What’s Ahead for CRE Investment in Eastern Europe?

A new report from Colliers sheds light on investment prospects for six key countries, including Bulgaria, Czech Republic, Hungary, Poland, Slovakia and Romania.
Mark Robinson, Colliers senior researcher, Central Eastern Europe
Mark Robinson, Colliers senior researcher, Central Eastern Europe

Commercial real estate investment in Central Eastern Europe (CEE) will far surpass 2016’s record, with more diversity than ever among investment sources, predicts the inaugural report on the six-nation region by Colliers International and global law firm CMS.

The CEE Real Estate Investment Compass 2017 examines key trends in the CRE market in Bulgaria, Czech Republic, Hungary, Poland, Slovakia and Romania over the last five years and suggests what’s likely to be coming up through the rest of 2017.

In 2016, a then record-breaking €12.2 billion ($12.9 billion) was invested in the real estate sector in the CEE region. But that’s likely to be surpassed this year, based in part on a first-quarter estimate of €2.3 billion ($2.4 billion) invested, which is a 41 percent and a 45 percent increase over Q1 2016 and Q1 2015, respectively.

“The growing maturity of the CEE region may help combat the specific risks affecting Western Europe, that of ‘Brexit’ and its reverberations, which may unfold further in 2017. Brexit’s full consequences are not yet known and some might even end up as a positive for CEE,” Mark Robinson, Colliers senior researcher, CEE, said in a prepared statement.

The targets of investment are changing in a big way. In 2012, Poland was the destination of choice, getting 69.6 percent, but by 2016 that had dropped to 37.8 percent, while Czech Republic doubled, to 31.5 percent. And based on the estimated Q1 2017 figures, Czech Republic has received 62 percent of the total real estate investment in CEE this year.

Driven by higher returns and solid prospects for rental growth in CEE, capital flows from Western Europe and the United States are expected to continue at a similar level to the €4.9 billion ($5.2 billion) reached in 2016.

But sources of investment flows into the CEE region are also expected to remain diverse in 2017, with Asian and homegrown investors becoming increasingly active there. Preliminary indications reportedly suggest significant local investor activity in Hungary and the Czech Republic and the entry of Thai investors into Czech Republic and Poland.

At 22 percent, Western Europe remained the main source of investment in the CEE real estate market in 2016, but inflows of South Africa (20 percent) and Asia (16 percent) were nearly as significant.

At this stage, there’s nothing to suggest that U.K. companies looking to make investments in CEE are holding back as a result of Brexit, though some London-based companies have said they would reconsider locations outside of the U.K. for some parts of their operations, “Brexit therefore may have some positive effects on the investment volume in real estate in Central and Western Europe, in particular in Germany, Belgium, France, Poland and non-Eurozone Nordics,” Mark Heighton, Head of UK Real Estate for CMS, said in a prepared statement.

Cross-border and domestic flows within CEE have more than doubled in the last five years, reaching €2.6 billion ($2.75 billion) in 2016. The Slovak and Czech markets were both the largest origins and destinations of CEE cross-border flow in the past five years, while lately Hungary’s domestic flows have been growing most rapidly.

“The further distance we get from 1989, the more developed the CEE markets become and the less reliant on outside investors we are,” Wojciech Koczara, a partner at CMS, added.