CEE-6 Potential medium-term pain

Poland secured a majority share of regional volumes at circa 42 pct but activity overall was slow. The Czech Republic followed with a 34 pct share. Bulgaria was the only market in the region to record a year-on-year increase, while the other markets all had drops in volumes of between 42 pct and 87 pct.

Economic growth faltered in the CEE-6 region at the start of 2023, with 3 countries, Czech Republic, Hungary and Poland seeing negative annual GDP growth as of Q1 2023, despite Romania and Bulgaria recording the best performances after their economies expanded by over 2 pct. Ahead of the Q2 GDP results, due mid-August, we can note that the weak streak is set to continue, at least over the short term, as high-frequency indicators are still not up to par for quite a few of the countries.
Silviu Pop, Director of Research for CEE and Romania

Interest rates and inflation

The impact of high interest rates, accompanied by an increase in the cost of risk, alongside a shaky global economic backdrop is still negatively impacting countries in the CEE region. Inflation remains a challenge, particularly as most of the drop in consumer price growth in recent months has been caused largely by the volatile components of the CPI basket, in particular energy. Meanwhile, the so-called ‘core inflation’, which strips away components like energy and seasonal food items, is seeing a decline.

CEE investment volume growth rates

Volumes for Q2 and H1 2023 across CEE were some of the lowest levels on record. At EUR 2.02 bln, H1 of 2023 saw CEE investment volumes decline by circa 64 pct year-on-year. According to preliminary results, this is unfortunately in line with European and global results. Given the current conditions, particularly in relation to the cost of debt, predicting market activity for the remainder of the year remains challenging, but we estimate it could reach EUR 5 bln or above at the current trajectory.
Kevin Turpin, Regional Director of Capital Markets, CEE

The lack of transactional evidence in the market is dragging out the period of price discovery and a meaningful recovery will depend greatly on an improved inflationary and interest rate environment. While we have not yet seen any significant signs of distressed sales, refinancing, maturing bonds, ESG compliance and other specific sector or country-related themes may have an impact on hold strategies for some investors.

H1 2023 prime yields

With the continued lack of evidence in the market, it remains a challenge for all market players to pinpoint where yields are currently. This means we need to look at a more sentiment-based, in-house view, taking current market conditions into account. As described last quarter, these views should take into consideration the various factors that are impacting liquidity. These include interest rates, bond maturities, ESG compliance and structural changes to occupier markets, for some sectors where applicable.

With all-in financing costs currently somewhere above 5.5 pct driven by significantly higher interest rates, as well as the costs of other financial tools such as interest rate swaps. In addition, the spread to other investment strategies has largely disappeared and in some cases are starting to look like compelling alternatives to real estate, putting further pressure on buyers’ expectations of pricing.
Kevin Turpin

CEE flows by sector

Office investment volumes have declined significantly, both globally and in CEE, accounting for just 29.5 pct of CEE volumes in H1 2023, similar to that of the I&L sector. Retail was back on top with a 35 pct share of activity at the end of half year period and included the only transaction over EUR 100 mln in Q2, a shopping centre in Pardubice, Czech Republic.

CEE flows by origin of purchaser

CEE-6 domestic capital has been the most active so far in 2023, with an impressive 59 pct share of total regional volumes. In particular, Czech capital (40 pct) secured the highest volume overall and almost 17 pct in just 2 transactions (both retail). Other CEE regional capital picked up a further 19 pct. These were followed by European (14 pct), APAC (7 pct), USA (5.4 pct) and Middle Eastern (5 pct) capital.

Trends and perspective for the upcoming months

We still maintain a very rosy long-term view regarding the CEE- 6 region. Between the geopolitical reshuffling taking place globally, the fact that CEE economies have a solid track record of fast economic development and still offer some of the most attractive wage-productivity gaps in the Western world, we would consider any potential medium-term pain to offer opportunities geared at the longer-term.
Silviu Pop