Q4 2022
After the solid start of 2022 and generally positive performance during its first six months, the economic growth slowed across CEE in the second half of the year, and business confidence weakened. Supply-chain disruptions and high energy prices elevated inflation, adversely impacting households’ purchasing power.
Nevertheless, consumer demand remained relatively strong in most CEE countries, boosted by the removed pandemic restrictions and supported by spending by refugees from Ukraine buying essential goods.
The recession is projected to be relatively short-lived and shallow, with economic growth subdued in 2023 and expected to recover beyond the near term. Global supply-chain disruptions are projected to abate in 2023. Also, after inflation reached new multidecade highs towards the end of 2022, it is expected to be on a downward path, though core inflation is likely to remain high at around current levels until spring 2023.
Investment activity will be confined by abnormally high interest rates and weakening demand. But despite increasing yields and the ongoing price discovery process, capital values for commercial real estate are expected to stay the same in most CEE countries due to upward rental dynamics and space shortages in many sectors across the region. Notably, the value gap in the property sector will further widen between the assets, depending on their efficiency and other quality attributes.
INDUSTRIAL MARKET
Across CEE, the fundamentals for the industrial property market remained particularly strong throughout 2022, as is further demonstrated by positive dynamics both on the supply and demand sides, along with considerable investors’ confidence in this asset class. Besides the earlier market drivers, additional demand in Q2–Q3 2022 was generated by industrial, automotive, and FMCG companies stockpiling production materials to shield themselves from expected price hikes.
At the end of 2022, the total stock of modern industrial and warehouse space in CEE exceeded 55.3 million sq m; 51% of that is situated in Poland. During the past 12 months, the new supply amounted to over 7.3 million sq m. Since early 2020, around 16.1 million sq m of modern warehousing and industrial space has been delivered in CEE, meaning the market has expanded by 49%.
Over 6.3 million sq m is presently under construction in the region, of which 54% is again in Poland. Although 44% of pipeline stock in CEE is still built on a speculative basis, the developers in the sector increasingly prefer a build-to-suit (BTS) approach to new developments in the sector. The recent slowdown in price inflation for construction materials resulted in improved availability and a shortening of the construction period.
Throughout 2022, occupiers’ activity was very healthy, with the aggregate gross take-up almost equal to the figure in 2021 but 39% and 67% higher than in 2020 and 2019, respectively. Furthermore, despite significant development activity, vacancy rates have not exceeded 6% in all CEE markets, while in Czechia stood at only 1%.
On an annual basis, prime rents increased in all the CEE markets in Q4 2022. The steepest rental growth over the past 12 months was observed in Poland (+41%y/y), Czechia (+34% y/y), and Bulgaria (+25% y/y).
The industrial segment accounted for 27% of total investment volumes in CEE in 2022. Still, the figure dropped by 34% y/y as stock available for sale remained achallenge, and investment dynamics slowed down. The significant investment transactions completed during 2022 include acquisitions of Project Danica portfolio, VidaXL, Panattoni Park Gdansk Airport, 7R portfolio, Zabka Distribution Centre and Cromwell Warsaw Portfolio in Poland, CPI Industrial Portfolio in Czechia, as well as Airport City Logistics Park in Hungary.
Over Q4, prime industrial yields have softened in all the CEE countries. Compared to Q4 2021, prime industrial yield increased in the Czech Republic (+0.75 pp), Slovakia (+0.25 pp), and Poland (+0.4 pp) but remained stable in Hungary and Bulgaria, while being lower by 0.1 pp y/y in Romania. Further dynamics of prime industrial yields are projected to differ across CEE in the coming months. Still, rental growth and healthy vacancy in the sector will remain among the key factors attracting CEE investors.
OFFICE MARKET
The office property markets in the CEE capital cities were marked by resilient occupier demand and increasing prime rents.
The occupier’s activity was healthy in 2022: aggregate total take-up grew by 18% y/y, while net absorption was not only positive in all the cities in focus but increased by an impressive 81% y/y as the aggregate figure due to annual increases of the figure in Budapest (+1021% y/y), Prague (+213% y/y), and Warsaw (+187%).
In 2022, development activity in the office sector has demonstrated differing dynamics across the CEE. During the year, new supply was particularly high in Budapest (+517% y/y) and increased in Prague (+34% y/y) but slowed down in other regional capital cities. Overall, the aggregate annual new supply in CEE in 2022 decreased by 11% y/y. The office delivery pipeline remains significant, with over 1.1 million sq m under construction in the CEE capitals, of which 62% is developed on a speculative basis. Budapest accounts for 29% of the total stock under construction.
The vacancy rates in Budapest and Bucharest were slightly higher in Q4 2022 than in the previous quarter and a year ago, having softened in all other capital cities in CEE.
In Q4 2022, prime office rent increased in Warsaw, Bucharest, and Sofia. On an annual basis, rental growth was observed in all the CEE capital cities except Budapest. Increases in construction and fit-out costs contributed to upward pressure on headline office rents, and the trend is expected to continue in 2023. At the same time, the rental gap ha
The office segment accounted for 43% of the total investment volumes recorded in the CEE for 2022 and in Q4 of the year. The acquisition of the CA Immo Portfolio in Romania was the significant office transaction reported in CEE in Q4 2022. Google’s acquisition of The Warsaw Hub in Poland remained the landmark investment transaction of the year since Q1.
