Investment in Central and Eastern European commercial property markets delivered a -6.5% euro total return in 2009, according to the IPD CEE Annual Property Index, compared to a positive 0.6% in 2008.
The deterioration in investment returns in Europe's emerging market was comprised of an acceleration in capital declines to -12.5%, compared to -5.3% in the previous year, while income returns improved by 50 basis points to 6.8%.
This is the first time the multi-country index comprised of 429 properties in 27 portfolios worth 9.1 billion from Poland, Czech Republic, Hungary and the Rest of CEE has delivered negative annual total returns in its five year history. At the headline sector level, the top performer was offices with a total return of -5.0%, followed closely by retails, at -5.2%, and industrials the worst-performing sector was Industrial with -9.7%.
Dr. Nassos Manginas, Director for Central & Eastern Europe at IPD, said: "In 2009, we saw a sharp correction in total returns of the CEE index being primarily driven by worsening negative capital growth across all sectors. Looking at the long-term picture, the last couple of years were characterized by negative capital growth while the initial three years by booming capital appreciation of the average market portfolio.
"Over the last five years it was income return at a level close of 7.5% that has been the primary driver of performance across the region with compounded capital growth being slightly positive."
Since the start of a dedicated index in the region, Poland has been the best-performing market followed by the Czech Republic, while Hungary has delivered the worst returns.
Poland: steepest capital falls but highest relative returns in region
Annual capital depreciation accelerated significantly in Poland commercial property, at
-10.6% according to the IPD Poland Annual Property Index.
Rental value growth, which measures underlying movements in estimated rental levels, fell into negative territory over 2009, at -3.5%, compared to 4.5% in 2008. Poland's industrial sector reflecting 31.8% of the Databank experienced the most dramatic rental value falls, at -11.2%. Balancing the impact of this steep decline were offices, which fell -0.4%, and retail, which bucked the trend to deliver positive rental growth, at 3.7%. Offices and retail account for 45.4% and 21.3%, respectively.
The second driver of the double-digit capital depreciation in Poland was yield expansion, which was reflected across the three main sectors. Again the greatest pressure was in industrials, which saw initial yield climb 130 basis points to 8.6%, followed by an 80 basis points hike in retail to 7.7%, while offices rose by 50 basis points to 6.7%. All property initial yields moved up 80 basis points to 7.5%.
The powerful combination of weak rental growth and yield expansion has contributed to steep capital depreciation at sector level, led by industrial's -15.5% , retail's -8.7% and office's -7.6%. Robust income returns across all sectors was insufficient to deliver positive annual total returns in and of the sectors and, consequently, all property total return was -4.6%.
Manginas added: "Last year was a difficult year for the Polish commercial property market. Since 2008, capital values in Poland have declined by a compounded 12.8%, as a result of an 90 basis point yield expansion and the reversal of solid positive rental growth, at 4.6% at the end of 2007, to -3.5% at the end of last year.
"Poland's capital Warsaw reflects the trend at national level; with the strongest underperformance in the industrial sector, which has suffered from a contraction in demand for its manufacturing industries from European countries. At the all property level, however, Poland's -4.6%, annual total return is the best relative performer of the countries which comprise the IPD Central Eastern European Index."