CEE still awash with capital

Investment transactions valued at a combined EUR 5.1 bln were closed on the commercial property market in Central and Eastern Europe in the first half of this year – a 69 pct increase on the same period of 2015 and the strongest H1 figure since 2007, according to JLL. Poland remains the dominant CEE market, but the other markets in the region have been putting on a strong performance too. The H1 2016 investment volume in the Czech Republic came to EUR 950 mln, with the full-year volume forecast to reach around EUR 2.5–3 bln, according to JLL’s ‘CEE Investment Pulse, H1 2016’ report. Interestingly, domestic capital accounted for more than half of the investment volume, in both the office and the retail sector. At the same time, the country has increasingly been attracting new global investors, the report claims. The transaction volume in Hungary amounted to EUR 910 mln in the first half of the year – higher than the volume recorded in the country for the whole of 2015. Liquidity has been on the rise, as a larger pool of equity targets the country and banks become increasingly willing to finance deals. Further transactions involving the sale of portfolios and landmark buildings are expected in the next few months, which should bring the combined 2016 investment volume up to app. EUR 2 bln, according to JLL. Meanwhile, in Slovakia a total investment volume of app. EUR 310 mln was generated in H1, with the experts remaining positive about the investment sentiment for the remainder of 2016, forecasting that the year-end volumes will outperform last year’s levels. “In 2016, it is clear that Slovakia has become an established and attractive investment destination. It still offers favourable market conditions and attractive pricing when compared to other CEE markets and Western Europe. New institutional market entrants and other international players are playing a dominant role in the investment market in Slovakia and are expected to further increase their exposure,” the JLL study states.

Dominant Poland

According to CBRE’s figures, more than EUR 2 bln was invested in the commercial property market in Poland in H1 2016, with the retail, office and industrial sectors respectively accounting for 48 pct (EUR 1 bln), 40 pct (EUR 0.8 bln) and 12 pct (EUR 0.25 bln) of the volume. One corporate transaction – the acquisition of a 75 pct interest in Echo Prime Properties by South Africa’s Redefine Properties for EUR 891 mln – dominated the investment market in the country in the first half of the year, making up 44 pct of the total. American and German investors respectively took a 21 pct and a 16 pct share of the volume in the period in question. In the opinion of CBRE’s experts, investors in Poland continue to be mostly interested in high-quality core retail and office assets. However, since these are in short supply, buyers are typically also considering secondary projects located in regional markets across the country. A number of prime office assets, including the Warsaw Spire and Q22 office skyscrapers in the Polish capital, are expected to be transacted in the next few months. BNP Paribas Real Estate Poland estimates that the year-end volume in the Polish commercial property investment market will close at around EUR 4 bln.

Cautious optimism

Generally speaking, the outlook for the next year remains moderately positive, even if a number of issues continue to worry investors. “For the time being, we have not seen any serious consequences from the Brexit vote or political uncertainty for the Polish investment market. However, these topics are very often raised and used as reasons when delays in transactions occur. It needs to be noted that the short-term forecasts relating to economic growth rates have been revised downwards across Europe and this might have more implications for the investment markets. Nevertheless, the view is that the recovery will continue and that economies will continue to expand, including the Polish one,” claims CBRE’s ‘Poland Investment Market View, H1 2016’ report. “The investment sentiment index – a composite indicator of overall investment market conditions – slipped into broadly neutral territory during Q2, down to +4. This follows Q1’s figure of +15 and suggests the momentum of the investment market is waning,” RICS admits in its ‘Q2 2016: Poland commercial property monitor’ study. The rising supply has been putting downward pressure on capital values. At the end of Q2, the twelve-month capital value expectations remained mixed – prime retail asset prices is forecast to see modest growth, while the outlook for prime office and industrial assets is marginally positive. “Meanwhile, prices are expected to come under further downward pressure in the secondary office sector,” predicts the RICS in its report.

Surveying opinions

Ahead of the Expo Real commercial property fair in Munich, we asked several leading real estate advisors, investors and lenders for their opinions on the prospects for the commercial property investment markets in Poland and the broader CEE market for the coming year. We asked them whether the high investment activity in Central and Eastern Europe would continue into 2017 and whether the Brexit could potentially have a negative impact on the real estate markets in the region. We also asked them to identify the asset classes that will attract the most investor attention in the near future. Below we publish the answers given by our respondents.

