CEE Central & Eastern Europe and Russia offer a variety of risks and opportunities for real estate investors. Lynn Strongin Dodds reports

Although real estate investment across Central and Eastern Europe (CEE) appears healthy, a closer look reveals that Poland continues to catch most of the limelight. Neighbouring Russia has had its fair share of attention, as has Turkey. However, transparency remains a problem in the former, while political risk is overshadowing the prospects of the latter.

“Central and Eastern Europe is a group of countries in the heart of Europe of growing interest now that we have moved past the crisis point in Europe, but Poland still dominates activity,” says David Hutchings, head of European Research at Cushman & Wakefield.
“The advantage of the region is that many of the markets are no longer considered emerging, because they have already emerged, but they still offer a more robust growth environment than Western Europe. There is also not much of a yield premium compared with that on offer in Russia and Turkey, because they are part of the European Union and that gives them a degree of stability.”

Troy Javahe, head of capital markets for CEE at Jones Lang LaSalle (JLL) believes “a meaningful analysis behind the data underscores that it remains particularly difficult to define the CEE market as a whole, as the markets are so diverse and the investor landscape itself is undergoing a meaningful change”. He adds: “Even speaking of sub-markets has limited value. Unlocking opportunities – and they are absolutely there – requires, more than ever, a detailed understanding of the occupational realities on a lease-by-lease level, legacy issues, valuation issues and the funds’ changing business models. Affordable debt remains the key impediment, especially further southeast.”

According to Cushman & Wakefield figures, investment in the first half jumped 24% to around €1.73bn in the core CEE markets of Poland, the Czech Republic, Slovakia, Hungary and Romania from the same period in 2012. The transaction total for the first six months was 52, up from 31 last year, and the end-of-year tally is expected to exceed 2012’s volume of €3.8bn, given the pipeline of transactions, availability of quality investment products and continued investor interest in the region.

JLL research shows that Poland was the clear CEE market leader, with €970m, or around 56%, of the total volume, followed by the Czech Republic with €400m – a 23% chunk. Hungary claimed a 10% slice and generated €170m worth of deals, while Slovakia and Romania completed transactions worth €137m and €62m, respectively. Bulgaria, Croatia and Serbia did not record any investment activity in the period.

It is unlikely that these countries will ever catch up with Poland due to the sheer size of the country and its economic prowess in the region. It boasts the largest population at 38.5m, while its economy rebounded in the second quarter with GDP estimates recently being upgraded to 1.1% from 0.8% this year.

“I think Poland will continue to be attractive to investors,” says Michał Ćwikliński, head of investment at Savills Poland. “Especially when compared with some southern European cities where economies are gradually recovering but investors still perceive an element of risk, Poland offers preservation and appreciation of capital that is comparable to other western markets but with a better yield. For example, a core office building in Warsaw is trading at 6% versus 4.5% in other capital cities in Europe.”

Ćwiklińsk, as well as other property fund managers, favour the country’s retail and logistics sectors. He says: “Logistics is trading at 7.5%, which is a 150 basis point premium to an office building in Warsaw and the income is steady. This is because the leases are around 10 to 15 years and the tenants are often blue-chip companies, such as H&M and Tesco.”

Kim Politzer, director of European Research at Invesco Real Estate, agrees. “We are cautious about the office market because rents are softening and there is a supply issue in Warsaw,” she says. “We do like the retail story which, in many ways, is comparable to Asia. The country has a growing middle class compared with other CEE countries, and there is an aspiration to spend. There is also an interesting story in Russia, but lack of transparency in the market makes it difficult.”

Activity has picked up significantly. CBRE figures show that total investment volume in Russia hit an historic high of $3.8bn for the first half of the year, with Moscow capturing the lion’s share at 80%. Retail was the most popular in the second quarter, accounting for 62% or $860m of transactions, followed by the office sector, which amounted to $314m, or about 22%.

The research found that institutions were still able to earn 225-300bps over other destinations with the same tenant mix. The picture for the second half, though, does not look as bright due to a dearth of good investment opportunities. However, CBRE predicts that volumes for the entire year will come in at around $5.5 to $6bn, a 10-20% hike on 2012 levels.

Shortages are most acute in office, according to Olesya Dzuba, deputy head of research, JLL Russia & CIS. “There is 10 times less office stock per capita in Moscow than in Zurich and Geneva and five times less than in Paris or London,” she says. “St Petersburg’s office stock per capita is three times lower than in Moscow, at 0.4sqm. This difference is a strong signal for developers to build quality office premises, which are in a deficit in the market. Importantly, these premises should gradually spread over the whole city instead of focusing in the city centre.”

Tom Devonshire-Griffin, head of Capital Markets for Russia & CIS at JLL, also believes investors should look outside Moscow, especially in retail. There are good prospects to be unearthed, not only in the so-called Millionniki but also sub-Millionniki cities such as Nvosibirsk, Yekaterinburg, Nizhniy Novgorod, Samara, Kazan and Omsk, which all have populations of over one million. “Retail makes sense in the regions because the shopping centres and the cost to build is the same as in Moscow, while 70-80% of the tenants are also similar. Properties can be bought on an initial yield of 11%, while the IRR is in the mid-20s. However, you need to do your analysis because each of these cities has a different dynamic and consumer spending habits vary.”

Topics