Interview with Lukáš Hejduk, Partner, Head of Real Estate, CEE, CMS Czech Republic
Real estate and construction remains the most active sector in emerging Europe measured by deal volume. While office and retail assets remain popular with investors, the rise of e-commerce has resulted in an increasing interest in logistics, warehouse, distribution and fulfilment centres says Lukáš Hejduk, partner at CMS Czech Republic.
Real estate is consistently the most active sector for M&A activity in emerging Europe. How has it performed in 2019 and what trends have you seen?
Real estate continues to perform very well overall. Markets in the region have seen a significant inflow of Asian capital and the office sector is the most attractive and active market. We continue to see an ongoing boom in the development of logistics, warehouse, distribution and fulfilment centres. This is partly driven by underlying economic growth, but accelerated by e-commerce.
Due to the growth in e-commerce, the traditional retail sector has become less attractive to investors. However, a solid economy and high consumer spending still make a good case for well-maintained shopping centres and we see interest from investors who know how to benefit from this situation.
What impact have you seen from online retailing?
E-commerce is driving development and in many areas demand outstrips supply. Internet retailing and online sales’ penetration in emerging Europe are not yet on a par with Western Europe, as only round 5% of total retail sales are currently made online in Eastern Europe. However, online sales are growing rapidly and the potential is enormous.
Brick-and-mortar retailing has not been such an active sector and that is reflected in yields on shopping centres, which are rising, while yields on ecommerce centres are compressing. The e-commerce sector is growing at the expense of traditional shops; however, it would be wrong to think that traditional retail is going to die out. It will probably need to reinvent itself and concentrate on the experience side of buying, but there seems to be room for e-commerce and retail to coexist together.
How is that translating into real estate growth in different countries?
Poland and the Czech Republic are leading the way as developers take advantage of lower property prices and labour costs, but also from solid infrastructure and proximity to the strong German market. Slovakia, Hungary and Romania are also seeing growth, but less so Bulgaria and Ukraine.
Poland has a number of large sites available for investment. In contrast, Romania cannot rely on supplying the West, although it could become a hub for the Balkans. It still requires improvements in infrastructure and a more liquid real estate market.
Romania cannot rely on supplying the West, although it could become a hub for the Balkans
Which investors and online retailers have been active?
As the largest online retailer, Amazon is leading the way followed by other online retailers such as Notino and Zalando, and many expanding local e-commerce players including Alza or Mall. Strong e-commerce operators are very sought-after tenants. They take properties on long leases with strict covenants which is every real estate investor’s dream.
E-commerce operators take properties on long leases with strict covenants which is every real estate investor’s dream.
Asian capital has been very active in the logistics sector. Frontrunners from Asia include Singapore sovereign wealth fund GIC, which is the owner of Prague-based P3, and China Investment Corporation, which bought Logicor in 2017. Many investors from South Korea have invested significant amounts of capital in various e-commerce and logistics projects across CEE. Other major investors include Germany’s Deka Immobilien, Allianz Real Estate and TPG. The market would have seen much higher investment activity but the largest developers, including CTP, Prologis and P3, typically employ a build-and-hold strategy so the availability of investment products remains limited.
What are operators looking for in terms of location and buildings? Are companies able to recruit the staff numbers they need to provide customers with the high level of service that is expected?
Location is, of course, the most important factor in real estate. Apart from traditional considerations such as quality of infrastructure and proximity to the target markets, the availability of labour is becoming a challenge in many CEE locations. This is particularly important in operations requiring a higher number of skilled workers, such as manufacturing and fulfilment centres.
The quality of buildings is not a problem. The stock is relatively new and well maintained, and we are seeing more multi-storey projects which have been a feature in other parts of the world but are relatively new in emerging Europe.
A drawback in some places, such as the Czech Republic, is that the permitting process is long and complex whereas in Poland it tends to be faster, which may account for some of its success in the sector.
What is the outlook for logistics real estate in 2020?
There are no signs of the tide turning. E-commerce is likely to be the driving factor of investment into logistics assets. CEE can deliver the construction of high-quality properties with good transport infrastructure, at prices that are lower than in Western Europe. Interest from investors from Europe, the US and Asia will continue, however labour constraints might slow down growth in some parts of the region.