CEE Real Estate Investment market | Mark Robinson October 2018 CEE- - PowerPoint PPT Presentation

CEE Real Estate Investment market | Mark Robinson October 2018

CEE- 6 flows ascending the peak: “are we there, yet?” Capital values 45% higher than end 2007: similar to other asset classes Historical investment volume into commercial real estate in CEE-6 (EUR bn) CEE-6 total investment volume (EUR bn) Weighted CEE-6 three sector capital value per sqm index (rhs scale) 15 160 13.1 13 12.2 12 140 10.1 9.0 8.9 9 120 7.5 6.5 5.5 6 100 3.9 3.8 2.9 3 80 0 60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Source: Real Capital Analytics, Colliers International • 9M 2018 (year to date) volume is 14% ahead of 9M 2017 6 Colliers International 2018

Polish deal flow is driving the CEE-6 in 9M 2018 Office sector overhauling retail volumes, a sign of a cycle peak? Split of investment flows by destination Split of investment flows by sector 136 445 290 1,075 625 Poland Hotel 348 Czech Rep 3,548 Industrial 1,291 Hungary Office EUR mn EUR mn Slovakia Retail 5,002 Romania Other 3,967 1,304 Bulgaria Source: Colliers International 7 Colliers International 2018

Inward investment: the “changing of the guard” continues Domestic players important in some markets; Europe/UK/USA net sellers Split of purchasers by region of origin, Split of vendors by region, 9M 2018 9M 2018 7.1% 4.9% W Europe 18.7% 24.5% UK 16.9% USA 23.3% Other G10 2.8% Asia 9.0% 1.7% S Africa 2.9% MENA 0.6% 13.9% Unknown/other 19.4% CEE domestic 15.2% 32.4% CEE cross border 1.2% 5.5% Source: Colliers International 8 Colliers International 2018

Is slower GDP growth signaling a peak to investment? Investment in CZ is down 52% yoy but is more robust in Poland GDP growth 2016-2018E and 1-year change in real estate investment in CEE-6 GDP (%) 2016 GDP (%) 2017 2018 estimate 1-yr change in 110% -52% -12% 6% -12% 3% investment 8 6.8 6 4.6 4.6 4.5 4.4 4.4 3.8 3.8 3.6 4 3.5 3.4 3.0 2 0 Poland Czech Rep Hungary Slovakia Romania Bulgaria Source: Oxford Economics, Colliers International 9 Colliers International 2018

The export locomotive (Germany) has lost momentum Rally of EUR hit Eurozone export competitiveness: EUR is now lower German IFO vs. CZ industrial production growth German IFO Exp. (lagged 4 months) CZ Industrial production % yoy 3MMA (rhs) * 120 20% 110 10% 100 0% 90 -10% 80 -20% Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17 Feb-19 Source: investing.com, Colliers International * 3MMA = 3-month moving average of year-on-year change • A lower EUR suits the Eurozone, likely enabling export-led growth to return. But will it last? 10 Colliers International 2018

Wage growth helps consumption amidst tight labour markets Gap between wage growth and inflation is real income growth for people Our CEE wage growth estimates for 2018 and present CPI levels (% yoy) 2018 estimated national wage growth (% yoy) Latest CPI (% yoy) 14 11 12 10 10 8 8 8 8 5 5 6 3.5 3.6 2.8 4 2.3 1.8 2 0 Poland Czech Rep. Hungary Slovakia Romania Bulgaria Source: Investing.com Colliers International • Low unemployment and strong growth is driving wages skywards • • “ Labour force riddle” in CEE -6 needs solving. We see 6 ways out 11 Colliers International 2018

How will CEE-6 consumers consume in the coming years? Will ecommerce cause the extinction of shopping centres? Ecommerce as a % of total retail sales in Europe, 2017 15.2% 16% 14% 11.5% 10.8% 9.9% 12% 10% 8.0% 8% 6.5% 6.2% 5.6% 4.9% 4.9% 4.9% 3.9% 3.3% 3.1% 6% 4% 2% 0% UK SWE NETH DEU FRA PORT ESP POL HU CZE ROM ITA SVK BULG Source: Statista, Oxford Economics, Colliers International • Logistics sector looks set to benefit, either way • Other data sources suggest Statista’s ecommerce estimates for PL and CZ may be low 12 Colliers International 2018

Is the development boom in CEE offices real? Active construction vs. stock ratios have picked up Active construction / total stock (sqm) in office sector across the CEE-6 capital cities 30% 60% Prague Budapest Warsaw Sofia Bucharest Bratislava 20% 40% 10% 20% 0% 0% Source: Colliers International • Sofia, Prague, Budapest, Bucharest near cyclical highs, Warsaw accelerating 13 Colliers International 2018

