Analysts Expect H1 Real Estate Yield Correction

Against this backdrop, many vendors and investors are exercising caution in anticipation of a more favorable political, economic, and financial environment and, critically, more predictable yields and pricing levels. In spite of these issues, a recovery in market activity is expected across Europe and CEE, possibly beginning in the second half of the year in the view of some analysts.

The general view is that, at least for the first half of this year, there will be a period of “yield correction” with most yields moving out, reflecting concerns over interest rates and the price of borrowing. However, the time scale of this process of correction could well be longer.

Colliers have traced a total of EUR 10.7 billion in investment volume for the CEE-6 (Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia) for 2022. CEE investment volumes were down just 3.3% year-on-year but more than 20% lower than pre-pandemic levels.

Poland represented over 50% of the investment volume and remained by far the dominant CEE market with EUR 5.8 bln recorded for the year, followed by the Czech Republic with about EUR 1.7 bln and, significantly, Romania with EUR 1.25 bln. Hungary came fourth in the region with EUR 860 million, although the country traditionally comes in third after Poland and the Czech Republic concerning investor sentiment and investment volume.

The Hungarian investor Adventum’s acquisition of the 273,000 sqm Tesco portfolio in the Czech Republic and Hungary, including 14 multi-tenanted assets at various locations here, was seen as a significant deal in Hungary for 2022 in terms of magnitude. This was one of the ten largest single asset or portfolio transactions traded throughout the year, each above EUR 200 mln.

Rising Financing Costs

Colliers put prime Budapest office yields at 5.75%, with industrial at 6% and shopping centers at 6.5%. Office and shopping center yields are expected to move out, with industrial remaining constant. This still provides a yield differential of around 100 basis points compared to Prague, where prime office yields stand at 5%, industrial at 4.75%, and shopping centers at 5.75%.

“While there has been an overall lack of prime transactions to gauge new benchmarks, we have moved yields further outwards by as much as 100 basis points, in some markets, compared to only 12 months ago,” comments Josefina Kurfurstova, research analyst for CEE at Colliers.

“We cannot rule out further shifts with the ECB having recently moved its key rate to 3%, meaning all-in financing costs can now reach north of 5%. With prime yields in early 2022 having been at or below the current higher debt costs, there will naturally be a period of mismatched expectations on pricing between buyers and sellers,” she explains.

A further potential challenge is the central role of ESG in any investment decision.

“This is partially driven by changing attitudes on responsibility towards the impact of real estate on the environment, but also by increasing requirements on the financing and reporting side of things that will ultimately impact the feasibility of business models going forward,” says Kevin Turpin, regional head of CEE at Colliers.

“But we also see sustainability and green ratings moving from a ‘nice to have’ to a ‘must have’ for various players active on the market, in particular from tenants and banks. This means that investors and developers will need to react and adapt if they want their buildings to continue to be competitive and attractive in the future,” he adds.

Colliers currently estimates that year-end volumes could reach anywhere between EUR 7 bln and EUR 10 bln for 2023.

This article was first published in the Budapest Business Journal print issue of March 10, 2023.