Product Availability a Brake on Investment Despite Strong Demand

Eston International advised on Oktogon Ház transaction.

Supply across the CEE region (Czech Republic, Hungary, Poland, Romania and Slovakia) exceeded EUR 8 bln for the first three quarters of 2019 according to Savills.  

With regard to the CEE region, a total investment volume of 54% above the five year average was concluded in the first three quarters of the year.

“We see prime yields reaching new, record lows in all the main sectors: a CBD office building has recently been at 4.9%,” comments Adorján Salamon, CEO of Eston International, the Hungarian associate of Savills, at the annual Eston International commercial property conference at Hillside Offices.

“Investors perceive the current situation as appealing and a bigger expansion of investment volume is hindered by the narrow supply of prime products.”

Poland, the largest economy in the CEE region, has captured 56% of the investment activity in the first nine months of the year with more than EUR 4.5 bln. The Czech Republic saw transaction turnover reach EUR 2.36 bln, according to Savills.

“Investment turnover in CEE has been rising steadily since 2013, by 24% per annum on average, reflecting increasing investor confidence in the region, underpinned by above EU average economic expansion, falling unemployment and growing consumerism,” says Savills CEE research.

Most Attractive

Offices continue to be the most attractive asset class for investment into CEE, accounting for more than 60% of the total investment volume in the first nine months of the year, a strong rise from 45% over the same period in 2018 according to Chris Gillum, head of offices regional investment advisory for EMEA at Savills.

“Access to good quality product as well as healthy fundamentals explain the sector’s strong performance,” he says.

In Hungary, transaction volume in the office sector is rising while simultaneously falling for retail. The industrial sector is seen as a hot investment destination and volumes are also increasing in the hotel sector.

“Competition for the best assets has caused a fast yield compression over the past few quarters in the region. The average prime CBD office yield in the five countries was down to 5.26% in the third quarter of 2019, 28 basis points lower than last year and 12 bps below the previous quarter. Prime CBD office yields are lowest in Prague at 3.9%, followed by Warsaw (4.5%) and Budapest (4.9%), while higher yields of 5.75% and 7% can still be achieved in Bratislava and Bucharest respectively,” comments Gillum.

Salamon argues that rising construction costs, 10% year-on-year for the first half year, will help prevent the markets in Hungary from overheating on the supply side. The change in the peception of Hungary from an investment perspective is that he no longer has to explain the details of the market to international investors.

With regard to market liquidity, he estimates that a prime located recently completed class “A” office development could attract as many as five-to-eight concrete offers, while a complex in a location further out could attract 15-20 offers.

With the low supply of investment-grade assets, more investors could look to the value-add, redevelopment option of older product. Eston International has established a service that combines design and construction as part of a single utility according to the consultancy. Eston has worked on the redevelopment of the 17,000 sqm Buda Square for investors at a cost of EUR 4.5 bln.