Pumping up the volumes

All of this activity has been taking place across the CEE region, in the markets of the Czech Republic, Hungary, Romania, Slovakia and Serbia, and especially in Poland. Some of the cross-border transactions have involved investors and funds from the usual suspects: Germany, the UK, the US, the Far East and so on, but there’s also been a perhaps surprising level of activity from Scandinavian players and CEE-based investors themselves. Undoubtedly, the real estate investment market in our part of the world has become much more dynamic of late. So, what is suddenly driving all this current activity? Is it due to investment funds finally sensing that the moment has come to splurge after keeping their powder dry during the long pandemic months? Is it more the case that opportunistic investors are taking advantage of distressed assets and the disruption to valuations and pricing in the wake of all the Covid-induced uncertainty? Is it the structural changes to the market and re-routed supply chains that have made the CEE region more attractive than other geographical areas? Is it all just down to a general post-pandemic feeling off greater optimism about the future and the prospect of everything getting back to normal? Or maybe it’s a combination of all these factors and others that we haven’t even thought of? The best way to find out is, of course, to ask the experts.

“We indeed noticed a certain slowdown on the investment market during the so-called ‘Covid years’. The current data shows that, in general, in 2021 an app. 13 pct volume decrease was recorded on the Polish investment market. This decrease could be seen in all the market segments: office, retail and warehouse. Although logistics is doing quite well in the overall investment volume, it has also gone down. It is worth pointing out, however, that this sector generated almost 50 pct of the entire investment market volume,” relates Andrzej Pośniak, a managing partner and head of the tax team in the corporate and M&A department at CMS Poland.

Waiting to splash out

One explanation for the slowdown and bouncing back of transactions and volumes is provided by Sean Doyle, the head of CEE capital markets at CBRE, who points out that there was a definite element of caution on the part of investment funds early in the pandemic. “Many investors adopted a ‘wait and see’ approach, both in terms of observing how the occupational markets would fare across sectors, but also in the hope there would be a ‘correction’ in terms of pricing. Now, 24 months in and hopefully near the end, we are witnessing some incredibly active and robust occupational markets, which are underpinning the strong activity and record pricing that is being achieved in office, logistics and residential investment transactions,” he says. However, he disputes the notion that investment went into a kind of deep sleep following the outbreak of the pandemic: “The reality is that investors have remained very active over the last 24 months, but there was a focus shift with many filling their allocations for logistics investment during this period, as the occupational fundamentals in this segment are incredibly strong, with record low vacancy rates across markets and growing demand following consecutive record years of net absorption.” On this point, that investors have stayed active and eager to invest over the pandemic but switched their attention to logistics, Andrzej Pośniak of CMS agrees: “When we talk about ‘activity’, I would say that investors have been very active, and this is due to there being a lot of capital to be spent. They were looking for transactions, though not all this activity ended with completed deals. Sometimes it is difficult to match the expectations of sellers and buyers. Even before the pandemic, the flow of capital was massive but there was a lack of product to be bought in some segments.”

According to Colliers, the total investment volume in the CEE region in 2021 reached EUR 11.07 bln (with Poland accounting for 57 pct of the regional volume), which is an app. 6 pct increase over 2020. And if it hadn’t been for a huge EUR 1.3 bln residential deal by Heimstaden in the Czech Republic in 2020, 2021 would have been almost 22 pct higher y-o-y. When you also factor in the absence of large retail and hotel deals over the period, then the figure is even more impressive, considering the ongoing uncertainty. “This is what the numbers say. But yes, there is a lot of activity on the real estate investment market at the moment – this is true,” confirms Kevin Turpin, the director of research for the CEE region at Colliers, who goes on to add: “Investors became more active in 2021 and also even at the beginning of 2022, especially in comparison to 2020, when some of them adopted, or at least extended, a ‘wait and see’ policy, while others have been hoping for more distress on the market and waiting for bargain deals. The latter did not happen on a major scale. So, 2021 – despite all the restrictions, difficulties in travelling and visiting properties, which is pretty essential for any purchase – was still pretty active. However, with the current new waves of governments announcing Covid-loosening restrictions policies, we expect 2022 to really be a recovery year in terms of activity. I like to quote here our colleagues in Germany, where they have been saying: this January, of 2022, is like March – the investor activity has just gone crazy!”