Upwelling of risk in Global Emerging Markets (“GEMs”) Why? Global debt levels. Equity and credit markets to be pressured US sovereign 10-year Treasury yield and Turkish 2-year sovereign government bond yield (rhs) (%) US 10-year Treasury Bond yield Turkey 2-yr bond yield (rhs) 6 30 5 25 4 20 3 15 2 10 1 5 0 0 Source: investing.com • US bond yields are rising, as the Fed “ normalises ” interest rates and the US fiscal deficit widens • US bond yields are the “risk free rate” for GEMs. Turkey is a high -risk bellwether for everybody 14 Colliers International 2018

The CEE funding “cushion”: is it vanishing? Schematic gap between R.E yields vs. “risk free rate” for Emerging Markets CEE prime capital city weighted commercial real estate yield* versus US 10-year sovereign bond yield (%) Weighted CEE-6 capital city commercial real estate market yield (%) 10-year sovereign US Treasury yield (%) 8 6 4 2 0 Source: investing.com, Colliers International * office / industrial / TSC retail yields weighted by market capitalisation across CEE • Rise in 10Y yields is reducing the funding “cushion” (effectively a variable in the IRR potential) 15 Colliers International 2018

State of play with prime yields – largest pools still compressing End Q3 2018 key sector capital city prime yields Prime yields (change vs Q4 2017 annotated) 12.00 10.00 10.00 8.50 8.25 - 40bp -100bp 7.75 8.00 7.25 7.25 7.25 7.00 - 10bp 6.50 6.50 6.25 6.00 6.00 6.00 6.00 5.00 4.75 4.70 4.00 4.00 2.00 0.00 Warsaw Prague Budapest Bratislava Bucharest Sofia Office Industrial Retail TSC Source: Colliers International 16 Colliers International 2018

Looking into the next cycle CEE region can see lower yields in the next economic cycle Average prime capital city real estate yield * (latest, %) vs. GDP per capita in 2017 (EUR) 9.0% GRE BULG 8.0% ROM 7.0% HUN SVK 6.0% PORT POL BEL ITL CZ 5.0% NETH DEN IRE FIN Average capital city AUT NOR 4.0% ESP prime real estate yield UK SWE DEU FRA (latest, %) 3.0% 2.0% 1.0% Nominal GDP per capita in EUR, 2017 0.0% 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Source: Oxford Economics, Colliers International * weights: office 40%, industrial 20%, TSC retail 40% • As GDP per capita rises, the rising liquidity in commercial real estate should compress yields 17 Colliers International 2018

How can CEE achieve greater liquidity? Greater investment in the regions vs. capitals and new sectors Proportion of commercial real estate Sector breakdown of real estate investment transactions outside of capital city * volumes in UK + Germany in 2017 2% 4% 2017 9M 2018 Senior housing 13% 100% 89% Student housing 75% 80% 63% 7% 56% 60% Other apartments 48% 41% 40% 39% 40% Hotels & 17% 15% 20% hospitality 10% 3% 74% Office, Retail, 0% Industrial Poland Czechia Hungary Slovakia Romania Bulgaria Source: Colliers International * multi-city transactions included Source: Real Capital Analytics • If the current cycle ends sometime soon, is investment in the regions risky? • 26% of volumes in UK/Germany from non-core sectors in 2017, 14% in CEE-6 18 Colliers International 2018

The peak of this cycle and beyond We see the CEE real estate cycle peaking in 2019 Signals of the coming peak What comes beyond it? • NO reason for a locally-induced sharp downturn, a • German economic sentiment well off its peaks more gradual slowdown is likely • Economic cycle in CEE mainly led by consumption • Risk aversion in Global Emerging Markets + Italy • Development boom in CEE real estate • Global factors (US/China trade, over-gearing of consumers/corporates) causes a bigger downdraft • Higher headline rents in CEE office sectors • Magnitude of 2008 crisis magnified by derivatives. • Unemployment at record lows: labour shortages => Absent this time • Wage growth not too far off 10% • Taxation risk (the Trump-Brexit World) • Interest rates rising, to be followed by funding rates • Interest rates eventually fall again 19 Colliers International 2018

Mark Robinson CEE Research Specialist | Prague +420 226 537 646 mark.robinson@colliers.com Colliers International | Prague Slovansky Dum Na Prikope 859/22 Prague 1 11000 Czech Republic TEL +420 226 536 618 2 20 Colliers International 2018 0