The first half of 2022, the value of the transaction volume in the CEE region increased by 30%. on an annual basis, reaching EUR 5.4 billion. This is a good result, but by 12 percent. less than EUR 6.1 billion, recorded in the first half of 2020, when the market was not yet affected by the effects of the pandemic.
Poland is a clear leader
All CEE countries recorded an increase in volumes in the first six months of 2022. Poland remains number one in terms of transaction volume with a result of EUR 2.9 billion, which is also the best result for the first half of the year in our country since 2016. In 2022, this result was significantly influenced by 3 large transactions: the acquisition of the office part of The Warsaw Hub by Google (EUR 585 million) and the sale by EPP of shares in two retail property portfolios – to PIMCO and I Group, with a total value of approximately EUR 654 million .
The Czech Republic comes second – EUR 1.2 billion is a 30 percent increase year on year. The investment volume was shaped by, among others, the purchase of a portfolio of shopping centers including IGY Ceske Budejovice, City Park Jihlava and OC Gecko Ceske Budejovice by the Slovak investor 365.invest (EUR 215 million), as well as the sale of Borislavka Office & Retail Center, a multifunctional property in Prague, to REICO for estimated value of approximately EUR 180 million. Assets in the warehouse sector continued to be attractive to investors, which is perfectly reflected in the purchase by Hines of a Prague logistics property portfolio with an estimated value of around EUR 100 million.
Slovakia, on the other hand, achieved a result of around EUR 620 million, which is mainly due to the transaction (estimated EUR 300 million) of the transfer of ownership of part of the Penta office portfolio to the newly established developer Alto Real Estate (owned by Jozef Oravkin, a former partner in Penta). The office buildings involved in this transaction include Jurkovičova Tepláreň, Sky Park Offices and Digital Park – one of the largest office buildings on the market.
The second largest transaction in the first half of the year in Slovakia is the sale of the Atrium Optima shopping center in Košice to two Slovak private investors for EUR 118 million.
In Hungary, the recorded volume is EUR 619 million – more than in the previous year in the corresponding period (EUR 590 million). The largest transaction in six months involved the sale and partial leaseback of the Tesco retail property portfolio, which was acquired by Adventum Investment Fund Management. In the portfolio of 13 assets located in Hungary and 4 in the Czech Republic, the Hungarian part comprised 273 thousand. sqm space worth approximately EUR 219 million. The most important transaction in the industrial sector was the acquisition of Airport City Logistic Park by WING from CPI in the estimated amount of approximately EUR 59 million. The office segment contributed to the transaction volume with the acquisition of the Akademia Business Center from DWS by Europa Capital and local partner ConvergenCE, in the amount of approximately EUR 49 million. In addition, the fund managed by Groupama Gan REIM entered the Hungarian market by purchasing the historic Freedom Palace from the SCC group.
Romania also raised the bar slightly compared to last year and came close to the volume of EUR 320 million. The largest transaction on the Romanian office market was the sale of Expo Business Park for approximately EUR 110 million. The second largest transaction was the purchase of Record Park, located in Cluj Napoca, by Aya Properties Fund with the participation of Belgian partners, for the amount of approximately EUR 35 million.
The office and commercial sector is on top
In the scale of the entire region, the office sector with a share of 36 percent. and commercial, responsible for 32 percent. investment values are the new market leaders in terms of the realized volume. The warehouse sector, in turn, has reached 20 percent. share, and the main factor affecting this result is the limited number of assets available on the market.
The retail parks sector can boast the most attractive capitalization rates in the CEE region. The lowest capitalization rates (5.25%) were recorded only in the Czech Republic, while in other countries in the region u are in the range of 6.50 – 7.25 percent. Warehouse properties in Romania are also attractive assets, with capitalization rates in the first half of this year. they oscillated around 7.50 percent, however, their compression is forecast in the next 12 months.
In the last six months, investors from the CEE region were the most active in the investment markets in the analyzed countries, and in fact from two countries – the Czech Republic and Hungary. Their total share in the region’s volume in the first half of 2022 amounted to 41%. and was about 10 percentage points higher than in the previous year. Apart from the participation of local investors, Avison Young draws attention to a wide range of other investors with diversified origins, investing their capital in CEE countries this year.
The war in Ukraine and high inflation replaced COVID-19 as the main source of uncertainty in 2022
The industry is currently in a difficult macroeconomic environment with record levels of inflation and the likelihood of an energy crisis. There is tremendous pressure on the government to deal with rising energy costs. It also presents a challenge for investors and tenants and strengthens the rationale for having an ESG strategy for real estate. Energy efficiency is a necessity today – it is measurable and therefore it is the first important step in implementing an ESG strategy.
Properties have always been a great hedge against higher inflation as rents are indexed each year. Next year, investors will benefit from increased rental income, which will be indexed by high inflation. Nevertheless, for tenants, the combination of rising rents and rising operating costs will be challenging; especially for those operating in low-margin businesses.
Assets rented to reputable tenants and bringing a stable income will be an important value for investors in these uncertain times. They will benefit from indexed revenues, but also the flexibility to adjust their rentals if needed.
Increase in interest rates and higher financing costs
High inflation forced central banks around the world to raise interest rates. High interest rates in CEE, especially in local currencies, mean a significant increase in the cost of financing development projects. In addition, high inflation, which increases the cost of materials and labor, makes it a particularly difficult period for developers, who have increased caution when assessing the profitability of new projects.
Also, assets with rents denominated in local currency will be difficult to finance in the current environment without significantly affecting investor returns.
The higher cost of the loan (also in euro) causes a certain increase in capitalization rates, but Avison Young experts estimate that the liquidity in the markets still looks good, and investors who are ready to finance acquisitions in 100% gain the advantage. from equity capital.
Changes in investment dynamics
Assets from the logistics and industrial sector, so sought after by investors in 2021, remained at the top of the shopping list, although the segment recorded in the first half of this year. lower investment volume due to poor product availability. Demand for warehouse properties is driven by near-zero vacancy rates across the region, driving rental rates up in all CEE markets. In the Czech Republic and Slovakia, a compression of interest rates is noticeable, in Poland and Romania the rates remain stable, while in Hungary they are rising. Liquidity in this segment remains very high, and Romania and Hungary are particularly attractive in terms of both yields and rental rates.
In the office market, only Romania saw a y / y compression of yields in this sector. Major investors have narrowed their investment criteria due to the current purchase financing costs and ESG requirements, leaving room for bargain hunters to purchase existing properties at attractive prices.
The sharp increase in construction costs in recent years has resulted in many properties being sold at or below cost. Avison Young analysts forecast an increase in rental rates in most CEE office markets. These two factors give owners of existing properties a competitive advantage and better returns on investment compared to new developments.
The retail sector in Hungary, thanks to a large portfolio transaction, had as much as 35 percent. share in the total investment volume. Also on the investment market in Poland, huge interest in convenience-type facilities is still observed. Hungary, Romania and Poland offer attractive products with high capitalization rates.
The residential segment in the CEE region continues to warm up, despite rising interest rates. There is a growing number of institutional investors who perceive this sector as safe, especially on the verge of a macroeconomic slowdown. High-interest loans force some potential buyers to rent flats, which drives demand and raises rental rates. An increasing number of housing developers are building the second pillar of their business, keeping some projects in their portfolio to create special housing funds or sell premises to institutional investors.
Author: Avison Young
