Poland and the Czech Republic tend to be the markets of choice, followed by Hungary, although the yield gap between Hungary and the Czech Republic is narrowing as investors increasingly target Hungary.
A yield differential is expected to continue between the two near neighbors, according to Luke Dawson, head of CEE at Colliers. He sees the Prague market prime yield remaining at 4.25%, bringing the spread to 75 basis points. Across the region the most notable compression has been seen in the office and industrial markets, reflecting investor preference for these market sectors.
With regard to the place of origin of investors, Asian purchase flows have risen at the expense of CEE players, according to Colliers. CEE cross-border purchases and domestic flows, although strong in Hungary and the Czech Republic, are very weak in Poland.
In Hungary, JR AMC, a South Korean real estate investment trust, has purchased the 14,000 sqm Nordic Light Trio, marking the entry of South Korean investors into Hungary.
In the Czech Republic, the 80,000 sqm office component of the Waltrovka complex in Prague 5 was purchased by GLL Real Estate Partners and LB Asset Management, who acted for the South Korean Hanwha, for EUR 250 million from Penta.
In terms of market sectors, office continues to dominate the CEE region, with an increase of 43% year-on-year as of the end of the first half year, according to Colliers. In the second quarter, industrial investment volumes increased by 26% while hotel deal flows rose by 320% in the same time period. The weakness is in retail, in which investment volumes fell by 69%, year-on-year.
In the hotel sector the Hungarian, American owned investment managers Indotek has purchased the 230-room Art Nouveau Gellért Hotel overlooking the Danube in Budapest. In Prague, the Hotel Intercontinental was purchased by R2G for EUR 225 mln from J&T.
“It is clear that there is a disbalance between supply and demand in almost all the markets in CEE and even more broadly across Europe,” concludes Luke Dawson, head of CEE capital markets at Colliers International.
“However, I believe that this lack of supply is not a negative factor overall, as it speaks firstly to the fact that existing holders are not looking to exit their positions in CEE. Secondly, it keeps our markets from overheating,” he adds.
“We are now more mature and diverse than during the last cycle and this restraint keeps us on a reasonable level of growth. I would expect 2019 volumes to come close to 2018 with total volumes between EUR 13 billion-13.5 billion. For 2020 I would expect the same with the sector breakdown continuing to favor office,” Dawson concludes.
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