The growth of purchases by domestic and cross-border investors in the largest six CEE markets accelerated 32% in 2017. The CEE cross-border flow more than tripled to 7% of the record overall volume of €13.1 bn, according to Colliers International.
Mark Robinson, CEE research specialist at Colliers International, commented: 'The faster march of domestic money helped mitigate the fall in 2017 from 2016’s record volumes from South Africa and Asia. South African funds may step back a little further in 2018; Asian money may become more active again, perhaps through portfolio deals or corporate M&A.'
Robinson was commenting on the release of Colliers' CEE Real Estate Outlook report to coincide with PropertyEU's CEE Capital Flows briefing at Mipim in Cannes. The CEE-6 markets are Poland, Czech Republic, Slovakia, Romania, Hungary and Bulgaria.
Further growth of domestically sourced investment depends on the relative attraction of the asset class locally and the availability to investors of access routes. Colliers sees capital city prime real estate yields as attractive, especially relative to sovereign bonds and also relative, with the exceptions of Prague and Bucharest, to the dividend yield of equities. The baskets of listed real estate stocks assessed have dividend yields in the range of 4% presently, the report found.
New capital sources
Although lower than in 2016, Asian and South African volumes remained healthy at €1.4 bn and €1.8 bn respectively. It was 2016's third new source, CEE money that performed most impressively in 2017, rising 32% to a combined (domestic and cross-border) total of €3.3 bn.
Momentum in cross-border flow hit an all-time high of 7% of 2017’s rising investment total for the CEE-6 of €13.1 bn, which itself surpasses 2007’s previous record high of €13 bn.
The CEE’s net flows almost tipped positive in 2017 at just –€220 mln, due to the 32% jump in buying activity by regional players and an €1.2 bn shrinkage of sales by investors and developers. These net flow data Colliers has presented for the first time show the recent leap in (net) buying by the Asian and South African funds. The US flipped from a large net buyer of CEE-6 commercial real estate in 2014-15 to a large €2 bn net seller in 2017. Europe and the UK were net sellers last year, continuing recently established patterns.
Local sources
Colliers sees the rise of the local investors as a long-term positive for the CEE-6 real estate investment markets, as a core base of domestic owners provides stability and depth of knowledge. This situation pervades across G10 and Asian real estate markets. In the CEE-6, domestic buyer volumes hit cycle highs in Poland (€421 mln), Hungary (€708 mln) and Romania (€35 mln) last year.
Czech Republic
The Czech Republic remains out ahead with €1.08 bn of purchases in 2017, representing a robust 29% of the country’s total volume, in line with long-term averages. Hungary’s 39% proportion ticked up, as did Poland’s to 8% last year, also a cycle high.
Czech investors represented nearly one in every seven euros of total investment (13.5% market share) in the CEE-6 countries in 2017. This was the second-largest share of any country globally (after South Africa). The €1.77 bn total grew 43% year-on-year. It was the cross-border flows that accelerated, rising to €691 mln from just €84 mln a year before.
Ample money to spend saw liquidity literally spilling over into the surrounding CEE countries and Czech buyers appeared on the transaction ledger both in the CEE capital cities and purchasing assets in the regions, especially in Poland.
The other country that contributed in size to cross-border flows in 2017 was Slovakia. Slovak cross-border purchases (€141 mln) were over 3x domestic purchases (€141 mln). Slovakia and the Czech Republic were amongst the most popular cross-border destinations for CEE-origin flows.
Will local flows rise?
Will domestic investors choose to increase their investments in commercial real estate assets? Looking at their situation overall vs. GDP, there may well be room to grow, the report concludes. 'The capitalisation of the investment opportunity in the capital and key cities is at reasonable levels, in a band between 7%-19% of national GDP. We predict a high likelihood of further growth in capitalisation: the healthy growth of nominal GDP across the region in 2018-19 we see as creating room for upside.'
The access routes to market for the end investor are arguably most-developed in Hungary and Slovakia, both with significant pools of domestic mutual funds investing into commercial real estate. Mutual funds investing in commercial real estate are by contrast largely absent from the two largest markets in the region by population Poland and Romania.
