Investment volumes in Central and Eastern Europe (CEE-6) fell by around 52 percent to €5.1 billion in 2023, reaching a ten-year low. Higher borrowing costs and the price gap between buyers’ and sellers’ expectations are some of the reasons why transaction volumes are significantly below the 10-year average level of ca. €10 billion. Domestic capital was the most active with an impressive 56 percent share of total regional volumes. Czech capital secured the highest share of volumes with 28 percent. This is according to a survey by Colliers presented at a meeting of Czech and Slovak investors and other financial experts active in commercial real estate.
The Czech Republic is the second most sought-after location in CEE-6
The total investment volume in the Czech Republic in Q4 2023 was €164 million, with office assets accounting for the majority of activity. The full-year results for 2023 were comparatively weak, with investment volumes reaching only €1.15 billion and declining for the third consecutive year. The 2023 volume also represented the lowest total recorded since 2014. In addition, the number of transactions only just surpassed the 40-figure mark.
Despite a slowdown of some 32 percent in investment volume, the Czech Republic remained a destination attractive enough to benefit from sufficient investor capital to defend its position as the 2nd most sought-after location within the CEE-6 region, given that nearly all within this grouping experienced a similar or greater drop off in investor activity
A recovery in retail has driven investment in the Czech Republic
In terms of sector breakdown, retail saw a recovery in 2023, leading the way with a 41 percent share of total transaction volumes, although this was mainly driven by two significant transactions. Office real estate came in second with a 34 percent share, although if measured by the number of transactions completed it would have taken the lead spot. Residential properties accounted for a 13 percent share and industrial and logistics (I&L) properties represented only 9 percent of volume.
“The growth in residential transactions was mainly driven by an increase in the number of investor groups focused on this asset class. At the same time, more developers were open to the idea of disposing of projects as the market experienced a slowdown in apartment sales. Forward purchases were the most typical model used for acquisitions of newly built residential projects that were sold to investors,” explains Omar Sattar, Head of Investment Services at Colliers, adding that the sectoral split was slightly different in the Czech Republic than in the CEE-6 region as a whole. Regionally, office transactions secured the largest share (33.7 percent), followed by retail (29 percent) and then I&L (27 percent).
Capital Values have declined
Yields continue to move out for some asset classes. This is largely due to the gap between bid and offer prices, which remains a feature of the current market conditions. However, according to Colliers, this gap is expected to narrow during 2024. “Our view of prime yields at the end of 2023 was 5.25 percent for industrial and logistics (I&L) assets, 5.50 percent for offices and 6.00 percent for shopping centres. The prime yield for office assets increased by 50 basis points compared to Q4 2022 and by 150 basis points when compared to Q4 2021. The prime yield for industrial and logistics assets increased by 25 basis points year-on-year and by 125 basis points compared to year-end 2021,” calculates Omar Sattar.
What will 2024 bring?
Expectations for 2024 can be described as moderately optimistic or even positively realistic. Given current conditions, especially in the context of persistently elevated credit costs, volumes in 2024 in the CEE-6 region could reach up to €6.0 billion. In the Czech Republic, total transaction volumes could end up at the level of previous years, i.e., ranging between €1.2 and €1.4 billion and halting the current trend of declining annual transaction volumes.
“Some transactions have already been announced, so the foundations of the investment market for 2024 have already been laid. The recent sale of Olympic Garden by CPI PG to a local investor should positively influence other investors to continue with their investment plans for further capital deployment in the Czech Republic,” comments Omar Sattar, adding: “Even more significant was the confirmed sale of the Arkády Pankrác shopping centre following a review by the Antimonopoly Authority. Real estate fund Trigea is now the proud owner, adding a new crown jewel to its growing portfolio. The reported sale price was approximately €265 million, which not only underlines the strength of Czech investor’s capital but also represents almost a quarter of the total annual investment volume of 2023.”
ESG is an important aspect of the investment world
Although the CEE region has a relatively younger real estate stock compared to Western Europe, ESG aspects can be expected to play a more important role in 2024 than in recent years. This view is supported by a recent Colliers survey of investors. According to that poll, ESG is becoming a key strategic element of investment decision-making, particularly in EMEA and APAC. The proportion of investors moving into the sale and acquisition phase of ESG-based strategies has reached 25 percent, up from just 10 percent two years ago. Thus, it can be expected that in 2024, value-added divestment and acquisition opportunities will come to the market and investors will raise capital to convert existing assets from brown to green.
Views of regional neighbours
In Slovakia, 19 investment transactions were recorded in 2023 with a total volume of approximately €668 million. The majority of transactions were in office (71 percent), followed by retail (15 percent) and industrial (14 percent). 91 percent of buyer capital came from the CEE region, with a further 7 percent from the Americas and 3 percent from the wider EMEA region.
In Q4 2023, investment returns remained in line with the previous quarter. Office yields were recorded at 6.25 percent and 7.75 percent for developments in the CBD and periphery, respectively. Industrial yields in the Bratislava region stabilised at 6.00 percent, with the national average estimated at 6.25 percent. Retail yields for traditional shopping centres were then estimated at 6.50 percent.
For 2024, it is expected that asset prices in the investment market will continue to move towards more realistic levels and achieve equilibrium. The rebalancing of prices is expected to lead to more activity in the market as buyers are under pressure to deploy capital and sellers face loan repayments and refinancing. Industrial and logistics properties will remain the preferred asset type for domestic and foreign investors. Specialist properties such as data centres and cold/dark storage will also be of interest.
