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

CEE Real Estate Investment market

| Mark Robinson

October 2018

Colliers International 2018 6

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)

Source: Real Capital Analytics, Colliers International

• 9M 2018 (year to date) volume is 14% ahead of 9M 2017

13 10.1 2.9 3.8 6.5 3.9 5.5 7.5 8.9 12.2 13.1 9.0 60 80 100 120 140 160 3 6 9 12 15 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD CEE-6 total investment volume (EUR bn) Weighted CEE-6 three sector capital value per sqm index (rhs scale)

Colliers International 2018 7

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

Source: Colliers International

Split of investment flows by sector 136 1,075 3,967 3,548 290 Hotel Industrial Office Retail Other EUR mn 5,002 1,304 1,291 348 625 445 Poland Czech Rep Hungary Slovakia Romania Bulgaria EUR mn

Colliers International 2018 8

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, 9M 2018

Source: Colliers International

Split of vendors by region, 9M 2018

18.7% 9.0% 19.4% 5.5% 1.2% 15.2% 0.6% 23.3% 7.1%

24.5% 13.9% 32.4% 2.9% 1.7% 2.8% 16.9% 4.9% W Europe UK USA Other G10 Asia S Africa MENA Unknown/other CEE domestic CEE cross border

Colliers International 2018 9

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

Source: Oxford Economics, Colliers International

4.6 4.5 4.4 3.4 6.8 3.8 4.6 3.0 4.4 3.8 3.6 3.5

2 4 6 8 Poland Czech Rep Hungary Slovakia Romania Bulgaria

GDP (%) 2016 GDP (%) 2017 2018 estimate

1-yr change in investment 110%

• 52%
• 12%

6%

• 12%

3%

Colliers International 2018 10

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

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?
• 20%
• 10%

0% 10% 20% 80 90 100 110 120 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17 Feb-19

German IFO Exp. (lagged 4 months) CZ Industrial production % yoy 3MMA (rhs) *

Colliers International 2018 11

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)

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

8 8 10 5 11 8 1.8 2.3 3.6 2.8 5 3.5 2 4 6 8 10 12 14 Poland Czech Rep. Hungary Slovakia Romania Bulgaria

2018 estimated national wage growth (% yoy) Latest CPI (% yoy)

Colliers International 2018 12

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

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

15.2% 11.5%10.8% 9.9% 8.0% 6.5% 6.2% 5.6% 4.9% 4.9% 4.9% 3.9% 3.3% 3.1% 0% 2% 4% 6% 8% 10% 12% 14% 16% UK SWE NETH DEU FRA PORT ESP POL HU CZE ROM ITA SVK BULG

Colliers International 2018 13

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

Source: Colliers International

• Sofia, Prague, Budapest, Bucharest near cyclical highs, Warsaw accelerating

0% 10% 20% 30%

Prague Budapest Warsaw

0% 20% 40% 60%

Sofia Bucharest Bratislava

Colliers International 2018 14

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) (%)

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

5 10 15 20 25 30 1 2 3 4 5 6

US 10-year Treasury Bond yield Turkey 2-yr bond yield (rhs)

Colliers International 2018 15

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 (%)

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)

2 4 6 8 Weighted CEE-6 capital city commercial real estate market yield (%) 10-year sovereign US Treasury yield (%)

Colliers International 2018 16

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)

Source: Colliers International

4.70 4.75 6.00 6.50 7.25 8.25 6.50 6.25 7.75 7.25 8.50 10.00 4.00 5.00 6.00 6.00 7.00 7.25

0.00 2.00 4.00 6.00 8.00 10.00 12.00

Warsaw Prague Budapest Bratislava Bucharest Sofia

Office Industrial Retail TSC

• 10bp
• 40bp -100bp

Colliers International 2018 17

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)

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

AUT BEL BULG CZ DEN FIN FRA DEU GRE HUN IRE ITL NETH NOR POL PORT ROM SVK ESP SWE UK

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

Average capital city prime real estate yield (latest, %) Nominal GDP per capita in EUR, 2017

Colliers International 2018 18

How can CEE achieve greater liquidity?

Greater investment in the regions vs. capitals and new sectors

Proportion of commercial real estate transactions outside of capital city *

Source: Colliers International * multi-city transactions included

• 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

Sector breakdown of real estate investment volumes in UK + Germany in 2017

Source: Real Capital Analytics

2% 4% 13% 7% 74%

Senior housing Student housing Other apartments Hotels & hospitality Office, Retail, Industrial

89% 41% 39% 56% 63% 17% 75% 40% 10% 48% 15% 3%

0% 20% 40% 60% 80% 100% Poland Czechia Hungary Slovakia Romania Bulgaria 2017 9M 2018

Colliers International 2018 19

The peak of this cycle and beyond

We see the CEE real estate cycle peaking in 2019

What comes beyond it? Signals of the coming peak

• German economic sentiment well off its peaks
• Economic cycle in CEE mainly led by consumption
• Development boom in CEE real estate
• Higher headline rents in CEE office sectors
• Unemployment at record lows: labour shortages
• Wage growth not too far off 10%
• Interest rates rising, to be followed by funding rates
• NO reason for a locally-induced sharp downturn, a

more gradual slowdown is likely

• Risk aversion in Global Emerging Markets + Italy
• Global factors (US/China trade, over-gearing of

consumers/corporates) causes a bigger downdraft

• Magnitude of 2008 crisis magnified by derivatives.

=> Absent this time

• Taxation risk (the Trump-Brexit World)
• Interest rates eventually fall again

Colliers International 2018 20

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

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