Investment volumes for the first three quarters of 2022 in Central and Eastern Europe have risen by 3% year-on-year, but displayed a noticeable slowdown after Q2, according to new research from Colliers.
Strong Q1 activity in particular contributed to the deal volume, partially spilling over from the end of last year. In total, investments reached €7.5 bn in the first three quarters, with Colliers predicting that that the final quarter could add another €1.5-€2.5 bn.
Said Kevin Turpin, regional director of capital markets: 'Individually, most countries saw mildly improved results year on year, with Hungary seeing a 53% increase.
'However, the typically strong fourth quarter is likely to be less active as there are fewer products on the market, amid elevated costs of financing and an ongoing period of price discovery. In terms of activity, Poland has secured 58% of CEE volumes so far in 2022.'
Colliers said it had started to record outward movements in prime yields of between 25 and 50 bps. Furthermore, the cost of financing has grown rapidly over the past quarter, with all in costs now ranging between 500 and 600 bps and could go even higher if the ECB puts its base rates up further to combat inflation.
'We are also seeing similar responses in other markets across Europe, with the UK and other western European markets typically adjusting quicker than in the CEE. As quoted in our global capital markets report, published in October, we could expect a correction of between 0% to 30% in capital values, depending on how other factors come into play over the next 6 to 24 months,' Turpin added.
Offices on top
According to the research, the office sector has continued to hold on to the top spot with a 38% share of Q1-Q3 2022 volumes. Retail volumes were boosted by two major portfolios transacting, while logistics remained in high demand, if affected by a lack of product.
Beyond this, the research recorded significant interest for PRS/Living assets, although they also remain in short supply. With much higher mortgage rates and falling sales, Colliers suggested developers may switch towards rental products.
CEE domestic capital has been the most active so far in 2022, with a 35% share of total volumes. Czech and Hungarian capital registered 19% and 10% of the total regional volume, respectively. Capital from CEE combined was responsible for over 10% of volumes in Poland.
Hungarian capital investing in Hungary was at 80% of its volumes and Czech Capital was responsible for 56% in its own market. This was followed by North American (27%) and European (22%) capital, although in general, interest from international capital has slowed while prices have been correcting.
The report concluded that the risk of recession is increasingly likely in many parts of CEE and Europe, as high inflation takes its toll.
'As a result, central banks have been raising interest rates to help counter the rise in inflation, which in the meantime is greatly impacting consumers on the cost of products and mortgages, and therefore creating lower consumption.
'Equally, it is hurting businesses and their ability to grow amid reduced demand for products and services, plus a workforce calling for increased salaries, to cope with a cost-of-living crisis, further adding to inflation.
'At the same time, investors will have some upside from the higher inflation on rents but, will also be impacted by the higher debt and operational costs,' Turpin concluded.
