Investors look to Central and Eastern Europe for value
Capital cities across Central and Eastern Europe are becoming ever more popular with international investors.
Global capital is moving beyond Europe’s main markets in the search for higher yields.
The Central and Eastern Europe (CEE) region recorded its best ever year for real estate investment, with €13.3 billion invested in 2018, according to JLL data. Poland, which accounted for 54 percent of the region’s deals, also recorded its highest investment since 2006 with €7.2 billion.
Cities such as Warsaw, Prague and Budapest are benefitting as investors focus on alternative destinations to get the yields they struggle to find in Europe’s more sought-after markets, says Fraser Bowen, head of international capital in EMEA at JLL.
“For global investors – particularly Asian, Europe is getting bigger.”
Asian investors are leading the charge east and Korean capital is particularly prevalent in the region’s core markets.
Europe is more attractive for Koreans than the U.S. from a currency perspective, says Mike Atwell, head of CEE capital markets at JLL.
“Competition for core real estate in major European cities is high, so the move to eastern European markets is an inevitable one.”
Last year, Shinhan Investment, part of South Korea’s Shinhan banking group, paid US$58 million for a central Prague office leased to global accounting firm, KPMG.
The deal was the first in the Czech Republic by a South Korean financial institution. It follows another debut in neighbouring Poland by two South Korean financial services firms; Heungkuk Fire & Marine Insurance and Kiwoom Securities jointly invested US$162 million in an office property in Warsaw.
Such deals helped to make the Polish capital one of JLL’s top 10 global cities for cross-border investment last year, the first time it’s featured in the rankings.
The arrival of new capital from Asia is changing the wider mix of investors across the region, says Atwell.
“This has historically been a popular market for private equity managers and European - largely German - investors,” he says. “That’s still the case.
“But new investors from Asia are now realising the difference in, for example, the office yields that Prague and Warsaw offer compared with Amsterdam, Frankfurt or Paris.”
Indeed, prime office yields in Prague and Warsaw of 4.5 percent and 4.75 percent compare favourably with Frankfurt (3.25 percent) and Munich (3.2 percent).
The quality of tenants in Warsaw and Prague, are major pull factors for international capital, with multinationals such as EY, JP Morgan, Samsung and SAP occupying large offices on the outskirts of both capitals.
“Both cities offer international investors a choice of quality office product and tenants,” he says. “That’s often significant back-office space for major, global corporates.”
Shorter leases and industrial sector in focus
A modern office leased to a single tenant for several years is a typical first stop for new investors, says Atwell. However, as rental growth improves, assets with leasing due for expiry in the next three to four years - and new leases at higher rents - are also becoming more sought after.
“There’s certainly an opening for investors willing to take some short-term leasing risk at a time when rents are rising,” Atwell, says.
Due to the natural historic constraints of Prague, supply of modern new office space is limited.
Australia’s Cromwell Group has also invested in the region, recently ploughing €69 million into a Polish office portfolio through its European REIT vehicle.
Atwell says there is particular demand from investors for industrial real estate. Late last year, Temasek-owned Mapletree Investments from Singapore invested in Polish logistics as part of a US$1.1 billion global portfolio it bought from Prologis. Singaporean capital played a big part in Polish logistics investment last year, accounting for 32 percent of overall volumes.
“Demand for space is rising, vacancy is stable and rental growth is on the up - that’s due in part to rising land and construction costs.”
He expects more new sources of global capital to continue to target the CEE region’s industrial and office sectors this year, with short supply of new developments and currency the only potential hindrances to the continued flow of capital.
“There’s demand for the right product and, although overall volumes may not reach the dizzy heights of 2018, the relative attractiveness of the region remains,” he says.