CBRE: Central European office investments to outperform other CEE and several European markets

Several Central European (CE) office markets are well placed to show above average occupational market performance in the short- to medium-term, not only compared to their Central and Eastern European (CEE) neighbors, but also compared to several EU-15 markets. Core office properties in markets such as Poland and Czech Republic have the potential to offer income generating characteristics at relatively low risk levels, and at prices that are significantly more sustainable than one year ago, thereby presenting interesting opportunities for investors to (re-)enter these CEE property markets, according to CB Richard Ellis' forthcoming research, 'Risk, Return & Reality – CEE Office Property'.

Negative sentiment surrounding CEE and a widespread perception that CEE markets are uniform in terms of property market risks have contributed to significantly lower property investment volume thus far in 2009. Such sentiment is justified with regard to certain parts of the region, while other parts of CEE have been unfairly swept up by it. CEE economies are not yet out of the woods, but recent forecasts are more positive for 2010 and 2011.

Jos Tromp, Head of CEE Research, explains: "All CEE economies have been affected by the downturn, but the impact has not been uniform. Poland, for example, is still forecast to record positive economic growth in 2009, which would make it one of only a few European countries to do so. Moreover, prospects for recovery in 2010/11 are generally seen as better in CEE than Western Europe. The IMF recently forecast economic growth of 3.7% and 2.2% in Slovakia and Poland respectively in 2010, well above forecast growth of 0.3% in the Eurozone. Even hard-hit economies such as Ukraine and Russia are expected to see positive economic growth in 2010. This would have positive effects on office markets across the region, including easing upward pressure on unemployment and limiting further downward pressure on rents."

Investors are likely to find attractive office investment opportunities in CEE for a number of reasons:
• CEE economic growth, especially in Poland and Slovakia, is forecast to be higher than in Western Europe on average in 2010-2011, which is likely to have salutary effects on office markets
• After a period of rapid growth, the CEE office market is moving to a more sustainable growth pattern. Core CE markets like Warsaw and Prague have low pipeline development to stock ratios, along with relatively low current vacancy rates
• Historically, many CEE office markets have offered investors relatively stable and high income returns compared to their Western European counterparts
• Yield decompression in the last year across CEE has allowed yield spreads – which had disappeared or narrowed – to redevelop. This means that risk and return have returned to a more sustainable level in CEE.

Office occupier fundamentals are also beginning to change across the region, and as a whole the CEE office market is moving towards a more sustainable growth pattern. Tromp explains: "Office development pipelines across the region have been slashed as financing remains scarce and as developers change their strategies based on high vacancy rates and still substantial pipelines in some CEE markets. While supply/demand imbalances are still possible in the short- to medium-term in several markets, this should help most markets rebalance. In the meantime, core investment product will be best positioned to weather the storm. Rental declines should remain more limited for core properties than for non-core properties as the amount of true prime office stock in CEE is limited. Based on current market fundamentals – including forecasts for a return to positive economic growth, current vacancy rates and confirmed development pipelines – the Warsaw and Prague office markets look most likely to become more favorable to investors in the short- to medium-term."

Income returns in CEE – especially in CE – have also proven to be of interest to investors. According to Tromp: "Prime offic

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