INVESTING IN CEE

Dynamic and diverse

Investors compete for rich pickings in markets such as lively Riga

Poland remains the star real estate market within the CEE, with a surging industrial sector. However, the lack of available product in logistics and residential may dampen the outlook for deal volumes, says Mark Faithfull

Poland continues to dominate real estate investment volumes across Central and Eastern European (CEE), with offices and industrial the standout asset classes.

However, lower COVID vaccination rates compared with the

EU average and constrained supply in sectors such as residential add a note of caution to an otherwise positive picture.

Poland maintained its dominant position, generating over 51% of total regional investment transactions for the first three quarters of 2021, according to advisor

Colliers International. Shares within asset classes have shifted significantly, with most deals recorded in the logistics and office sectors.

Recent among these, Generali

Real Estate completed the acquisition of 7R Park Krakow IX, a core logistics asset in Poland, on behalf of the Generali Real Estate Logistics Fund (GRELF). This was the second transaction in the logistics segment in Poland between the two last year, after the acquisition of a warehouse complex in Gdansk. Indeed, despite the ongoing disruption caused by the pandemic, investment volumes for the first three quarters of 2021, totalling €7.3bn, are only down 10% yearon-year and about 20% lower than the same period in 2019. According to Colliers, year-end volumes once confirmed are likely to be at similar levels to 2020 at between €10bn-€11bn. Kevin Turpin, regional director of research, CEE, says: “We have recorded limited movements in prime yields for many markets, primarily due to the ongoing lack of transactional evidence to support further shifts. The main exception, however, is prime logistics yields that have come in by almost 100bp on average across the CEE since Q1 2020, with Poland reaching over 180bp.”

The office sector just retained top spot with a 36% share of Q1-Q3 2021 volumes. Logistics and residential continue to post increasingly strong volumes, limited primarily by the shortage of available product. Retail volumes continue to be supported by retail park and supermarket assets, while hospitality volumes remain limited. The CEE’s logistics sector was further boosted late last year after Allianz Real Estate launched a joint venture with Belgium’s VGP to invest €2.8bn in European logistics real estate across five

NREP’s 800-apartment Smartti Mokotów co-living facility is the jewel in its Polish operation years. The fourth joint venture between Allianz and developer VGP since 2016, its focus will be on the Czech Republic, Hungary and Slovakia, plus Germany. The two companies last year jointly acquired 19 assets for €424m. Also in December, Savills Investment Management acquired the 90,000 sq m 7R Park Beskid II, a multi-let logistics asset in Poland, on behalf of Vestas Investment Management from 7R and VRE, for in excess of €101m. In recent months 7R has also divested the first phase of 7R Park Lodz West II, acquired by Macquarie Asset Management on behalf of one of its managed accounts. “When preparing new investments in 7R, we focus on the high quality of our facilities, enriched with technology and ecological solutions,” says Lukasz Jachna, chief capital markets officer, 7R. “I believe we have a common goal of creating long-term value for logistics facilities.” Colliers says that overall, Western and Northern European funds contributed 42% of all investment volumes in the first three quarters of 2021, most notably Germany, the UK and Sweden. CEE capital was also active, with a 30% share of total volumes. Czech domiciled capital was also active and one such example is Zeitgeist Asset Management, which last year bought a 157-room student residence in Krakow. Czech-based real estate operator Zeitraum — a subsidiary of Zeitgeist Asset Management — runs the property. “Through this transaction, we are implementing our strategy of building a portfolio of private student dormitories in order to soon become the market leader in Poland,” Peter Noack, CEO of Zeitgeist Asset Management, says. “In autumn 2022, the currently renovated, student house in Warsaw’s Solec district will also be added to the portfolio under the Zeitgeist Student Housing brand.”

In the summer, Copenhagen-based NREP made its first investment in Poland, acquiring BIK, a local logistics real estate investor and developer with a logistics portfolio of 130,000 sq m, and investing in over 1,000 new residential apartments in central Warsaw from Finnish housing developer YIT as part of an initial €500m investment. By 2025 NREP aims to deliver a total of 10,000 new homes in major Polish cities, matching its scale in Scandinavia, with the largest project the 800-apartment Smartti Mokotów co-living facility. Poland will be NREP’s most important market in 2022, says director Rune Kock: “We hope to announce the next transactions later this year, when the contracts are signed. As with our co-living properties in Scandinavia, our projects will typically have a gym, restaurant, and common areas for work and leisure. All this is included in the lease price, as well as utilities.” Chief investment officer Jani Nokkanen says: “The private rental offering in Poland is growing, but still in its infancy compared to Denmark, Sweden or Finland. Only 16% of Poles rent their homes, and we see demand for modern, customer-friendly rental options of high quality.”

Other markets are also expanding, with a record investment year for Latvia, with total annual volumes reaching €655m, ahead of the previous record in 2015 of €395m, according to Colliers International Latvia. Martins Kokalis, head of investment promotion, Rīga Investment & Tourism Agency, says: “The vast majority [over 80%] of investment took place in Riga and, while the transaction numbers are similar to previous years, more large-scale transactions took place.” Kokalis says that over 80% of capital originated from the Baltics, notably Lithuania, Estonia, and domestic. Prime office yields compressed by 10 bps to 5.5% and prime industrial by 25 bps to 6.5%. Prime shopping centre yields held at 7.0%, with retail accounting for 51% of total volumes, followed by offices (24%), and industrial (13%). “However, looking ahead, office space dominates the development market,” Kokalis adds. “While almost no retail projects are currently under construction, over 150,000 sq m of office space is currently being built. Since the implementation of new rental regulations in 2021, investor interest in the residential rental market has also gained momentum.” Turpin believes that economies across the region have held up relatively well, although he cautions that there are several challenges ahead. “The ESG agenda has become and will continue to be a key factor for change and success when investing in real estate,” he says. “In addition, supply chain and labour issues are causing shortages and price hikes for construction materials and essential components and goods in other industries. Residential prices are spiking, causing concern over affordability, on top of the energy crisis and other inflationary pressures.”

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