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Economic Climate Restrains CEE Investment Activity

Office Market

The first quarter of 2023 saw CEE investment volumes decline by around 57% year-on-year. That is still marginally better than European results, where the decrease was 62%. Given current conditions, predicting market activity for the remainder of the year is challenging but could reach EUR 5.6 billion, according to Colliers in its Q1 2023 Investment Scene report.

“Volumes across CEE were some of the lowest levels recorded since the GFC [Global Financial Crisis of 2007-2008]. Poland still secured a 50% share of first quarter 2023 volumes, followed by the Czech Republic with 31%,” comments Kevin Turpin, director of capital markets for CEE at Colliers.

“Interestingly, Romania and Bulgaria both had a better start to the year than in 2021 and 2022. A meaningful recovery still rides greatly on an improved inflationary and interest rate environment to close the pricing mismatch,” he adds. Hungary traditionally stands third in CEE investment volumes after Poland and the Czech Republic.

“With a lack of evidence in the market, it remains a challenge for all market players to pinpoint where yields currently are. This then leads us to provide a more sentiment-based, in-house view, taking current market conditions into account,” adds Turpin.

“Amongst other things, these need to address the various elephants in the room, such as interest rates, ESG compliance, and structural changes to occupier markets for some sectors,” he concludes.

Colliers estimate yields for Hungary stand at 6% for office, the same for industrial, and 6.75% for shopping centers. This compares to the lowest CEE yields in Prague at 5.25% for office, 4.75% for industrial, and 5.75% for shopping centers.

Higher Financing Costs

Financing costs are currently seen as between 5% and 6%, driven by significantly higher interest rates than 12 months ago, as well as the costs of financial tools such as interest rate swaps. In addition, the previously generous spread between other investment strategies, such as bonds, has diminished and also caused investors to pause and reassess their portfolios and strategies.

With regard to sectors, industrial and logistics has reclaimed its leading position over offices and retail in the region. Significant transactions included Panattoni disposing of more than EUR 300 million in assets in Poland. In the retail sector, Trei divested its supermarket portfolio across the Czech Republic and Poland for more than EUR 200 mln.

Despite the reduced levels of activity, the dominance of domestic capital prevails, with CEE capital being responsible for 53% of investment volumes, most notably Czech at 41% and Hungarian at 5%.

“International capital is still seeking opportunities in the region; however, the combination of fewer opportunities being openly marketed, and the widely discussed macro and financing challenges, are currently causing many to put decision-making on hold. As a result, we can expect to see a similar trend for the remainder of the year,” says Colliers.

“The global outlook remains quite mixed: while we are starting to have more clarity on inflation, this does not necessarily mean more clarity on interest rates or the threat of a banking crisis and a potential credit crunch in advanced economies,” Turpin points out.

“Other geopolitical and COVID-related crises remain in place, which explains why the global economic outlook, along with the CEE-6’s outlook worsened a bit compared to a few months ago. That said, as long as no external event is driving a material downward shift in economic activity in the Eurozone, we would expect the CEE to continue to outgrow their Western partners over the long term, thanks to EU funds and an attractive business backdrop,” he concludes.

This article was first published in the Budapest Business Journal print issue of June 2, 2023.

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