First quarter of 2022 sees decline in M&A dealmaking, but strong real estate activity

The Romanian mergers and acquisitions (M&A) market recorded 48 transactions in the first three months of 2022, a 17 percent increase compared to the first quarter of 2021. Despite the higher volume of dealmaking, the estimated value of local M&A activity was lower on a year-on-year basis, at USD 1.8 billion in Q1 2022 vs USD 2.1 billion in Q1 2021, according to EY Romania calculations. The level of activity reflects the global slowdown in M&A after a record year in 2021.

By Aurel Constantin

Strategic investors continue to be the dominant players on Romania’s M&A market

The largest transaction of the first quarter was the acquisition of automaker Ford Romania by Ford Otosan Netherlands for USD 785 million, followed by the acquisition of wind farm Beta Wind by Energias de Portugal, through its subsidiary EDP Renovaveis, for USD 136 million. “The Romanian M&A market showed continued resilience in the first three months of 2022. Despite the challenging geopolitical and macroeconomic contexts, M&A activity remains significant and close to record-high levels,” said Iulia Bratu, Associate Partner for Strategies & Transactions at EY Romania. Strategic investors continue to be the dominant players on Romania’s M&A market, accounting for 92 percent of closed transactions. Foreign players increased their activity in the Romanian market, with 28 transactions representing a 56 percent increase compared to Q1 2021, whereas domestic transactions registered a 10 percent decline (18 transactions) when compared to the same period. In terms of origins, the most active investors were from the Netherlands (5 deals), the United States, and Belgium (3 deals each), followed by Poland, Austria, Hungary, and Gibraltar (2 deals each).

The most active sectors by inbound deal volume were technology and real estate (7 deals each), followed by diversified industrial products (5 deals), telecommunications, media & entertainment (3 deals), power & utilities, and healthcare (2 deals each).

REAL ESTATE MAINTAINS STRONG PACE

The good news is that based on the activity levels of Q1, real estate investment volumes in Romania could finally exceed EUR 1 billion in 2022, according to the 2021 annual report released by Colliers. Just a few big-ticket office deals in quite advanced stages—which Colliers consultants predict with a fairly high degree of certainty will close in 2022¬—could generate deals totalling over EUR 600 million. In line with 2020, the Romanian investment market recorded transactions of almost EUR 900 million last year, which represents over 8 percent of the total EUR 11.7 billion investment volume recorded by the six largest countries in Eastern Europe.

In the current context of geopolitical and health challenges, it is extremely difficult to make predictions regarding global economic developments. The war in Ukraine and the related sanctions, which came on top of the pandemic and ESG-related drivers and disruptions, are going to impact property markets in terms of supply, demand, and

affordability. As a result, it is hard to say how the Romanian economy—and especially the real estate sector¬¬—might be affected in the future. The inflationary backdrop and aggressive monetary policy tightening by the Federal Reserve could impact local activity as well, delaying some of the positive changes many had expected.

Overall, 2021 was a decent year for the Central and Eastern Europe (CEE) region in terms of investment market activity, with the overall volume (based on preliminary numbers) up by about 6 percent compared to 2020, at EUR 11.7 billion, but still some 20 percent behind 2019 levels, Colliers writes in its latest “2021/2022 CEE Investment Scene” report.

Bucharest has been seeing some of the highest yields in the region for the industrial and logistics facilities (7.5 percent), compared to at most 4 percent in Prague, 4.1 percent in Warsaw or 5.7 percent in Budapest and Bratislava. In fact, Romania’s industrial assets in 2021 recorded their best results since 2015, attracting transactions totalling around EUR 260 million, which represented over 29 percent of the total volume. This figure is also more than two and a half times higher than the yearly average seen for deals involving I&L (Industrial and Logistics) assets between 2010 and 2020.

“We continue to view the rather depressed volume of traded I&L assets in previous years as the result of a low offer on hand, which failed to underscore how deep the actual demand was. This means that 2021’s result was rather the mere consequence of more properties seeking a different owner, as buyers were likely to dig into their pockets. In fact, a Colliers survey conducted late in 2021 showed that industrial assets had become the most favoured asset class in Europe. Meanwhile, offices remained the most active asset class, attracting deals worth around 44 percent of the total, though very much below 2020’s share of 89 percent. Otherwise, after having underperformed CEE peers in past years, Romania saw its 2021 yields for prime offices performing a bit better than some of its neighbours’, though I&L assets saw a much steeper drop in the region,” says Robert Miklo, Director of Investment Services at Colliers. RETAIL RECOVERY

2021 brought improvements in the retail segment as well, attracting deals of about EUR 170 million, a sharp increase from 2020, though this is barely half the yearly volume seen between 2013 and 2018, when there were several large transactions involving commercial properties. Investors’ interest in retail products has been growing steadily over the last half year, focusing on various product categories such as retail parks or shopping arcades, shopping centres in secondary/tertiary cities in need of repositioning or boxes leased to supermarkets or DIY stores.

In terms of investment sizes, the office sector again saw the largest transaction of 2021, with the purchase of Atenor’s Hermes

Business Campus for around EUR 150 million by Hungarian fund Adventum. The second biggest office deal was the sale of Skanska’s Campus 6.2 and 6.3 to Austrian fund S IMMO for EUR 97 million, marking the latter’s first major purchase on the local market, after having acted primarily as a developer previously. This deal also set a provisional low for prime office yields, i.e., 6.75 percent, but based on advanced deals on the market, Colliers consultants believe that yields continued to move south in the second part of the year.

Another deal worth mentioning is the sale of Atenor’s Dacia One office project to the owners of Romanian DIY chain Dedeman for EUR 50 million, a deal closed late in 2021 at a yield well below the prime level for offices, largely influenced by the longer-than average lease, though it ticked all other boxes, being a new building in a very good location, with a large surface leased by a single blue-chip tenant. Other major office deals included the sale of River Development’s The Light to Austrian group Uniqa for EUR 56 million, marking their first major local purchase in over a decade, as well as BCR’s former HQ heading to Immofinanz for EUR 36 million.

The industrial and logistics sector also had several major deals from active developers, as well as from two new entries on the local scene. CTP Invest, the biggest developer on the local industrial market, added nearly 340,000 square metres of new warehouse spaces to their portfolio via four different purchases during 2021 for around EUR 170 million in total. Around 80 percent of the sum came from two portfolios with various

properties scattered throughout the country: Olympian Parks (owned by Greek developer Helios Phoenix) and a part of the Zacaria portfolio. The third largest industrial deal in terms of size marked the first direct local purchase by Fortress REIT, NEPI Rockcastle’s biggest shareholder, which acquired Element Industrial’s ELI Park 1 near Bucharest for EUR 30 million.

Following trends similar to those in the CEE region, office prime yields saw a steady descent in 2021 in Romania, falling from 7 to 6.5 percent. A similar situation may be recorded for prime I&L yields, where Colliers consultants note that figures are likely headed to around 7.5 percent towards the end of the year. As for prime retail assets, they believe a prime retail shopping centre would currently trade at around 6.75 percent, a bit higher than the trough seen before the pandemic.