Opening up to new opportunities

Fraser Watson, the director of the investment advisory at Savills in the Czech and Slovak Republics, provides us with a measure of how much real estate investment has recovered from its pandemic-related dip: “In the last three years (2019–2021), each CEE market had its strongest year in 2019, with the exception of Romania and Slovakia, where 2021 saw a higher transaction volume than during the previous two years. However, with the exception of Romania, all markets experienced a stronger 2021 than 2020 and so, yes, it seems that confidence has picked up and markets are gearing back up to full strength again.” For him, the resurgence in the confidence of the investment market has much to do with the lifting of restrictions, particularly when it comes to making the deals themselves: “Firstly, physical travel broadly opened up again during 2021, which is a very important aspect of real estate investing. Whilst videos and virtual meetings played an important role in keeping the markets moving in 2020, they are no substitute for in-person inspections. Secondly, it has become clear that the world is not ending and that businesses (i.e. tenants) are not all going to crumble into dust. This confidence in income security is a key aspect of the markets picking up in activity,” insists Fraser Watson.

Another interesting theory that could explain the current dynamism of the property investment market is that the pandemic reared its ugly head at just the right time. Back in 2019 and early 2020 there were fears that the market was over-heating and a correction was imminent. But rather than market forces, it was actually Covid that applied the necessary brake on investment activity. This is a view offered by Agata Jurek-Zbrojska, a partner and the head of real estate at CMS Poland: “Just before the pandemic, the real estate investment market in Poland was so hot that some reduction or even another crisis was somehow expected. In some segments, there was speculation about a new bubble. But instead of another ‘Lehman Brothers event’, Covid arrived, and caused a certain reduction on the market. Of course, nobody would call what happened a market crisis, but some transactions were indeed frozen and everybody was focused on fighting the pandemic – not only in the medical sense but also in monitoring the economy and adjusting to what was happening,” she adds.

“We have seen a significant uptick in office investment in Q4 2021 and this will continue into 2022,” predicts Sean Doyle of CBRE, who expects Q1 2022 to be a record quarter due to the dynamics of the Warsaw market and the positive fundamentals in certain regional markets. As he goes on: “The office market registered lower transaction volumes during the height of the pandemic as investors needed to understand the impact of the adoption of the home office and hybrid models that were being touted as the new norms. However, it is evident that the majority of people will return to the office. This is supported by the fundamentals we now see in the Warsaw office market, where there was over 175,000 sqm of grade-A net absorption in 2021.” In fact, 2021 was the third highest year on record for Poland in terms of the real estate volume traded, with EUR 5.7 bln of investment transactions registered – compared to EUR 5.4 bln in 2020.

Record-breaking yields, too

With the investment volumes holding up and indeed increasing over the last year, the recent uptick in activity cannot be wholly accounted for by the notion that valuations have been adversely hit by the events over the last two years. “We would not say that valuations have come down, and quite the opposite in some cases – but what we have seen is a gap in pricing expectations between sellers and buyers,” observes Dorota Wysokińska-Kuzdra, the senior partner for CEE corporate finance and living services at Colliers. “There were of course a few bargain transactions, or with lower valuations, but this was more connected with both the strategy and life of funds selling the assets, who were prepared to lower the valuation in order to exit. Any general conclusion would not be appropriate here. We saw both transactions being done on lower valuations as well on regular or even slightly higher valuations. The end of 2021 even saw some of the highest yields in the market’s history, particularly in the industrial and logistics sector,” she points out. Among the other factors that could be having an influence on the current real estate volumes are the soaring inflation rates across the developed world. Could this be what’s driving the rush to invest in safer, more solid and long-term real estate? “Regarding inflation and other economic factors, these of course play their respective roles and form the underlying fundamentals of the investment market, explains Fraser Watson of Savills, who adds, however: “As inflation is currently viewed as more of a transitory situation than as a sustained and long term consideration, it is perhaps not playing as much of a part in decision-making processes as maybe one would expect. Does the current inflation level make real estate a “safer bet” – if viewed just as a store of wealth, then arguably yes, but concurrent with the rising inflation are the rising treasury rates in most markets, which of course represent a ‘safer bet’ in terms of the risk curve.”

