After the pandemic-induced recession in 2020, GDP rebounded across the CEE region in 2021.
The economic outlook for CEE has weakened substantially during the initial months following Russia’s invasion of Ukraine. In July, Moody’s Analytics slightly improved the GDP growth projections for 2022-2023, though significantly worsening the CPI outlook, with inflation now expected to exceed 10% in all the CEE countries in 2022.
The critical short-term risk factors for CEE economies include the persistent global supply chain and logistics issues originating from the residual effects of the COVID-19 pandemics, which in 2022 have been aggravated by the high inflationary pressures amid ongoing Russia’s war in Ukraine and other geopolitical tensions.
Despite the perceived economic uncertainty, H1 2022 was positive for the commercial property markets in CEE both in terms of occupier demand and investment transactions.
The industrial property market continued developing actively across CEE. This was fuelled by robust occupier demand for warehouse space, mainly from retail transformation and rapidly growing e-commerce, and the investors’ confidence in this asset class. Industrial, automotive and FMCG companies, stockpiling production materials to shield themselves from expected price hikes, also drove demand for warehousing space.
At the end of Q2 2022, the total stock of modern industrial and warehouse space in CEE exceeded 51.4 million sq m, over half of that (51%) in Poland.
Development activity in the sector remains high: the new supply reached almost 3.6 million sq m in H1 2022, with over 12.4 million sq m of modern warehousing and industrial space delivered in CEE since the beginning of 2020.
More than 7.6 million sq m is presently under construction in the region, 57% of which is ongoing in Poland. Approximately 45% of pipeline stock in CEE is built on a speculative basis, further emphasising the positive outlook for the sector.
The occupier’s activity remained robust in Q2 2022. The aggregate gross take-up was only 7% lower compared to the historic record-high figure of Q4 2021, which increased by 23% y/y, while the 12-month rolling average shows a clear upward trend, which has accelerated since Q3 2020.
Despite significant development activity in the industrial property sector, vacancy rates decreased in all CEE markets, except for Hungary, where the figure stood at around 6%.
On both quarterly and annual bases, prime rents increased in all the CEE industrial property markets. Over the past 12 months, the steepest rental growth was observed in the Czech Republic (+23% y/y) and Poland (+26% y/y).
Office property markets in the CEE countries were marked by improved occupier demand and rental dynamics during Q2 and H1 2022. The occupier’s activity continued recovering, with the aggregate total take-up in H1 2022 increasing by 40% year-on-year. Despite the office downsizing trend, net absorption was positive in all CEE capital cities during the first six months of the year and increased by 75%.
Development activity in the office sector demonstrates differing dynamics across CEE. The office delivery pipeline slowed down in Bratislava, Bucharest and Sofia, but it remains significant in Warsaw and Prague, while Budapest expects a record high annual supply in 2022. Nevertheless, in H1 2022, the aggregate new office supply in the CEE capitals decreased by 15% year-on-year, showing a growth trend on the city level only in Budapest and Bucharest.
The overall vacancy rates in Q2 2022 were higher than the figures a year ago in most capital cities in CEE. Over the past quarter, the office vacancy softened in Warsaw and Bucharest, remained unchanged in Prague and Bratislava, but slightly increased in Budapest and Sofia.
Prime office rents grew across the whole region during Q2 2022, except for Budapest and Sofia, where no rental changes were observed. In the short term, further upward pressure on headline rents is expected in CEE due to rising construction and fit-out costs.
The COVID-19 pandemic has not gone away and continues to disrupt global supply chains, but most restrictions relevant to the retail market have now been lifted across CEE. As a result, in Q2 2022, occupiers’ demand and rental rates continued recovering in many locations amid increasing footfall and retail sales.
Development activity in the retail property markets in the CEE region mainly focuses on refurbishments and extensions of existing shopping centres, as well as the construction of smaller retail parks and retail convenience schemes in regional towns.
CEE is still attracting new brands, which announced their plans to enter the markets in 2022. In addition to international retailers, the region also benefits from the increased demand from Ukrainian firms, which are expanding to compensate for the losses caused by ongoing Russia’s invasion.
In Q2 2022, prime retail rents remained relatively stable across the region, with some upward dynamics noticeable in the segment of retail parks. Some increases in prime rents were also evident in the best shopping centres in Hungary and Romania and high street retail premises in the Czech Republic. At the same time, prime high street rent corrected downwards in Poland.
Overall volumes for H1 recovered to pre-pandemic levels as a result of momentum in the latter part of 2021 and early 2022. Notable themes for sectors include increased liquidity in retail (particularly core plus and value add or retail warehousing), core plus office, and single asset and industrial property portfolios.
Throughout CEE, locally managed or originated capital remains very active in retail and core plus offices, including larger scale portfolios (such as the Tesco portfolio). International private equity is increasing its exposure via corporation acquisition (EPP partial exit), and Google’s acquisition to become an owner occupier shows that occupiers see value in owning real estate.
These high volumes disguise the downturn in sentiment since the start of Russia’s war in Ukraine and its associated weak economic outlook of rising interest rates and high inflation. As such, we expect to see lower volumes in H2 as buyers and sellers ‘wait and see’ during this period of increased uncertainty.
Despite this, we expect the capital allocations to gather pace towards the end of the year, driven by the lack of supply in the Czech Republic, strong fundamentals of low price per sq m across CEE (compared to other European markets), and rising rents (in most sectors but particularly in the industrial sector). In many cases, we should expect yields to soften but be compensated by higher rents.
The global hotel sector has been experiencing a strong performance rebound following the ease of COVID-19-related travel restrictions since last summer. Hotels in the CEE were no exception to this recovery. The average revenues per room (RevPAR) across the CEE-6 capitals (Bratislava, Bucharest, Budapest, Prague, Sofia, Warsaw) increased in H1 2022 by about 348% compared to the same period last year. Although this figure is notably lower (-27%) than the RevPAR achieved in H1 2019, the performance gap continues to diminish, especially in Q2 2022. For instance, in June 2022, the average occupancy across the CEE-6 capitals reached around 71% (-15% vs. June 2019), with hotel room rates increased to about EUR 98 on average, already surpassing 2019 levels (+0.4% vs. June 2019).
Hotel investment activity was limited during H1 2022, with the transaction volume across the CEE region totalling only EUR 110M, reflecting an 87% decline compared to H1 2019. While some hotels have been brought to market, the deal progress has been relatively slow. Investors follow important geopolitical and macroeconomic issues such as the war in Ukraine, energy and food crisis, tensions between Hungary and the European Commission, escalating inflation and interest rates, lack of labour and recession concerns. This impacts the perceived risks and costs of financing, which further alters expected returns, prompting investors to remain cautious. At the same time, rising concerns and re-financing challenges will likely moderate the sellers’ price expectations. This, combined with improvements in hotel performance, the anti-inflationary nature of hotel real estate, the wall of capital, and investor appetite for the CEE region, should allow for increased transaction volumes in the second half of 2022.