011-16, while Hungary’s domestic flows have grown most rapidly in the recent period.
“The further distance we get from 1989, the more developed the CEE markets become and the less reliant on outside investors we are. This can be observed not only in the real estate sector, but in the whole M&A market,” says Wojciech Koczara, partner at CMS. “The spread of Warranty & Indemnity insurance across the CEE markets is another sign of growing maturity in the region as well as the increased level of sophistication in the structuring of large real estate deals”.
Domestic investors are becoming increasingly comfortable with market liquidity, and with commercial real estate market capitalization estimated at between 55% - 65%, local investors such as those in Poland who only executed 2% of deals in their local market in 2016, may be tempted to become more active. The main risk to domestic activity in CEE in 2017 is a global economic slowdown, perhaps triggered by higher bond yields or China’s debt pile.