- European markets driven by eurozone distress –
- Investor activity in CEE focused on Poland and the Czech Republic

Warsaw, 9 October 2012
CBRE, the leading global property adviser, is seeing real estate investors displaying greater caution, which is leading to constrained activity in increasingly polarized real estate markets in Europe. As the 15th International Trade Fair for Commercial Property and Investment in Münich kicks off, a discernible trend is the strong focus on investment in larger, liquid, core markets perceived as “safe havens”. Investment activity contracted sharply in Central and Eastern European markets in H1 2012, falling by over half compared with the previous six months, and the focus has narrowed to concentrate on Poland and the Czech Republic. Yet figures show that Poland is a top performer with overall commercial property investment volumes worth €1.1 billion in the first three quarters of this year.

Polish companies from the real estate sector and Polish municipalities believe in showing a strong presence at EXPO REAL, Europe’s largest B2B commercial property and real estate investment fair. Last year Polish entities were the second most numerous group of exhibitors from abroad, with 45 exhibitors, behind Austria with 67 and ahead of the Netherlands with 44. This year 55 companies and entities from Poland have set up stands at the fair.

Przemysław Felicki, Associate Director, Capital Markets at CBRE Poland:

“Investors are still showing unfaltering interest in the Polish market and are eager to be present here. Even though transaction volumes are lower than last year and the processes are taking far longer than in the past, not least because securing financing has been a challenge, there are a number of large transactions in progress. For example the sale of the Warsaw Financial Centre office building by CA Immo and Pramerica Real Estate Investors is expected to be finalized by the end of this year. The value of this transaction is estimated at €210 million. Other ongoing transactions include the sale of Platinium Business Park or of the renowned Manufaktura shopping centre in Łódź, which is expected to go for a reported €400 million. Poland is being targeted by investors not only in the retail and office real estate sectors. The logistics sector is also attracting capital and there have been some huge transactions this year such as the one between Prologis and Hines worth €96 million with more expected to close this year. All in all the property investment market in Poland is expected to reach the value of €2 billion by the end of 2012.”

While investors have been manifestly reticent in the eurozone markets, they have been more active in the UK and Scandinavia. London accounted for 20% of European investment transactions in H1 2012 and attracted almost half of the global capital flowing into European markets from outside the region. Its size and pull coupled with the high quality of London’s commercial real estate is obviously still a magnet for money from around the world. The Nordic markets increased their share of the European investment market from 14% in 2011 to 18% in H1 2012.

Southern Europe is faring particularly badly – the share of the five euro periphery markets (Spain, Portugal, Italy, Greece and Ireland) in total turnover in H1 2012 fell to 4.9%, compared with 13% in 2008-09. While prime yields in stronger markets remain relatively stable, yields in southern Europe are particularly week. Elsewhere, for example in, the Netherlands and the UK regions returns are also feeble. At a sector level, prime High Street retail shows the most resilient performance, while prime office and industrial capital values have slipped back into negative territory in terms of annual changes at the European level.

Key trends in 2012
The key trends on the European markets in 2012 include weaker occupier demand in many markets resulting from economic uncertainty, stalled or still falling office rents, retailer demand very concentrated on prime city centre locations and dominant shopping centres, little finance available for development activity and investor activity maintaining a strong focus on prime assets in core markets. Overall investment activity in European markets weakened over H1 2012 with total volumes down by 22% on the previous half-year.

Peter Damesick, EMEA Chief Economist, CBRE:
“While investor sentiment has been influenced by the sovereign credit rating downgrades and the lack of a solution to the eurozone crisis, demand for prime real estate in core locations remains undiminished. Solid fundamentals have driven an increase in the number and diversity of foreign buyers looking to enter the region, which is testament to the enduring attractiveness of key cities such as London and Paris.”

Some hope is being offered by cross-regional investments which have been flowing into Europe from North America, Asia or the Middle East. The value of such direct foreign investment is estimated at €10 billion, with the office sector being the preferred segment of the market for such capital. Further acquisition activity by German spezialfonds has also been notable recently with the industry expected to grow to €50 billion over the next three to five years.

Przemysław Felicki added:
“Both trans-regional capital flows and spezialfonds activity are a distinct trend on the Polish market. Spezialfonds are active in Warsaw where they are purchasing top quality core assets in prime locations, such as the purchase of the Renaissance office building by Euro GLL or of Norway House by IVG, both in the centre of Warsaw. The value of such transactions rarely exceeds €50 million. Poland is also seeing its fair share of trans-regional investors with both Blackstone and Hines active on the Polish market. In the past year Blackstone has purchased
a number of promising regional shopping centres with a view to adding value to those assets.”

Outlook for European real estate
The prospects for European real estate are hindered by continued uncertainty over how the euro crisis will play out. Currently the main assumption is that eurozone authorities and national governments will do enough to keep the eurozone intact, but the economic outlook for 2013 is weak and recovery is expected to be slow. Key short-term implications for European real estate include weakness in occupational markets and limited, patchy rental growth, constrained investment activity, with limited availability of debt, continued market polarization, with further re-pricing outside core markets, very limited development projects and a shortage of prime space, with vacancy increasingly concentrated in lesser quality stock.