European real estate investors seeking good yields should look eastward to markets such as Romania and Hungary, according to a report backed by a number of prominent players in the CEE region.
'Hungary and Romania are two markets that offer quality products with very attractive prime office yields in their capital cities: 6,75% in Budapest and 7.5% in Bucharest – almost twice as high as those in Western European countries,' says Adrian Karczewicz, head of divestments CEE at Skanska Commercial Development Europe.
Commenting in the report entitled , Karczewicz added: 'It's no wonder then that CEE locations are attracting an increasing number of global players who seek both profitability and diversification of their asset portfolio. In H1 2016 we observed new investors, such as Zeus Capital and KGAL entering the Budapest commercial real estate market, and we expect to see more newcomers in the near future.'
The report was compiled by Skanska, JLL and law firm Dentons, in partnership with ABSL.
Prime office yields in Berlin are currently very low at 3.85%, although products in major German cities such as Frankfurt are still providing higher returns than those located in London or Paris. At the same time Romania and Hungary are seeing new capital flowing into their respective commercial real estate markets. This is a consequence of a significant yield spread between Western and Eastern Europe, where prime office yields, for example in Bucharest, are currently at 7.5%.
Shift in investor interest
Favorable macro-economic conditions in CEE countries have also contributed to this shift in investor interest, something that the report underlines. According to the World Bank Group, the Czech Republic, Hungary, Poland, Romania and Slovakia will remain among the fastest growing economies in the EU over the next few years. Moody’s forecasts state that these countries should also be resilient to international economic and local socio-political challenges for the near future.
Poland and the Czech Republic, the most mature of the CEE markets, are still regional leaders in terms of commercial real estate transaction volumes with 40% and 18.5% market share respectively. However, international investors have already identified new opportunities in the form of other CEE countries that have higher yields than Prague and Warsaw.
According to JLL, the increasing pool of foreign capital targeting Budapest and the growing appetite of banks to finance deals is dramatically increasing liquidity. Budapest's real estate market fundamentals remain robust, with solid occupier demand, declining vacancy rates and a limited development pipeline.
One of the main factors boosting the demand for modern office space is the business services sector, which is also the main driver of employment growth in Hungary. Favourable operating conditions have encouraged UNICEF to open its Global Shared Services Center in Budapest, attracted by a highly-qualifed workforce, well-established infrastructure and a relatively low cost of doing business.
In 2015, Hungarian GDP grew by 2.9%. The country’s government forecasts that GDP growth will remain above 3% between 2018 and 2020 . This means Hungary will still be attracting major new FDI, such as that of Daimler (Mercedes Benz) which is planning to build a car plant in Kecskemet for $ 660 mln.
Romania is growing fast
The Romanian economy offers another great investment opportunity. Since the financial crisis, GDP growth in Romania has been driven by a gradual recovery of domestic demand and strong exports. With 3.8%, the country had one of the highest growth rates in the European Union in 2015, behind Sweden, the Czech Republic and Luxemburg, while in Q2 2016 Romania recorded the highest growth (+5.9%) among member states compared with the same quarter of the previous year.
Romanian property investment volume in the first half of 2016 is estimated at €340 mln, 80% higher than the number registered in the corresponding period last year (€187 mln). Bucharest accounted for close to 48% of the total investment volume, with retail, office and industrial transactions in the city leading the way with 45%, 38% and 17% respectively.
Cushman & Wakefield reports that the Romanian Sibiu Shopping City retail park in Sibiu, was acquired by Nepi from the Argo group for €100 mln and was the region's largest single-property transaction in Q2 2016. Romania also witnessed new players entering the market, like Logicor, Blackstone’s European industrial division, which acquired Immofinanz portfolio.
