Central and Eastern Europe (CEE) office investment turnover totaled over 760 million in the first half (H1) of 2010, a 310% increase on the 185 million recorded in H1 2009, confirming views that the CEE office market has turned the corner.
CB Richard Ellis' latest data on the CEE market shows that office investment remained highly concentrated in Poland and Russia in H1, which together accounted for almost 80% of the CEE office investment total.
H1 2010 office take-up in CEE increased by 36% compared to a year earlier and is up by 12% compared to H2 2009. The rebound in office demand was most significant in Moscow where take-up in H1 2010 has already surpassed the average for the period of 2005-2009.
While take-up in Central European (CE) countries has risen by 13% year-on-year (y-o-y), South-Eastern Europe (SEE) take-up was up by 51%, reflecting the impact the recession caused on these property markets. The level of new office development completions has decreased since 2008 and is expected to be almost 25% below 2009 levels. This trend is likely to continue in 2011, with 1.7 million m² of office space planned for delivery and reflecting, among other factors, the difficulties in obtaining development finance.
Annual completions in 2011 in CE are expected to be the lowest on record. Completions in SEE are also declining but are likely to surpass CE's level next year for the first time in history. Limited development financing available continues putting a break on the development pipeline. From an investor point of view, a positive outcome of this is that the decreased pipeline is further improving the outlook for the occupier market, especially in CE in the medium-term.
After a period of increasing vacancy levels in CEE, office vacancy started to decline in Q2 2010. CEE vacancy levels fell from 15.8% at the end of 2009 to 15.5% in H1 2010. Vacancy rates in CE and SEE are still on the rise despite strong net absorption, although the increase in vacancy has moderated. Similarly, the vacancy rate in Eastern Europe (EE) has dropped compared to a year ago.
After a year of downward pressure on rents in CE, prime rents in the office sector are stabilizing. Markets such as Warsaw and Prague are rebalancing relatively quickly due to the constrained development pipeline and increasing gross take-up. Due to a general imbalance in supply and demand in most of SEE, some continued downward pressure on prime rents is expected.
Despite a relatively high vacancy rate in EE, markets are on an upward trend in the rental cycle with prime rents increasing for the second quarter in a row. On the back of compressing prime yields and stable prime rents, the CEE prime capital value index (including Eastern Europe) has turned positive y-o-y for the first time since Q3 2008. Most robust is the prime capital value growth in EE cities as a result of prime yield compression coupled with increasing prime rents.
As witnessed in 2009, cross-border investment activity remains low compared to recent years, with transactions instead being dominated by local investors, yet with significant differences across countries. Russia was highly dominated by local investors as a result of the increased volatility in the market in recent quarters. Czech Republic also saw more local investors in H1 2010. Poland was the only market in the region where the majority of investment involved cross-border purchasers in H1 2010.
Jos Tromp, Head of CEE Research & Consulting, CBRE, commented: "After a period of lower interest by cross-border investors over the last 12-18 months in CEE, more activity has been registered recently. This is not only based on announced fund raising for CEE but also on actual commitments. Two recent examples are the acquisition of the Europolis CEE portfolio by CA Immo (to be completed in January 2011) and Unibail-Rodamco's purchase of a portfolio of shopping centers in Poland (subject to the customary closing conditions and antitrust approval)."
Most investor interest in CEE is still focused on prime