CEE MARKETBEAT
After the solid start of 2022 and generally positive performance during the first six months, in Q3 2022, the economic growth slowed down across CEE, and business confidence weakened. Nevertheless, consumer demand remained relatively strong in most CEE countries, boosted by the removed pandemic restrictions and spending by refugees from Ukraine buying essential goods.
Supply-chain disruptions and high energy prices will keep inflation elevated, adversely impacting households’ purchasing power. However, after inflation reached new multidecade highs in summer, it is expected to be on a downward path from now on. The EU’s long-term budget for 2021–2027, coupled with the temporary instrument, NextGenerationEU, designed to power the post-COVID recovery, jointly totalling over €2 trillion in current prices, is expected to boost industrial production and sustainable investment across CEE markets.
Though economic uncertainty prevailed, the first three quarters of 2022 were generally positive for the commercial property markets in CEE, both in terms of occupier demand and the volume of investment transactions.
Investment volumes of over EUR 2 bn for Q3 were substantial, albeit lower than the previous two quarters of 2022, thus reflecting the slowdown in transaction activity experienced since Q1 this year. Further, investment activity is expected to be confined by abnormally high interest rates and weakening demand. But despite increasing yields and the ongoing price discovery process, in most CEE countries, capital values for commercial real estate are not expected to fall due to upward rental dynamics and space shortages in many sectors.
INDUSTRIAL PROPERTY MARKET
Across CEE, the fundamentals for the industrial property market remain strong, as further demonstrated by positive dynamics both on the supply and demand sides, along with considerable investors’ confidence in this asset class.
Besides the earlier market drivers, additional demand in Q2–Q3 2002 was generated by industrial, automotive, and FMCG companies stockpiling production materials to shield themselves from expected price hikes. The drawn-out lease negotiations and sales price discovery, both resulting from the ongoing economic and geopolitical uncertainty, may negatively affect the occupier and investment demand in the near future.
In Q3 2022, the total stock of modern industrial and warehouse space in CEE exceeded 53.7 million sq m;
51% of that is located in Poland. New supply reached almost 5.8 million sq m during the first 9 months of 2022, while over 14.6 million sq m of modern warehousing and industrial space was delivered in CEE since early 2020
(or +45%).
Over 7 million sq m is presently under construction in the region, out of which 57% is again ongoing in Poland. Though 45% of pipeline stock in CEE is still built on a speculative basis, the developers in the sector are increasingly interested in developing build-to-suit (BTS) in the sector. The recent slowdown in price inflation for construction materials resulted in improved availability and a shortening of the construction period.
The occupier’s activity remained robust in Q1–Q3 2022, as the aggregate gross take-up increased by 13% y/y, while the 12-month rolling average showed a clear upward trend. Furthermore, despite significant development activity, vacancy rates remained below 5% in all CEE markets, while in Czechia dropped below 1%.
On both quarterly and annual bases, prime rents increased in all the CEE markets. The steepest rental growth over the past 12 months was observed in Poland (+45%y/y), Czechia (+34% y/y), and Bulgaria (+21% y/y).
The industrial segment accounted for 28% of total investment volumes recorded in CEE in Q1–Q3 2022, but the figure dropped by 11% y/y as the availability of stock for sale remained the challenge. The significant investment transactions completed during the first three quarters of 2022 include acquisitions of Project Danica portfolio, Panattoni Park Gdansk Airport, 7R portfolio and Cromwell Warsaw Portfolio in Poland, CPI Industrial Portfolio in Czechia, as well as Airport City Logistics Park in Hungary.
OFFICE PROPERTY MARKET
The office property markets in the CEE capital cities were marked by resilient occupier demand and rental dynamics.
The occupier’s activity was generally healthy in Q1-Q3 2022: aggregate total take-up increased by 25% y/y, while net absorption was positive in all the cities in focus and grew by 17% y/y as the aggregate figure. The annual increase in net absorption was registered in Budapest, Prague, Warsaw, and Bucharest.
In 2022, development activity in the office sector has demonstrated differing dynamics across the CEE. During the first 9 months, new supply was particularly high in Budapest (+342% y/y), retained the previous year’s dynamics in Prague but slowed down in other capital cities of the region. Nevertheless, in Q1-Q3 2022, the aggregate new supply in CEE decreased by 14% y/y.
The office delivery pipeline remains significant in the region, with around 1.2 million sq m under construction, of which 30% may be delivered in Q4 2022.
The vacancy rates in Q3 2022 were slightly higher than those in Prague, Budapest, and Sofia a year ago. Over the quarter, vacancy softened in Bucharest and Prague, remained generally unchanged in Bratislava and Sofia, but increased in Budapest and Warsaw.
During Q3 2022, prime office rent increased only in Bucharest. But due to rising construction and fit-out costs, upward pressure on headline office rents was evident across the CEE region and is expected to continue in Q4. Notably, the rental gap keeps widening between the office schemes, subject to their efficiency and other attributes.