During Q4 2022, prime office yields were subjected to upward pressure across CEE. Except for Sofia, in 2022, prime office yields increased in all the region’s capital cities, with the most significant correction noticed in Budapest (+0.75 pp), as well as Prague and Warsaw (+0.50 pp).
RETAIL MARKET
After the restrictions related to the COVID-19 pandemic were removed across CEE in 2022, occupier demand and rental rates continued recovering. Despite the past year's challenges, retail schemes' performance across different formats was solid, while retail sales reached or exceeded pre-pandemic figures.
However, the double-digit inflation and energy crisis resulted in retailers’ increased costs, lower margins, and the erosion of the population’s purchasing power. As a result, retailers and developers in the sector started adjusting their strategies for the near future.
Development activity in the retail markets in the CEE region primarily focuses on refurbishments and extensions of existing shopping centres, as well as the construction of smaller retail parks and convenience schemes. Several shopping centres are in the pipeline, too.
CEE is attracting new brands with over 80 new market entries registered in 2022 and more companies committed to opening their stores in 2023. In addition to international retailers, CEE also witnessed the demand of Ukrainian firms to expand to compensate for the losses caused by ongoing Russia’s invasion of their home country.
Prime retail rents in the segment of shopping malls were subject to some upward correction in Q1–Q3 2022 across CEE, mainly due to increasing energy prices, but remained stable in Q4. Positive prime rent dynamics also continued in relation to retail parks, particularly in Poland (+22% y/y in Q4 2022), driven by relatively robust occupier demand. In 2022, prime high street rents softened in Warsaw and Budapest but increased in Prague, Bucharest, and Sofia, remaining unchanged in Bratislava since Q1 2020.
Retail retained its liquidity across CEE, as investment volumes in the sector almost doubled in 2022 compared to the previous year. The key investment deal closings in the retail property sector include the sales of 50% of the M1 portfolio, 49% of EPP shares and Forum Gdansk in Poland, and the portfolio of Tesco shopping centres in Hungary and Czechia. In Q4 2022, prime yields have softened for some categories of retail space in CEE and may continue to do so in 2023.
The surging inflation was the main challenge for the retail market across CEE during 2022. Among other things, it led to the erosion of purchasing power of the population and increased service charges for the properties.
INVESTMENT MARKET
Investment volumes of over EUR2 bn for Q3 are substantial, albeit lower than the previous two quarters. This reflects the slowdown in transaction activity experienced since Q1 this year. Key deal closings this quarter (sale of Generation Y, Warsaw office by Skanska (PL), Hillwood’s Project Danica industrial portfolio (PL), and Prime Kapital ‘s sale of its Retail portfolio (RO) are transactions agreed upon and contracted at the start of the year.
Investors are all currently adjusting to the increased interest rate environment and the threat of recession; as such, we expect activity to reduce until there is more stability and visibility in the economic climate. In the meantime, current deals are taking longer to close, but within this context, we expect the usual uptick in the volume of last quarter’s deal closures.
Yields across all sectors have softened and may continue to do so into 2023. Higher yielding real estate such as retail warehousing, regional offices, or non-CBD office and some SEE markets are expected to show some resilience as they maintain a positive arbitrage to the new cost of debt. The presence of local capital in these deals and markets also allows some consistency. Traditional pan-European investors have money but take longer to engage in new transactions.
Relative value (price per sqm) and pockets of strong, structural rental growth remain key drivers attracting CEE investors.
HOTEL MARKET
Hotels across the CEE region (Bulgaria, Czech Republic, Hungary, Poland, Romania, and Slovakia) recorded a robust 104% RevPAR growth during Q4 2022 (compared to Q4 2021). The performance recovery was mainly driven by a healthy increase in average daily rates (ADR) that surpassed pre-COVID levels, while hotel occupancy levels remained below 2019.
Although a clear improvement in the KPIs across CEE, the region’s RevPAR was 21.3% lower than the European average, a gap that increased by 3.7% compared to 2019. The slower recovery of the CEE hotel sector can be attributed to the geopolitical turbulence in the region following the start of the full-scale Russian war against Ukraine. This constrained the demand in specific segments such as transient travel, leisure groups, and MICE. On the other hand, there has been increased demand from refugees escaping the conflict and higher usage of hotels by the government, military, and other authorities. This new demand helped especially the hotels in Warsaw that recorded the highest RevPAR increase in Q4 2022 (+16%) compared to the same period in 2019.
Hotel investment activity in CEE was limited during 2022, with the transaction volume reaching EUR 409 million, reflecting a 70% decline compared to 2019 (this includes hotels acquired as part of entity deals, such as the takeover of S Immo by CPI Property Group). Numerous factors contributed to a climate of uncertainty in CEE, including the Russian war in Ukraine, rising energy costs and the lack of qualified labour, Hungary’s disagreements with the European Commission, high interest rates, and overall recession concerns. This prompted investors to adopt a wait-and-see approach.
Looking ahead to 2023, transaction activity should start to recover in the second half of the year, underpinned by the investors’ need to deploy capital as well as pressure on some owners to dispose of non-core assets to address their liquidity needs, especially in case of re-financing, fund redemptions or when facing major CapEx requirements. The anti-inflationary nature of hotel real estate and the significant amount of equity raised for investment and solid performance recovery should facilitate the rebound of hotel transactions across the CEE region.
