Colliers charts shrinking pricing gap in Eastern Europe

Evidence on the ground points to an uptick of real estate investment activity in Eastern Europe's main Tier 2 markets of Hungary, Romania and Bulgaria.

This is one of the main findings of Collier International's research on bond-yield gap in the region. The new research entitled 'Closing the Gap' considers the investment risk appetite for the main Tier 2 locations in Eastern Europe and whether the gap between bonds and yields is closing.

Eastern European Tier 1 locations, Russia, Poland and the Czech Republic have recently been characterised by a more active investment market and greater availability of debt finance.

Colliers said that the main Tier 2 locations, Hungary, Romania and Bulgaria have a slightly different risk profile and investment landscape which has seen them fall off the radar for many investors, particularly those seeking core and core plus assets.

However, recent evidence on the ground points to a rebound in activity in the main Tier 2 markets of Hungary, Romania and Bulgaria.

Attitude shift
Damian Harrington, regional director, research & consulting, Eastern Europe regional team said: 'In Hungary, there has been a shift in the attitude of some banks towards the financing of commercial real estate transactions, with financing conditions improving both in terms of availability and pricing terms and conditions. The Hungarian economy is recovering and current prime office yields of 7.75 per cent offer an attractive 200 basis points (bps) discount to Hungarian bond yields, which is above historic rates both pre and post crisis.'

The report also points out that Bulgaria’s GDP has adapted well since EU accession in 2007 and from a yield perspective Bulgarian asset classes are well above the CRE 3.0 per cent yield premium threshold over local 10 year sovereigns, which is a very positive investor message from a macro perspective. Romanian prime yields are trading at a similar discount of those in Bulgaria at around 300 bps to bonds, also putting the market in a strong light from a macro investor perspective. However, Romania is similar to Bulgaria in that debt availability is low and expensive.

This yield message is reinforced when comparing these markets to the Tier 1 cities in the region and wider European area. There are discounts of at least 200 bps available relative to the likes of Warsaw and Prague, or even Madrid which is now re-emerging from its post-crisis nadir.

Values below peak
Just as importantly, property values remain below peak and par values in these Tier 2 cities, and office markets look like they are finally recovering from a long bottom with take-up and absorption improving, pushing down vacancy rates.

Harrington said: “We are starting to see the first visible signs that these countries are starting to close the gap: One the one hand the wider macro-conditions have improved, reflected in lower government bond yields and increasing office take-up and absorption. On the other hand, the external perception of political regimes remains challenged and although banking conditions may be turning the corner, debt conditions remain difficult.

Yields may need to soften a little more to encourage investors back into the markets but overall sentiment suggests that the Tier 2 markets, Hungary, Romania and Bulgaria, are worth considering as a target for investment capital.

The full report is attached below.