Colliers sees Norges moving to CEE

Concern over the level of sovereign bond yields is set to trigger a new tranche of investment in real estate within Central and Eastern Europe, according to new research from Colliers International.

The Colliers report - ‘Mind the Gap: Bonds, Yields and Returns’ – points to the decision by Norwegian sovereign wealth fund Norges to divert funds from government bonds into real estate as evidence in support of this trend.

Norges almost halved its bond holdings by €2.1 bn during the first quarter of the year and intends to add some €27 bn of real estate to its portfolio in the short term - much of it in the CEE region.

Colliers also notes that other institutional investors - including JP Morgan, M&G Real Estate and the Canadian Pension Plan Investment Board (CPPIB) - have publically stated that they too intend to increase their exposure to real estate. CPPIB said that it intends to establish a 20% exposure to real estate over the next 10 years.

This rush to reallocation has been fuelled by fears over a bubble in the sovereign bond market and the increasing gap in prime yields between bonds and property, the report says.

The report also notes that, with ‘safe-haven’ bond prices at all-time lows, eventual price increases will lead to a further softening of yields in the medium-term as the market readjusts.

Colliers regional director Damian Harrington believes that, with no dramatic rent volatility anticipated, this investor flight to real estate is set to continue. ‘As for where the money goes in the future, that appears to depend on investors’ attitudes toward country risk and the availability of appropriately priced product,’ he said.

‘Increasingly, allocations are likely to be driven by the availability of appropriately priced product which are typically found in the larger markets. As pricing really tightens and product dries up, however, we are likely to see a shift into peripheral locations and secondary assets as investors move up the risk curve in search of value.’