The new catchphrases of the Central and Eastern European (CEE) real estate market are beginning to fall into place. The core markets of Poland, the Czech Republic, Slovakia and (to a lesser degree perhaps) Hungary can no longer be so easily tossed into the CEE mix, prime product in Prague or Warsaw is as good as or better an investment than that in many Western European capitals.
So far, growing investor sentiment and the deals that arise from it are giving these phrases some genuine credence. “At the moment, there is appetite for very good quality prime real estate in the Czech Republic, Poland and Slovakia,” said Alessandro Bronda, head of global property investor solutions at Aberdeen Asset Management in Brussels.
The same cannot be said of CEE countries such as Croatia, Romania, Bulgaria and Ukraine, where Bronda sees the only potential dealmakers being opportunistic investors who are offered a big discount. Though he does not know of a big deal in the works in any of those countries, he insists it would not be a surprise if one took place.
Projections for investment into Czech commercial real estate this year exceed €1 billion, an increase on the almost €800 million invested in 2010. But after the liquidity crises experienced by German open-ended funds, traditionally a dominant investor in the region, the question arises as to where the new investment is going to come from.
Risk vs. return
While some of the largest international investors are putting money back into property, the consensus is that the core CE markets are too small for US, Middle Eastern and Asian investment funds to consider. According to Bronda, it is not only about size but due to the fact that the return outlook for these markets simply is not good enough.
In Aberdeen’s five-year projected returns, the average total return of the Czech market is 8.1 percent, a figure that does not come up to the company’s hurdle rate — the minimum return balanced against market risk. But while Aberdeen would not recommend buying Czech property, the company does have assets in the country as a result of its ownership of the liquidated Degi funds, which contain properties such as The Park in Prague 4–Chodov.
Bronda told Czech Position that Aberdeen is looking to transfer the Degi assets to new funds rather than selling them. This way the company will retain the management fees involved in the properties. A report from the MIPIM property fair in Cannes in March in Property EU had a comment from Aberdeen head of property Andrew Smith regarding “selling the assets to a new, tax-efficient vehicle targeting institutional investors,” on which the company was waiting for approval from the German financial supervisory body Bafin.
German holding pattern
And is the formerly leading role of the Germans a thing of the past? Not necessarily, says associate director/head of capital markets at CB Richard Ellis in Prague, Stuart Bloomfield, who points to a change in the kind of German fund that will be active on the market.
“The German open-ended funds are still in a state of re-assessing and re-raising their levels of liquidity to a level that they will be comfortable with,” Bloomfield told Czech Position, adding that the funds that are hoping to reopen have to be prepared for investors that want to get their money out immediately.
‘They would like to invest and the nearest, comfortably stable markets to their own are Poland and the Czech Republic’
“They have to build up their redemptions to a higher level. It would be a disaster for them to reopen and have to close again. They have to have enough liquidity so they can weather the initial storm when they reopen.”
The German funds likely to be active on the Czech and Polish markets are more closed funds and special funds (Spezialfonds), which will look at individual opportunities, particularly prime, well-leased and long-leased properties.
“So the dominance the Germans had over the market before and during the crisis is not really the case anymore. They are still there, they can buy — but for the special funds and the closed-ended funds,” Bloomfield said.
Broader range of sources
Other investors gaining a higher profile here include UK fund managers, as well as Spanish and French funds such as AXA. Bloomfield also cited potential investment from the east, not only from Russian capital but from a country like Greece.
“There is equity there that can be spent. Their domestic markets are still not very stable. They would like to invest and the nearest, comfortably stable markets to their own are Poland and the Czech Republic. Then you have the next tier — Hungary and Slovakia, which are leading up to a more stable situation,” Bloomfield said.
Ultimately, investment conditions are improving along with the economic outlook. Bronda sees Poland as the superior market, not only for its larger size and liquidity, but for the fact that it requires more growth to catch up with the EU average than the Czech Republic does. The only negative he sees for the region is the weak demographic projections that group CEE together with Germany and Japan as one of the few places with a population in decline.
For real estate though, Bronda says this factor might not be too influential. “When you invest in property you often target the main cities, so countrywide population decline doesn’t necessarily play a role if the cities continue to create jobs.”