Investor demand for property in Central and Eastern Europe fell in the first quarter of 2007, in particular in Poland, Hungary and the Czech Republic, according to the latest capital markets update from property adviser DTZ. The volume of transactions across the region amounted to EUR 2.3 bn, marking a decrease of 18% on the same period in 2006. As in the year-earlier period, Russia and Poland accounted for the bulk of transactions, with Russia responsible for 35% and Poland 26%.

Investor demand for property in Central and Eastern Europe fell in the first quarter of 2007, in particular in Poland, Hungary and the Czech Republic, according to the latest capital markets update from property adviser DTZ. The volume of transactions across the region amounted to EUR 2.3 bn, marking a decrease of 18% on the same period in 2006. As in the year-earlier period, Russia and Poland accounted for the bulk of transactions, with Russia responsible for 35% and Poland 26%.

While transaction volumes in Hungary were down 75% in the first quarter year-on-year, volumes in Romania surged to EUR 470 mln. This marks a 560% rise on the same quarter in 2006. Austrian and UK investors were the most active in the core markets, accounting for a combined 41% of deals. Australian investors have also become major buyers in recent years in markets which have traditionally been dominated by Austrian, German and French investors.

Offices were the most traded sector in the period, accounting for 69% of transactions. The majority of office deals took place in Russia (43%) and the Czech Republic (23%). The severe dearth of modern office space in Moscow is meanwhile fuelling rental growth with the surge in take-up - over 1 mln m2 in 2006 - auguring well for rents in 2007-08 when Moscow's office stock is expected to grow by a further 3 million m2.

Prime office and retail cap rates have levelled off in the core markets, currently fluctuating in a band between 5.5% and 6.25%. Meanwhile yield compression in Bucharest and Moscow continues apace. Yields for prime offices in both capitals are likely to fall to 6% and 8% respectively by the end of 2007, DTZ said.

While investment activity in the core markets is expected to slow this year, higher volumes in the emerging markets, in particular Russia, are likely to ensure that overall volumes in 2007 will be roughly similar to 2006. In full-year 2006, investment transactions in CEE totalled a record EUR 11.1 bn.