U.S.-based investors are becoming increasingly interested in Central and Eastern Europe. According to Damian Harrington, a director of research with Colliers International, the region’s strong fundamentals are attracting attention.
Harrington notes that it is a very diverse region comprising 13 countries and around 40 percent of Europe’s population. Harrington notes that opportunities exist in logistics/industrial, retail, office, and even hotels in the region.
According to Harrington, the choice of location depends on investors’ appetite for risk. While Warsaw and Prague have become core markets — albeit core markets with higher yields than those found in London or Paris — opportunities also exist in secondary cities, which have seen increasing levels of investment. As you move further east and south from Poland and the Czech Republic, you essentially move up the risk spectrum and where investment locations become more value-add and opportunistic.
In fact, Harrington argues the macro story is very strong — nearly half of Europe’s population lives in CEE, and the region is experiencing strong job growth via outsourcing and offshoring. He notes that outside of the core CEE markets, the region’s key perceived risk is liquidity, especially in the smaller markets, but CEE’s real advantage is the pricing in the market. Not only are prime office yields higher than in Western Europe, but yields are still 100 basis points above their prior peaks, leaving room to compress in the future.
The big change in the past 18 months is that much of the post–global financial crisis action happened in Russia — but this has become a no-go zone for most cross-border investors since the conflict in Ukraine began, leading to a 50 percent fall in transactions — driven by domestic investors.
Conversely, however, all other markets have witnessed a rebound in investment activity — Romania and Bulgaria registered volume growth of 270 percent and 160 percent, respectively, in 2014 — as they increasingly attract interest from cross-border investors and help drive regional volumes. Harrington notes that a number of key U.S.-based investment firms are engaged in this process.
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Loretta Clodfelter is editor of The Institutional Real Estate Letter – Americas.
