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Christmas cheer approaching after a disappointing Q3?

Commercial property investment activity in Central & Eastern Europe totaled €1.35 billion in the third quarter, a disappointing 34% down on the previous quarter, with falls in virtually all sectors and most countries,Cushman & Wakefield said.

This did follow a particularly strong second quarter when volumes hit a six quarter high of €2.04 billion – and it was also 39% up on the market low point in Q3 2009.


Commenting on the figures, Charles Taylor, Capital Markets, Central Europe at Cushman & Wakefield said; “The main signs of an easing in activity came from domestic rather the foreign players. Cross border investors have actually increased their share of total buying to 57% so far this year versus 43% for the first nine months of 2009.  What's more, both foreign and domestic demand is increasing and while a shortage of affordable finance is limiting deal activity to some extent, the main barrier to more deals being done has been firstly a shortage of the quality of stock being sought by incoming investors and secondly a lack of realism on the part of some vendors over the pricing they need to accept to make deals work.”


“However signs are now improving, with more stock being marketed and a more realistic attitude on pricing starting to be seen, helped by a degree of urgency being injected by banks looking to restructure some of their loan book. Alongside a further firming in economic and market sentiment, this should support stronger activity in the coming months and volumes are expected to increase by as much as 70% in the final quarter, driven in particular by Russia as well as further increases in Turkey and Poland, taking deal volumes for the year to around €7 billion compared to €4.9 billion in 2009.” concluded Taylor.


The retail sector is seeing the best demand at present, as investors look to the long-term growth potential of the region. Even in the last quarter when activity overall fell back, demand for retail stock held up well, chiefly at the expense of the office sector, with retail accounting for 55% of all trading in the quarter versus just 15% in 2009.


“With the first major deals closed post Lehman's, the Hungarian investment market is moving again, albeit with caution. Transaction volumes are unlikely to exceed € 300 million for 2010 with activity largely confined to the retail sector. However, with an increase in quality office stock now being offered in the Budapest market, the emphasis is likely to shift as we move into 2011,” added Charles Taylor.

It is not surprising that two popular retail investment targets have bucked the trend shown around the region and have recorded strong growth in investment volumes over recent quarters: namely Turkey and Poland, both up over 200% on 2009 averages. Poland has in fact moved up to be the number one CEE destination for investment so far this year – although with interest reviving quickly in Russia, it may struggle to hold on to that position for long.


Romania and the Ukraine have seen volumes increase over 2009 but remain very much down on the levels of activity experienced in prior years, while in smaller markets such as the Baltics and Bulgaria, activity to date has been very negligible. The more mature markets of Central Europe have fallen back on 2009 dealing volumes with buyers and sellers failing to agree on pricing in some cases.

“Looking at the slowing in activity in Q3, it may be tempting to conclude that the CEE region has been penalized by an increase in investor risk aversion since the sovereign debt crisis hit Europe earlier this year.” commented David Hutchings, Head of European Research at Cushman & Wakefield, “In reality however, while this has led some investors to downgrade certain western markets, it is also encouraging them to rethink the grading they apply to parts of what had previously been seen as “Emerging” Europe, namely to countries where it is clear that levels of maturity are much improved and growth prospects are still considerably brighter. Liquidity is key however and many investors are asking whether there will be sufficient deal volumes to allow them to enter and exit when the time comes.”


According to Hutchings, “Core markets remain the priority for most investors but stock shortages and a search for income and growth are pushing some to expand their search horizons. To date, many have chosen to stay focused on core markets but shift their attention to tier two centers. However, some interest has also spread to less mature markets, with Turkey and Russia both more popular for example but Poland the real star to date. Other Central European markets are attracting interest but can't offer the scale of Poland while further afield, Bulgaria and Romania may be favored over other eastern markets because of their relative scale and position inside the EU. While it is too early for many to consider such fringe locations, a growing number of opportunities are being seen in these and other emerging markets as refinancing demands increase and businesses look to recycle capital into new ventures.”


A stirring of interest in CEE markets is also leading to greater clarity on pricing – and yields in general have hardened. Shop, office and industrial yields in eastern markets have fallen by over 100 basis points so far this year while shopping centers and retail warehouses have seen a correction of between 50 and 75 basis points. Central Europe has seen a somewhat more modest yield fall of 40-60 basis points for retail and 30-40 basis points for offices and industrial while gains in western markets were considerably less at around 10-20 basis points on average. (BBJ)