According to Colliers International’s latest report, Opportunity Knocks for Central Eastern Europe (CEE), there are signs that the current European investment cycle will be extended, creating an opportunity for CEE to absorb greater volumes of capital.
Quantitative easing and low interest rates are driving also driving this international search for property, which offers relatively high returns. Risk has been difficult to gauge because bond market pricing is distorted, especially in the case of long-term government bond yields which are often used as a benchmark for property yields and the cost of borrowing. In some global and European markets this pattern has led property yields to surpass their previous 2007 peak, meaning that these markets are less attractive to investors from a pricing perspective.
Damian Harrington, Regional Director of Research for Colliers International, Eastern Europe, said: “Institutional, private equity and sovereign wealth funds are growing and increasing allocations to property. The weight of this capital, alongside increasing debt availability and a new real estate development phase are helping extend the current investment cycle.”
In the CEE region, Poland and the Czech Republic continue to be very strong performers in terms of investment turnover but do not appear to be showing any signs of overheating from a yield pricing perspective. Neither do the markets of Hungary, Bulgaria, Romania and the Baltics where there was a significant rebound in investment activity during 2014. Russia, unfortunately, has moved in the opposite direction.
In the report we look at the spread of yields over 10-year national government bonds and even though some of government bond rates have changed in response to quantitative easing, the analysis provides insight into which markets offer a risk-premium.
A significant factor which has played down CEE investment volumes post-crisis is a lack of obvious distressed portfolio sales. CEE sales have been carefully managed back into the system as values have recovered, but total sales to date comprise less than €5 bln, less than 7% of total sales post-2009. Elsewhere across Europe, almost €50 bln of distressed assets have been sold over the same period, thereby reducing the role of CEE region in overall European investment volumes.
This figure pales in comparison to the €200 bln of commercial real estate non-performing loans which have been reported sold, primarily to well-capitalized investors seeking significant large lot size opportunities at discounted prices. The bulk of these NPLs have been sold by banks focused on the UK, Ireland, Germany and Spain with limited exposure to CEE.
As the volume of distressed debt and asset sales diminishes across Europe, much as it has in the US market, investors will need to consider other opportunities. Additionally, Italian and Austrian banks, comprising a strong element of CEE loans, are being targeted for sales in 2015.