Total transaction volume in the CEE region in H1 2023 (€2.2 billion) decreased by 59% (Y-O-Y). The smallest change occurred in Czechia (38% decrease with a result of €749 million) and the biggest – in Poland (72% decrease with a result of €801 million) and Hungary (82% decrease with a result of €114 million). The market freeze in Hungary is driven not only by global conditions, but also those specific to Hungary, which might be concerning for some investors – the tensions between Hungary and the EU, provider of structural funds to the country and the position of Hungary in the Ukraine-Russia conflict.
Slovakia with the volume of €321 million noted a decrease by 48%, and Romania – 44% with €180 million.
In Hungary, there are significant assets under exclusivity or under marketing, so volumes are expected to recover in the second half of the year bringing the yearly total above €500 million.
In Romania, the full year investment volume is expected to reach €600-700 million, with the retail sector being the engine of the investment market.
Retail sector
Dominance of the retail sector in the results of the whole region (35%) is mostly due to two large transactions which took place in the Czech market – divestment of Trei Real Estate from their CZ-SK supermarket and retail park portfolio to Plan B Investments for an estimated value of ca. €187 million (Czech portfolio allocation) and Pardubice Retail Fund acquisition of Palac Pardubice Shopping Center for €123 million. One of the founding companies of Pardubice Retail is Perrarus Plus, a company in the ownership of Richard Morávek, the Czech real estate investor and developer also owning Redstone Real Estate.
Despite retail transactions achieving only 18% market share in Romania (€32 million), we are expecting that this particular segment will be the investment engine in H2 which will boost the total transaction volume. In particular regional retail parks are attracting investors in Romania.
In Poland, retail volume reached €175 million, marking the lowest H1 result since 2010. After several years of unquestionable dominance by retail parks and convenience schemes, the structure of the retail investment market is undergoing a shift in 2023 as the market witnessed a return to transactions of regular shopping centres in regional cities and acquisitions for redevelopment purposes.
In Hungary retail transactions accounted for ca. 51% of the total volume but the numbers were low – only €58 million was transacted in total and it was built up of high street units, regional strip malls and smaller shopping centres.
Industrial sector
The biggest winner of the COVID-19 pandemic was hit most by the transactional slowdown of 2023. The overall result of the industrial sector in H1 in the region is mostly due to Poland’s €436 million transaction volume allocated in this segment. This result was generated in Poland by single-assets only as no portfolio deals took place and none are expected in the near future. In an effort to minimize risk investors have turned to smaller scale deals.
The largest transaction recorded on the Romanian property market in H1 2023 was the sale and leaseback of the FM logistics portfolio, with total pricing estimated at ca. €60-70 million.
No industrial transactions were recorded in Hungary and Slovakia. In Slovakia, this was partially due to investors flight to core markets, as regional Slovakia is often considered secondary by institutional funds; and partially by a lack of available product on offer in the much more liquid Bratislava Region.
Office sector
In terms of total volume, the office sector is shoulder to shoulder with the industrial sector recording a 28% market share across the CEE in H1 2023. There is a major focus on future rental growth as recent inflation levels and the consequent rental indexation have pushed many assets into “over-rented” territory.
In Poland all office deals during H1 were located in Warsaw – contrary to the trend in 2022, which favoured regional cities.
The biggest office deals in the analysed period in CEE took place in Bratislava, Slovakia – Pribinova 19 Bratislava Office was acquired by IAD Investments and Landererova 12 Bratislava Office was purchased by ZFP Investments – both deals are estimated to have a value of ca. €100 million each.
A key focus on investors in assessing acquisition opportunities is the ESG related future CAPEX. The required upgrade of older buildings is sometimes difficult to assess in the context of high construction costs. As buyers are almost always expecting higher deployments than sellers, the gap is often unreconcilable.
There is an abundance of opportunistic capital available for deployment, but the cost of such equity and targeted returns are so far from current sellers’ expectations that we anticipate a longer-term stalemate leading into 2024 in some markets. In markets where the re-pricing is now at play, volumes might show significant improvement in the second half of 2023.
As debt finance became more restrictive and pricier, the failure rate of transactions has dramatically increased and full equity deals are the only safe option for sellers.
While only accounting for 28% of total volume in the first semester, the industrial sector remains the darling of investors and the most sought-after segment. As in the past, the limited availability of product and ownership consolidation causes the relatively low transaction volumes.
Despite the transaction slowdown and low volumes, CEE capital remains active with a 66% share in total investment volume generated in CEE in H1 2023. Local capital is dominating in Czechia (81%), Hungary (69%) and Romania (50%).
We expect to see greater divergence in prime yields across geographies as we see a divergence of inflation rates across the region. Those countries who can reel in inflation via sensible monetary policy will win the battle against cap rate decompression.
Author: Avison Young
