Central and eastern Europe is an increasingly attractive region for investors. Its office products offer both profitable yields over the long-term and low investment risks - informs the ‘Rising Stars 2015’ report by Skanska, JLL, Colliers International and ABSL (the Association of Business Service Leaders).
There is a huge investment gap and therefore a great opportunity in CEE as it attracts only a few percent of the total value of investment transactions in Europe, even though the region is one of the biggest engines of growth on the continent with an average 4.6% GDP increase forecasted by McKinsey. CEE cities have a lot of the required fundamentals in place to drive continuous investment and development activity, according to Colliers International. This situation can change quickly with funds becoming more open to pursuing ‘non-core’ strategies. The total volume of investment transactions on the global market is expected to rise by 5% to 10% in 2015, JLL informs.
“There is a lot of money to be spent on the market mainly due to the recovery of the global economy. The number of available, attractive investment products in the countries that are at the top of investors’ lists is limited. This is why investors are increasingly attracted to safe products in CEE which offer good yields and long-term profits,” says Adrian Karczewicz, Transaction Director at Skanska Commercial Development Europe.
A safe land of opportunities
Most of the countries in the region are members of the European Union, which provides stability and a secure environment for conducting business. A total CEE population, of more than 100 million, creates a strong internal market of people who share Western values. 24% of employees in the region have university degrees. These are some of the reasons why CEE attracts many companies that decide to locate their service centres or factories there. International companies – considering their long term development plans in CEE – are key, reliable tenants of office buildings across the region. The biggest engine of the office market growth is the business services industry, which will continue to develop in CEE countries for many years to come, according to ABSL. Poland is a good example of this trend.
“The business service sector continues to constitute the largest proportion of foreign direct investment projects in Poland. Over 356 investors from all over the world now operate in the country. Thanks to this sector, Poland is fast becoming an internationally recognised brand,” says Jacek Levernes, President of ABSL, Vice President of HP Europe.
Central and eastern Europe provides investors with modern, green buildings with high technical standards, in excellent location and with easy access to public transport. The overwhelming majority of the office buildings have 90%+ occupancy.
“The core CEE markets increasingly provide high-quality product to fit investor needs, on a par with product availability in the more mature EMEA markets. Although CEE may not compete at the highest level on lease length, it can certainly compete on risk adjusted pricing,” comments Damian Harrington, Regional Director of Research for Colliers International, Eastern Europe.
Prime office yields in CEE are recognizably higher than in western countries. In 2014 they averaged 6-7.5% depending on the city, with 6% in Warsaw and Prague, 7.25% in Budapest and 7.75% in Bucharest, according to JLL.
“Although it is naturally Warsaw that leads Poland's office investment market with the most spectacular deals, we have observed growing interest in regional cities. So far, the clear front runners in terms of investment volumes have been Cracow, Wroclaw and Tricity. At the same time, other regional cities – like Poznan, Lodz and Katowice - where tenant’s demand continues to grow, are expected to catch up very quickly with investors trying to benefit from more relaxed yield profiles,” says Tomasz Puch, Head of Office and Industrial Investment, JLL.
Growing maturity of the CEE market is leading to yield compression. As Skanska states, prime yields in 2015 in CEE capitals can reach, on average, 5.75-6% in Warsaw, 7.5% in Bucharest, 5.75-6% in Prague and 7% in Poznan – a regional city in Poland.
Growing competition among investors
Investors already present in CEE are the best ambassadors for the region. German and Austrian funds are the most active. The biggest global players are being attracted by the region, for example, Skanska sold the Riverview office building in Prague to Invesco Real Estate, and the Dominikanski in Wroclaw to Union Investment. Also investors from the Middle East and Asia are allocating their capital in CEE with increasing frequency.
Central and eastern Europe is part of China’s new “Silk Road” policy, illustrating the importance China attaches to the region in its business strategy. Arrival of Chinese capital is definitely noteworthy, as well as the role of the local funds.
‘CEE Investment Report - Rising Stars 2015’ is the guide on the most attractive office investment locations in central and eastern Europe. The report has been prepared by experts from Skanska, JLL, Colliers International and ABSL and it covers a multi-dimensional analysis of the CEE region’s potential in terms of office real estate investments, broken down into individual locations. The report also contains a set of recommendations on how best to create an investment product in the most absorbent markets within CEE. The report was officially presented during the ABSL Conference held in Cracow on 16 and17th June 2015.
Full version of the ‘CEE Investment Report - Rising Stars 2015’ is available to download here.
 A new dawn: Reigniting growth in Central and Eastern Europe, McKinsey Global Institute, 2014
 China’s New Silk Road Diplomacy, Policy Paper, PISM, 2013