Marek Koziarek

managing director, department of structured finance and real estate, Bank Pekao

I believe that the high transaction volumes will be maintained. There is still a great deal of surplus of cash on the financial market, while investors are actively on the lookout for sensible investments. Compared to Europe and the rest of the world, which have continued to experience ‘turbulence’, Poland still looks like a relatively stable and safe place offering higher rates of return at the same time in spite of the fact that the arguments and reference points have shifted. Investors will be attracted by new leased commercial properties as well as renovated and repositioned properties that have already confirmed their market position. The segment is of no major significance in this case. Such facilities can be found in each segment. It is a good time for developers and investors in terms of the sale of successful assets and the launch of another investment cycle. As far as the influence of Brexit on the investment sentiment in the region is concerned, this is a difficult question because there are still many question marks hanging over the Brexit as well as the UK, Europe and its implementation process. I would not like to make any long-term forecasts. Over the short-term, its effect could be positive for Poland because of the influx of capital that would have been invested in the UK, as well as the opportunity for Poland to compete with other European countries for business activities that value being in the European zone – a slice of this could come to Poland as an alternative to the UK.

Matthias Brodeßer

the head of transaction management international, WHIH – Warburg HIH Invest Real Estate

WHIH anticipates a further increase in the record volumes of 2015 and the beginning of 2016. The reasons are the ongoing strong GDP growth and the greater maturity of the markets. Any concerns about the political turbulence stemming from the general election from last year seemed to be assuaged. Below the line, Polish properties do offer a premium in comparison with their European equivalents. This applies to all asset classes. In our opinion Brexit will rather have a positive outcome. We anticipate stronger occupational demand from BPOs, in general and financial services especially. Whether Warsaw will become a new financial centre will have to be seen. Investment in offices in the capital will be scrutinised more carefully due to the still strong development pipeline.

Dieter V. Knittel

Europe director of international real estate finance, Deutsche Pfandbriefbank AG

Poland has been the leading investment market so far this year – accounting for more than 40 pct of the market, mainly driven by large South-African transactions – followed by the Czech Republic. A good number of transactions have taken place in the CEE region, resulting in an overall investment volume of around EUR 5 bln in the first half of 2016, which was an increase by over 50 pct. Hungary performed well, with double its volume in comparison to last year, making up over 10 pct of overall transactions, while Slovakia and Romania also showed increased interest. Global uncertainties have not yet resulted in a reduction of investor interest due to the solid macroeconomics. We are now seeing greater diversity of active investors across the CEE region with the established European, US investors and local money being joined by South African, Asian and Middle Eastern capital. Investors are buying into local platforms and they are moving up the risk curve looking at good assets in secondary locations, e.g. offices in the region or in Poland, or prime investments in capital cities in the other big three CEE countries. Prime yields in Poland are expected to slightly move out, whilst they are contracting in countries like Hungary. This would be a natural reaction, as prime yields in some places are already looking to be close to the top of the market. The financial environment is supportive with low costs of debt for moderate leverage. As we look forward at the last quarter of 2016 and into 2017, it is expected that investment figures will be around last year results.

Przemysław Felicki

director, capital markets, CBRE

The good figures for the CEE investment market have made it possible to expect a similar volume of investment transactions next year. The Brexit and other political insecurities in certain counties should not have a significant influence on investors’ decisions. They will be looking at investment products more cautiously, but we do not believe they will suspend investment. The real estate sector is attractive enough for investors, so there will always be capital ready for investing and extending the investment area as a natural consequence of that. The office and retail sectors can count on investors’ greatest interest; however, it is worth pointing out the growing interest in alterative investment products such as hotels, hostels and care homes.

Tomasz Trzósło

managing director, JLL Poland

Investor interest in the Polish real estate market is clearly very high. In H1 2016 alone the value of investment transactions in the commercial real estate segment exceeded EUR 2 bln and 2016 should close with very good figures similar to last year’s. Furthermore, we have been seeing an influx of new capital, one example of which is this year’s transaction involving Echo Investment as a new player making its debut in Poland: South African fund Redefine Properties. We are not expecting any significant changes on the investment market next year, just stable development without record high volumes or major declines. It is difficult to predict what the actual transaction volume will be in 2017. It depends on the availability of products for sale at suitable prices, the scale of possible portfolio transactions and the finalisation dates of ongoing negotiations. I would characterise the 2017 forecasts for the investment market as cautiously optimistic.

Chris Bell

managing director for Europe, Knight Frank

The hype and speculation both immediately before and after the Brexit vote might have led us to believe that the UK and the EU should by now be heading towards an economic crisis, with property very much in the eye of the storm. Whilst it is still too early to tell what the full impact is, a number of facts and trends are becoming clearer.

