Central & Eastern Europe (CEE) office investment volume reached €1.7 billion in the first half of 2013 (H1 2013), reflecting an increase of over 100% compared to H1 2012, according to the latest research from global property advisor CBRE.
H1 2013 was the second most active period for office investment since the start of the 2008 financial crisis. Although the traditionally strong markets of Poland and Russia represent almost 75% of investment activity during H1 2013, deal flow is slowly becoming visible in other parts of the region, including Czech Republic and Romania. Institutional investors who are in the process of restructuring their portfolios and some distress coming to the markets are reasons behind this emerging trend.
However, slow economic growth and tenant favored market conditions are slowing a wider increase of office investment volumes in CEE, with limited activity in the smaller markets of Southeastern Europe. Investors perceive these smaller and less liquid markets clearly as value-add territory especially for office investment.
Mike Atwell, CBRE Head of Capital Markets, CEE & Poland, commented: "Developers and investors need to contend with lower effective rents when marketing their office properties in today’s market situation. Secondary locations will suffer more significantly than buildings that are able to offer contemporary office space in well-established and attractive locations. Ultimately a location decision will not be made entirely based on rental levels, as employee requirements are becoming ever more important in locational decisions.”
A slow growth environment in the short-term, a relatively substantial pipeline under construction (U/C), and limited fresh demand for office space is expected to result in a continuation of tenant-favored market conditions in most of CEE. Unless economic growth shows an upturn the situation is expected to persist through to the end of 2014.
In line with expectations CEE’s occupier demand has remained moderate in the first six months of 2013. With the exception of Warsaw and Belgrade, all other markets saw take-up at or below the averages recorded since the start of the 2008 financial crisis. This does not mean tenants are not taking advantage of the market conditions; however, most of the requirements remain consolidations and renegotiations and therefore have limited (positive) effect on vacancy.
Jos Tromp, CBRE Senior Director - Head of CEE Research and Consulting, commented: “Short-term vacancy points to an imbalanced market situation in most CEE office markets. As is the case in previous cycles, a period of high vacancy may pass relatively quickly in emerging markets; however, low economic growth and limited employment growth prospects do not point at this as yet.”
Despite low levels of new demand, office development has remained relatively strong. From the more developed markets, Warsaw stands out in this regard. In total around 450,000 m² of office space is under construction and expected to be completed through to the end of 2014, with approximately a third of this space already pre-let.