Declining interest in investments in CEE region
Property adviser CBRE reports that the overall investment volume in Central & Eastern Europe was around 35% lower than for 2011 and reached €7.4 billion, despite solid year-end results in Poland and Russia. Notably, these two markets are increasingly driving CEE volumes, although both of them saw a year-on-year fall in transaction volumes of around 20%.
Total investment volume on the commercial real estate market in Poland in 2012 stood at €2.7 billion. It is notable that Q4 2012 proved to be the most active quarter for Poland since 2006, with transactions worth over €1.6 billion in total.
According to CBRE experts, retail and industrial projects are highly sought investments while offices are treated with increasing caution by investors. In Poland, the limited availability of quality retail stock has meant that offices, which account for 39% of total transaction volume, or €1.053 billion, remain the most liquid segment. In 2012 a total of 15 office buildings changed hands, the majority of them in Warsaw. The largest office transaction of 2012 was the purchase of the Warsaw Financial Centre office building for €210 million and shows that prime assets in excellent locations with long term leases maintain their value over time. The capital remains the largest and most robust market in Poland and the place which most investment funds concentrate on. However, investors have also started to price in the risk of growing vacancies over the next 12-18 months. A clear difference exists between prime assets in the key locations, where investor interest has remained strong, whilst the rest of the market is struggling to attract investors.
Mike Atwell, Head of Capital Markets for Central and Eastern Europe, CBRE, said:
“Although the main focus of investors is on the Warsaw market, there are a handful of investors willing to look at regional cities, as top quality prime regional office assets achieve yields of around 7.5%. However, investor focus in the regions is mainly restricted to the dominant cities of Krakow and Wroclaw. The increased activity in these cities, where companies from the BPO sector are setting up, can provide quality investment stock though to satisfy investor requirements the length of the lease must be in excess of 5 and ideally 10 years. The tenant covenant strength and appropriate rental level is also critical. Investors require secure, sustainable rental levels and quality covenants.”
With prime pricing relatively stable in most segments and markets so far, pricing for secondary offices has gone down by at least 75 – 100 basis points to date, even in cities with the most liquid markets. Some investors have started to show interest for value-added opportunities in prime office locations in order to pro-actively prepare for the anticipated increasing vacancy. The yield gap between prime offices in the capital and regional cities amounts to around 150 basis points. Generally the gap between prime and secondary is expected to increase through to the end of 2013.
“With the softening of certain office occupational markets and growing vacancy rates, investors are now looking more favorably at retail. Poland’s retail story still remains positive but transactions do require careful competition analysis and retailer performance levels need to be fully understood. Investors are now targeting two key types of retail schemes. Firstly, the dominant city centre schemes are pursued by the core buyers. Here yields remain stable at about 6% as seen in the case of Łódź shopping centre, Manufaktura, and other on-going transactions.
Secondly, we are seeing more opportunistic investors looking for value-added schemes, which require a more active approach to management and provide good growth opportunities. Such assets are in the region of 150 basis points off from prime levels. Investors target such retail properties when they see the opportunity to implement a clear asset management plan and complete successful de-risking in order to provide both some rental growth and yield compression on exit” added Mike Atwell.
Increased volumes in the industrial sector have confirmed growing interest in this segment. Warehouse project purchases worth €467 million in 2012 show that investment funds are striving to diversify their portfolios while developers are expanding on the Polish market and seeking funds for new projects.
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