(This was updated on 10 March on the EBRD's support programme in the 13th paragraph)
Having advised Belgian developer Ghelamco on the circa €583 million sale of the Warsaw Hub tower to Google, CBRE’s head of property investments in Poland, Sean Doyle, said the deal “firmly cements Warsaw’s position among the core investment markets globally”.
The office deal, which has been six months in the making, is no ordinary investment deal as Google invests cash to support its Polish operations. Still, it may well be one of the last mega-deals in the region for a while.
Investors have pressed the pause button on property deals in central and eastern Europe given the increased uncertainty since Russia invaded Ukraine and the proximity to the conflict. German and Austrian banks are also expected to rein in their lending to the region for the same reason.
"This is a humanitarian crisis that is causing investors to hold off and carefully monitor the situation,” said Ben Maudling, CEE director at logistics company Garbe.
Jan-Willem Bastijn, EMEA chief executive at property consultant Cushman & Wakefield, agrees but sees the sale of sizeable logistics properties and certain retail schemes proceeding.
“It’s back to core Europe,” said Bastijn. “Every crisis is the same; investors retreat to Germany, Greater Paris, the Nordics and the UK.”
The CEE region has always been a small segment of the European real estate market. Last year, a total of €11 billion-worth of property changed hands, according to property consultant JLL. Poland accounted for 58% of that volume. By contrast, European investments totalled €272 billion, according to property consultant BNP Paribas Real Estate.
Investors spent a record €2.8 billion on Polish logistics assets last year, outpacing all other sectors, according to JLL. It was the same picture in the neighbouring Czech Republic, where logistics properties accounted for 44% of the €1.64 billion spent on commercial real estate. The demand for logistics properties thanks to the pandemic-related switch to online has forced down yields. Prime yields now stand at 5.25%-5.5%, higher than the 3.5% to 4% in western markets such as Germany and the Benelux due to the perceived extra risk of investing in these markets.
Following the collapse of the Iron Curtain in the early nineties, it took years for CEE markets to be seen as core markets. Few international investors dared to venture into these countries, even after they had joined the European Union in the noughties. They were concerned about the exit for their investments given the limited liquidity in these markets and the lax planning policies, which could see a competing scheme popping up next door. Politicians have tightened planning regimes and markets in the region have become more established, attracting international investors such as Blackstone Group, Deka Immobilien and Partners Group. However, politicians cannot control liquidity.
A real estate lawyer working for a large international law firm in the region worries that “the ground we made over the past 50 years could easily be wiped out".
He would like to see tax incentives and nearshoring schemes to support the markets and could even see the European Bank for Reconstruction and Development return to the region to as the traditional lenders, German and Austrian banks, are expected to limit their exposure to the region.
“Even some financing is put on hold,” said the lawyer, speaking on the condition of anonymity.
The EBRD has pledged €2 billion to help Ukraine and neighbouring countries. In the countries nearby taking in refugees, the programme includes not only supporting refugees and helping with emergency energy purchases, but also providing trade finance and liquidity for small and medium sized companies.
German property lender Pbb Pfandbriefbank does not see its lending business in Poland and Czech Republic affected by the war next door. Chief financial officer and chief executive Andreas Arndt said the company will continue to stay focused and disciplined in the two countries.
Rising prices and interest rates were already pushing up debt before Russia invaded Ukraine. The conflict has accelerated the rising prices of energy and food globally.
Cushman & Wakefield’s Bastijn said investors worry about three things: “Inflation, interest rate and liquidity.”
The other new reality that investors will have to get their head around is investing in a country with an aggressive neighbour. Almost all CEE countries are members of both NATO and the EU, which should give investors some confidence. But that also means that they could be drawn into a bigger conflict than the one now playing out. That’s not a scenario currently on the minds of investors.
“We are assuming that war in Ukraine does not spill over,” said Richard Wilkinson, chief financial officer at CTP, a developer and owner of logistics properties in the region, during the company’s annual results presentation on Wednesday. “Assuming it stays within the borders, we expect system positive demand drivers to continue to be in place.”