The office segment accounted for 44% of the total investment volumes recorded in the CEE during the first three quarters of 2022 and 39% in Q3. The acquisition of Generation Park Y in Poland was the major office transaction reported in CEE in Q3 2022. Also, Google’s acquisition of The Warsaw Hub in Poland remains the landmark investment transaction of the year.
RETAIL PROPERTY MARKET
As most of the restrictions related to the COVID-19 pandemic were removed across CEE, occupier demand and rental rates continued recovering in many locations, along with improved footfall and retail sales. However, supply-chain disruptions and escalated energy prices will elevate inflation, adversely impacting households’ purchasing power and the need to optimise costs for retailers and developers.
Nowadays, development activity in the retail property markets in the CEE region primarily focuses on refurbishments and extensions of existing shopping centres, as well as the construction of smaller retail parks and retail convenience schemes in regional towns.
The CEE region is still attracting new brands, which announced their plans to enter the markets in 2022. In addition to international retailers, CEE also benefits from the increased demand of Ukrainian firms to expand to compensate for the losses caused by ongoing Russia’s invasion of their home country.
In Q3 2022, prime retail rents were subject to an upward correction in the segment of shopping malls across CEE, mainly due to increasing energy prices. Positive prime rent dynamics also continued in relation to retail parks, particularly explicitly in Poland (+24% y/y), driven by relatively robust occupier demand. At the same time, prime high street rents softened in Poland and Hungary.
The surging inflation remains the main challenge for the retail market across CEE, as, among other things, it leads to the erosion of purchasing power of the population and increases service charges in the properties.
Retail retained its liquidity across CEE, with investment volumes in the sector almost doubling in Q1–Q3 2022 compared to last year’s respective period. The key investment deal closings in the retail property sector include the sales of 50% of the M1 portfolio and 49% of EPP shares in Poland and the portfolio of Tesco shopping centres in Hungary and Czechia.
INVESTMENT MARKET
Investment volumes of over EUR2 bn for Q3 are substantial, albeit lower than the previous two quarters. This reflects the slowdown in transaction activity experienced since Q1 this year. Key deal closings this quarter (sale of Generation Y, Warsaw office by Skanska (PL), Hillwood’s Project Danica industrial portfolio (PL), and Prime Kapital ‘s sale of its Retail portfolio (RO) are transactions agreed upon and contracted at the start of the year.
Investors are all currently adjusting to the increased interest rate environment and the threat of recession; as such, we expect activity to reduce until there is more stability and visibility in the economic climate. In the meantime, current deals are taking longer to close, but within this context, we expect the usual uptick in the volume of last quarter’s deal closures.
Yields across all sectors have softened and may continue to do so into 2023. Higher yielding real estate such as retail warehousing, regional offices, or non-CBD office and some SEE markets are expected to show some resilience as they maintain a positive arbitrage to the new cost of debt. The presence of local capital in these deals and markets also allows some consistency. Traditional pan-European investors have money but take longer to engage in new transactions.
Relative value (price per sqm) and pockets of strong, structural rental growth remain key drivers attracting CEE investors.
HOTEL MARKET
The global hotel sector continued its rebound from the COVID-19 crisis during Q3 2022. This was also true in the CEE region, with average revenues per available room (RevPAR) across the CEE-6 capitals (Bratislava, Bucharest, Budapest, Prague, Sofia, Warsaw) increasing by about 92% in Q3 2022 compared to the same period last year. However, when compared to the pre-COVID period, the CEE-6 average remains about 6% below September 2019 levels, while the European RevPAR has been above 2019 levels since May this year and reached 14.5% RevPAR premium in September 2022. The main reason was a slower recovery in Budapest, Prague, and Sofia, while the hotel markets in Bratislava, Warsaw, and Bucharest already recorded RevPAR above 2019 levels. Overall, the performance in the CEE region was primarily hindered by the low occupancy (on average 14% lower than in Q3 2019). This was to some extent offset by the strong ADRs growth, with the CEE-6 average surpassing 2019 levels by 8% in September 2022.
Hotel investment activity was limited during Q1–Q3 2022, with the transaction volume across the CEE region totalling only EUR 120M, reflecting an 88% decline compared to Q1–Q3 2019. While some hotels have been brought to market, the deal progress has been relatively slow. Investors follow important geopolitical and macroeconomic issues such as Russia’s invasion of Ukraine, the energy and food crisis, tensions between Hungary and the European Commission, escalating inflation and interest rates, the lack of labour, and recession concerns. These issues impact the perceived risks and costs of financing, further altering expected returns, and prompting investors to remain cautious. At the same time, rising concerns and re-financing challenges will likely moderate the sellers’ price expectations. This, combined with improvements in hotel performances, the anti-inflationary nature of hotel real estate, the wall of capital, and investor appetite for the CEE region, should allow for increased transaction volumes in 2023.