CEE Investment Briefing Kevin Turpin Regional Director of Research CEE | Colliers International Budapest, January 30 th 2020
CEE Headlines for 2020 …Economies & Cycles… …Geopolitics… …Sovereign Ratings… …Data & Technology Enablers & Disrupters… …Brexit / Trade & Tech Wars... …Automotive futures… …Supply chain & fulfilment… …Growth of online sales… …Cost & Availability of Labour… …Rising construction costs… …Upward pressure on rents… …Alternatives… …Flex Space & Co - working… …Shortage of housing / Price Rises… …Land availability & Permitting… 20 Colliers International 2019
Economic Growth Cooling Across Europe CEE remains positive but risks are present GDP (Real) Growth Forecast 2020-2023 (%pa) < 1.0% 1.0 - 2.0% 2.0 - 3.0% >3.0% Source: Oxford Economics Jan 2020 21 Colliers International 2019
Retail Sales Outlook is Positive CEE markets have experienced strong wage growth Total Retail Sales (US$ PPP) Growth Forecast 2020-2023 (%pa) <2.0% 2.0 - 3.0% 3.0 - 4.0% 4.0 – 5.0% >5.0% Source: Oxford Economics Jan 2020 22 Colliers International 2019
Unemployment a Double-edged Sword Many markets face a war for talent 2019 Unemployment Rate (%) ILO Definition <3.0% 3.0 - 5.0% 5.0 - 7.0% 7.0 – 9.0% >9.0% Source: Oxford Economics Jan 2020 23 Colliers International 2019
CEE Investment flows by Country: 2007 - 2019 Volumes remain healthy at ca. €13.4 bn … How long will this last? Poland takes a 55% share in 2019 24 Source: Real Capital Analytics, Colliers International (Volumes exclude Land and Development Colliers International 2019
CEE Investment flows by Sector: 2007 - 2019 Another near record year despite the drop off in Retail. Office transactions dominate with a 51% share. 25 Source: Real Capital Analytics, Colliers International (Volumes exclude Land and Development Colliers International 2019
Sources of Capital: 2018 vs. 2019 CEE domestic players, WEU and a lot of noise about Asian capital Czech (35%) and Hungarian (68%) capital very active in their own markets Split of purchaser capital by region of origin 2019 26 Colliers International 2018
Private Equity is Chasing Returns TE EQUITY “DRY CURRENT PRIVA POWDER” 40.0 37.5 35.0 32.5 REAL ESTATE 30.0 OPPORTUNISTIC 27.5 REAL ESTATE VALUE ADDED 25.0 USD bn REAL ESTATE 22.5 DEBT 20.0 REAL ESTATE 17.5 CORE REAL ESTATE CORE- 15.0 PLUS 12.5 REAL ESTATE 10.0 SECONDARIES 7.5 REAL ESTATE FUND OF FUNDS 5.0 REAL ESTATE 2.5 DISTRESSED 0.0 REAL ESTATE CO- INVESTMENT Dec-11 Dec-13 Dec-17 Dec-01 Dec-10 Dec-12 Dec-14 Dec-15 Dec-16 Dec-18 Oct-19 Dec-07 Dec-00 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-08 Dec-09 Source: Preqin Source: Preqin 27 Colliers International 2019
CEE & German Prime Yields: Q2 2007 vs. Q4 2019 Almost all yields have well surpassed pre-GFC levels INDUSTRIAL SHOPPING MARKET OFFICES CENTRES & LOGISTICS Q2 2007 Q4 2019 Q2 2007 Q4 2019 Q2 2007 Q4 2019 GERMANY (BLENDED) 4.70 2.95 5.65 4.45 6.50 4.20 CZECH REPUBLIC 5.75 4.00 5.50 4.75 6.50 5.25 POLAND 5.75 4.50 6.50 4.00 7.50 6.50 HUNGARY 6.25 5.00 6.00 5.50 7.00 7.00 SLOVAKIA 6.50 5.50 6.50 5.00 6.75 6.50 ROMANIA 6.00 7.00 7.00 6.50 9.00 8.25 BULGARIA 8.00 8.00 7.30 7.25 9.00 9.50 28 Colliers International 2019
CEE Remains Attractive Despite Further Compression How low can we go? CEE PRIME OFFICE YIELD (%) SPREADS ACROSS TO GERMANY AND 10 YEAR EURO BONDS 370 - 770 bps spread to 10 year bonds 105 - 505 bps spread to Germany 29 Source: Colliers International, Oxford Economics Colliers International 2019
Low Interest Rates & Excess Capital What does this mean for CEE? Real estate continues to be viewed as attractive asset class vs. bonds (low-yield) and equities (hi- volatility) CEE is seen as attractive given the current risk / reward profile Large volumes of capital and low interest rates remain Indicative Debt / Margin Conditions*: ± 2.5% @ 60-70% LTC Development: < 2.0% @ 60-70% LTV Investment: *Debt & margins quoted are for Poland and will vary depending on various property related fundamentals, plus the asset class and origin of the bank. 30 Colliers International 2019
2020 CEE Outlook Positives and Negatives Positives Negatives • • Potential of rates rising and risk of inflation spike Despite some headwinds CEE economies are doing well and are more diverse than ever • Demand > Supply as owners hesitant to sell without • the opportunity for redeploying capital Effect of rate rises on CEE is not immediate as funding “yield gap” is quite wide. Yields therefore have a little more room to compress • Product availability vs. sellers expectations • Headline rents are increasing in offices and rising across • EU funding reduces as punishment for “populism” or other sectors as a result of EU political instability • Strong occupier markets for office and industrial with • Wage growth negative for the business services strong development pipelines (BPO/SSC) and industrial • Wage growth is very positive for retail • E-commerce risk continues for retail (opportunity for logistics?) • We could see some liquidity returning to the retail sector 31 Colliers International 2019
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