cee real estate investment market€¦ · 17 colliers international 2018 looking into the next...
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CEE Real Estate Investment market| Mark Robinson October 2018
Colliers International 20186
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
3.95.5
7.58.9
12.213.1
9.0
60
80
100
120
140
160
0
3
6
9
12
15
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD
CEE-6 total investment volume (EUR bn)
Weighted CEE-6 three sector capital value per sqm index (rhs scale)
Colliers International 20187
Polish deal flow is driving the CEE-6 in 9M 2018Office 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 20188
Inward investment: the “changing of the guard” continuesDomestic 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 20189
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
4.43.8 3.6 3.5
0
2
4
6
8
Poland Czech Rep Hungary Slovakia Romania Bulgaria
GDP (%) 2016 GDP (%) 2017 2018 estimate
1-yr change in
investment110% -52% -12% 6% -12% 3%
Colliers International 201810
The export locomotive (Germany) has lost momentumRally 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 201811
Wage growth helps consumption amidst tight labour marketsGap 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
8 810
5
11
8
1.8 2.33.6 2.8
53.5
02468
101214
Poland Czech Rep. Hungary Slovakia Romania Bulgaria
2018 estimated national wage growth (% yoy) Latest CPI (% yoy)
Colliers International 201812
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 201813
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 201814
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
0
5
10
15
20
25
30
0
1
2
3
4
5
6
US 10-year Treasury Bond yield Turkey 2-yr bond yield (rhs)
Colliers International 201815
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)
0
2
4
6
8
Weighted CEE-6 capital city commercial real estate market yield (%)
10-year sovereign US Treasury yield (%)
Colliers International 201816
State of play with prime yields – largest pools still compressingEnd Q3 2018 key sector capital city prime yields
Prime yields (change vs Q4 2017 annotated)
Source: Colliers International
4.70 4.75
6.006.50
7.25
8.25
6.50 6.25
7.757.25
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 201817
Looking into the next cycleCEE 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
CZDEN
FIN
FRA DEU
GRE
HUN
IRE
ITLNETH
NOR
POLPORT
ROM
SVK
ESP SWEUK
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
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 201818
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 201819
The peak of this cycle and beyondWe 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 201820
Colliers International | PragueSlovansky DumNa Prikope 859/22Prague 1 11000Czech Republic TEL +420 226 536 618
Mark Robinson
CEE Research Specialist | Prague
+420 226 537 646
mark.robinson@colliers.com
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