Unlike in 2008 this was never a financial crisis, but more of a political crisis – particularly in the UK. With Theresa May swiftly appointed as prime minister and appointing a well received and highly regarded cabinet, the immediate political crisis in the UK was resolved quickly and efficiently and, despite the dire prior warnings, the malaise has not spread to mainland Europe. Clearly sentiment and business confidence took an immediate hit after the Brexit vote, but the most recent PMI indicators suggest there has been improvement in both business confidence and overall sentiment since June and an increased resolve from business to ‘get on with life’. As far as property is concerned, with interest rates and bond yields at all-time lows, it is difficult to see anything that has fundamentally changed since June in terms of real estate as an asset class. Whilst the UK property investment market has inevitably been in the spotlight, this market peaked – especially in London – at the end of 2015, with most commentators forecasting a decline in investment volumes during 2016 and a 5–10 pct pricing correction during this period. The Brexit result merely precipitated this correction. A number of UK open-ended retail funds have been under heavy redemption pressure since the referendum, with a number widely reported to have ‘closed’ redemptions in early July — albeit less widely reported, a number of these have since reopened. Whilst these make up less than 5 pct of UK commercial property ownership, the market does pay particular attention to them because of the nature of the investors and because they were instrumental in setting the previous 2015 high water mark pricing levels. Across Europe, after the initial shock of the result it would appear to be very much ‘business as usual’, with the Brexit result having had very little real impact in domestic markets, either on the investment or occupier side with some, notably Dublin and Frankfurt, seeking to open their doors to financial services firms and banks potentially being forced to relocate parts of their business from the City of London. Prior to the Brexit vote, Central Europe and particularly Poland was very much on investors’’ radars and, if anything, concerns about the UK market will be to their benefit. It is interesting to see that HB Reavis have recently successfully sold three of their prime Warsaw office assets for in excess of EUR 300 mln. In relative terms, we anticipate that the European markets should benefit from any concerns with the UK market. The balance of probability is that if you are a UK investor you will likely pause for breath whilst you assess the impact of the Brexit vote. Whereas, in Central Europe it has very much been ‘business as usual’, as investors and occupiers increasingly recognise that the fear and conjecture of financial Armageddon presented prior to the vote was wildly exaggerated. Businesses across the region have been doing what they do best – assessing what is in front of them and getting on with life. Certainly, none of this is likely to be negative for the CEE region, which has seen a steady increase in investment volumes and interest from investors over the past two years, a trend that we forecast to continue at least for the next two years. Whilst it is doubtful that the Brexit result will have a directly positive impact on the region, it will not be negative and there remains an appealing case for investing in the region, with Poland as the dominant market in this part of Europe. Certainly, Knight Frank as a business is growing as quickly, if not more so, in Poland and Central Europe than in any other markets in Continental Europe.

As for when things will be ‘getting back to normal’ – well, perhaps we have to ask ourselves what has been ‘normal’ over the last few years? Whilst across Europe property investment volumes and values remain below their 2007 peak, this gap is fast closing.

Spiro Noussis

chief executive officer, Rockcastle Global Real Estate

The CEE commercial real estate investment market is becoming increasingly competitive and the risks for new entrants are not being adequately factored into their pricing calculations. Companies without in-country management teams and economies of scale will find it difficult to identify good opportunities and to manage the assets that they do acquire. The long term economic prospects for economies in the region remain strong. However, in the short and medium term, additional volatility can be expected.

Martin Erbe

head of international real estate finance, Continental Europe, Helaba Landesbank Hessen-Thüringen

The latest projections of the investment volume for the CEE region (excluding Russia) in 2016 are more than positive. After a record figure of slightly more than EUR 5.1 bln in H1 2016 – an increase of 69 pct compared to H1 2015 – more big transactions are expected to take place by the end of the year. The key to the higher investment volume is the sale of platforms or at least their portfolios. Redefine bought a significant stake in Echo’s new retail and office fund and CBRE GI is about to buy the 450,000 sqm Hillwood logistics portfolio. And the next platform is already on the market: P3 is to be sold by TPG/Ivanhoe, which will boost the volume to record heights. The strong office development pipeline in Warsaw will add further significant volume – already proven by the sale of two projects by HB Reavis for over EUR 300 mln as well as the expected sale of projects like The Spire or Q22. The positive impact for the investment market this and maybe in subsequent years includes are the new entry of players from South Africa and Asia. But how will this continue in 2017? Certainly interest rates will remain at a low level, which is a precondition for liquidity in the markets and high investor interest. But what should be sold in 2017 if the newest and biggest properties are traded and many platforms/portfolios have been sold? I expect a lower CEE investment volume in 2017. Office buildings with sufficient lettings in Warsaw but also in the regions will create a reasonable part of the future volume. Due to the strong GDP growth and the development pipeline of almost 700,000 sqm of retail to be completed in 2017, shopping centres will most likely outperform the office sector. Maybe we are going to see some forward transactions in both asset classes for projects to be completed in 2018 but sold in 2017. But without similar deals like Echo it will be very difficult to achieve a new record in 2017.