Whatever the reasons for the current investment boom, we should also take a look at whether the pandemic has transformed the picture in terms of who is investing and what they are investing in. According to Agata Jurek-Zbrojska of CMS: “The profile and geographic origin of investors has been quite stable for a number of years now. European capital represents more than 50 pct, but here in Poland we can see a new wave of capital from the north (e.g. Sweden); from the USA it is about 20 pct, with Asian capital representing around 7 pct. It was expected that Asian capital would be higher, but this slowdown was probably due to the pandemic, so we can predict a slight increase in the coming years. In Poland, domestic capital is at a very low level, at just about 2 pct. An interesting feature is the flow of capital from other CEE countries, like Slovakia, the Czech Republic and Hungary, which is new trend that we have noted over the last two years,” she points out. Dorota Wysokińska-Kuzdra of Colliers agrees: “Last year was the year of CEE and Nordic money. This was especially visible in Poland, where unfortunately we don’t have domestic capital. During 2022, the trend of CEE and Nordic money investing into the region will continue and strengthen, and again we will especially observe this in Poland.” In her view, the reason for this is that both Hungarian and Czech capital is currently very active on their home markets, but these have actually became too small for them to operate in, thus the decision to invest abroad – and Poland was and still is a natural destination for them: “They have become the main competitors to traditional Western investors. Even if the return expectations are usually similar, either a healthy annual cash-on-cash return or good internal rates of return, CEE investors do not need to prove that there’s any gap in terms of yields or valuations, when these can already be achieved in their home countries; whereas this is still the case with German or UK-based money. Also, CEE money is better able to assess the different risks associated with the transactions – in most cases the risks are pretty similar in their home markets,” explains Dorota Wysokińska-Kuzdra.

Generational shift

Logistics is clearly the market segment that has been the main beneficiary of recent events – as in the last two years it has accounted for more than 50 pct of the total investment volume. But the boom in this sector, although accelerated in proportion to others in the wake of the pandemic, had already been underway prior to it: “We don’t even need to mention that logistics is and has been the darling of the market for the past 2–3 years. Furthermore, yields are at or even below the level of best-in-class offices, and the gap with yields in Germany is really narrowing. Due to the huge demand from abroad from a range of tenants, including the growing e-commerce sector, we believe this ‘love’ for logistics will continue for next 24 months at least,” predicts Kevin Turpin of Colliers. But logistics is not the only sector that’s on an upward trajectory. “We also saw a meteoric rise in PRS/multifamily investment over this period due to developers meeting the strong demand from investors for this product underpinned by the dynamic that young professionals and Generation Z across Europe are increasingly renting as opposed to buying. The main reason we are now seeing so much investment activity in certain sectors is due to investor confidence in the occupational markets in these sectors and the fundamentals being such that they feel more confident they will be able to deliver solid returns,” insists Sean Doyle of CBRE.

There are, however, some clouds on the horizon – and one rather big one is the Russian occupation of part of Ukraine. How serious could this be for the CEE investment market? “Yes, the eastern border is something we should never forget. Of course, there are no major scares or concerns at the moment – nobody is panicking or moving out of Poland because of the situation in Ukraine, but we need to continue to monitor this. In particular, very new investors – who are not familiar with our market, or the economic and political situation – might not be willing to consider their first new investment in this region. However, I am sure that investors who have capital already here in our market will not move out or take any other dramatic steps,” believes Andrzej Pośniak of CMS Poland. For him, it’s inflation that is the main worry, but once again, not a reason to panic: “High inflation is a cause for concern across the whole of Europe, but Poland is still enjoying good forecasts in terms of its economic growth and low unemployment rate. I feel that the most important concern will be the growth in the costs of developments, due to inflation, the higher transport costs of materials and the increased prices of certain imported goods.”