In the context of COVID-19 pandemic, the global debt markets saw increased activity and heightened competition in Q1 as the lender pool expanded for the second consecutive quarter. Despite inflationary pressures and increasing interest rates in the U.S. in recent months with improving vaccination efforts and optimism in various economic indicators, the global debt markets remain firmly in a favorable, historically low interest rate environment.
2020 will undoubtedly go down as one of the most memorable years for all the wrong reasons. The arrival of the Covid-19 pandemic in March 2020 has impacted the CEE real estate market across all sectors. Some with positive gains, such as in the logistics sector, but others with clear negative impact, such as retail and tourism.
There is a continuing debate around the impact onto the office occupational markets where we have seen falling demand and increasing vacancy rates and an increase in sub-leasing activity. It is expected that the office sector will start to recover as we go back to our office workplaces following the successful roll-out of the vaccination program through 2021. Even with these challenges, the CEE markets continue to attract strong interest from investors, both international and domestic. However, with a shortage of available products and the impact of Covid-19, there have been volume declines across nearly all markets.
Romania was the only country in the region to show an increase in transaction volume in 2020, driven mainly by AFI’s acquisition of NEPI Rockcastle’s office portfolio.
In Romania, 2020 started with a large pipeline of transactions; several high-profile office deals were in advanced stages of negotiation. While the outbreak of COVID-19 had a significant impact on the investment market, the total transaction volume for 2020 represented a significant increase from 2019. The only country in the region to show an increase, driven mainly by the large NEPI/Rockcastle portfolio acquired by AFI. Q1 2021 property investment volume for Romania is estimated at €73.5 million, a value approximately 50% lower than the one registered in the same period in 2020. This comes on the back of a relatively healthy 2020, when transaction volume reached €892.5 million.
In Q1 2021 offices represented almost 50% of total investment volumes, followed by hotels, with 32% and industrial, with the remainder 19%. This is a trend that started with the beginning of the COVID-19 pandemic, when the only transactions that advanced were mostly offices and small industrial properties, which were not affected by the crisis to the same extent as the other types of commercial properties.
Although there is much uncertainty ahead regarding the conclusion of the COVID-19 pandemic, there is a consistent pipeline of deals which might potentially close during 2021, estimated at over €700 million. The office sector continues to show liquidity, with approximately 50% of the potential pipeline volume.
Poland continued its dominance with 57% of total CEE volume in 2020 and notably a strong year in logistics.
Polish investment market started off 2021 in good shape on the back of robust activity in the office sector. The total transaction volume reached almost €1.4 billion in Q1, which translates into the third-best opening of the year in history (surpassed only by Q1 2020 - €1.9 billion and Q1 2018 - €2.1 billion).
Good market results in Q1 were mainly influenced by the activity of office investors, committing €605 million. It is noteworthy that the majority of this volume was invested outside Warsaw. Warehouses was the second-best performing asset class, representing 29% of the total turnover and proving the continuous interest of the industrial sector. The retail segment, with 14% share, registered a portfolio deal for over €100 million (the first so significant since the outbreak of the Covid-19 pandemic), while the living sector, recognized as a rising star, was responsible for another 11%. The remaining 2% belonged to hotels, which have seen the first transaction since the end of 2019.
The evolution of the real estate market and of the property investment market has changed bank’s behavior over the last 18 months
In Romania, banks became more cautious when it comes to real estate acquisitions financing. Lenders are focusing on core assets enjoying solid track record and cash flow. Also, there is a very careful selection process when it comes to office and retail assets (excluding convenient parks which performed very well during the pandemic and for which banks still have appetite). Almost no financing goes for hospitality, for obvious reasons. Instead, we see strong appetite for logistics and residential as considered more resilient by banks.
When it comes to development financing, banks are even more cautious and are putting a special attention to the pre-let/presale ratio as financial institutions aim to limit as much as possible the commercial risk surrounding the respective development. They finance only experienced owners and developers enjoying extensive and proven track records. A common point of Romania and Poland is the focus on logistics and a very selective process for retail and office properties. This is translated into less borrower friendly conditions especially in terms of LTV (60% vs. 65% pre-Covid-19 levels) and pricing (ca. + 25-50 bps vs. pre-Covid-19 levels).
In comparison with Poland, the financing conditions remain, from a borrower's perspective, less attractive in Romania as banks are willing to provide more flexibility in terms of loan reimbursement while offering lower cost. Polish market also benefits from a wider market diversity in terms of stock, investors, and lenders, resulting in a higher level of competition between the different stakeholders which is translated into sharper yield and lower cost of funding reflecting the maturity degree of the polish economy. Reasons might be on one hand the nature of banks and investors (more institutional investors and more presence of western banks mainly Germans) and the fact that Polish RE market managed much better during the 2008 financial crisis on the other hand.
That said, we see more and more interest coming from international banks and which are willing to lend in Romania. Main break is rather the minimum ticket size to be invested which is usually around 100 m, very few assets are suitable as most of them are owned by investors funding themselves through the bond market directly.
In the medium/long term, another type of lender might enter the market as more and more insurance companies/pension funds are lending against real estate assets because of low returns on bond markets and favorable treatment under Solvency II Directive. Banks are raising more and more green bonds, and, in this respect, they have a very special focus to finance/refinance eco-friendly assets, green certification being more and more required.
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