Commercial property investment exceeded €8 billion across Poland, the Czech Republic, Slovakia, Hungary and Romania (CEE-5) during the first three quarters of 2019, 54% above the five-year average, with the Czech Republic taking just under a third of that total, according to the latest Savills research.
According to the report, investment in the commercial property markets of the five countries has been rising steadily since 2013, by 24% a year on average, reflecting increasing investor confidence in the CEE-5 region, which is underpinned by above EU-average economic growth, falling unemployment and growing consumerism.
Poland, as the largest economy accounting for 46% of the total GDP of the CEE-5, captured 56% of the investment activity in the first nine months of the year with over €4.5 billion. The Czech Republic saw transaction turnover reach €2.36 billion, just under one third of the total, while Hungary and Romania accounted for 6% of the total turnover each and Slovakia 3%.
Historically, cross-border investors have been the strongest players in the CEE-5 region. German, UK and Austrian investors have traditionally dominated these markets, accounting for over half of the activity, but over the past three years the share of US and German investors has dropped, while significant inflows were recorded from South Africa (14% in 2018) and Asia (12% in 2018). Most notably in the first nine months of 2019, South Korean investors increased their share of activity to 14% from 4% last year, with recent deals involving Korean capital including the sale of an Amazon warehouse in Prague, with Savills advising the buyer.
Offices accounted for over 60% of the Q1-Q3 investment volumes in the CEE-5, a strong rise from 45% in the same period in 2018. Retail investment saw its share drop to 16% from 38% last year, while the industrial investment share remained stable at 13%. A number of hotel deals, particularly in Prague and Budapest, pushed the share of hotels up to 9% in Q1-Q3 from 3% last year.
Access to good quality product as well as healthy fundamentals explain the office sector’s strong performance in Q1-Q3. Occupier take-up levels across the CEE capitals have been rising by 9% a year on average over the past five years, pushing down the average vacancy rate across Prague, Budapest, Bucharest and Warsaw. The average office vacancy rate now stands at 6.8%, down from 13.8% in 2014 and half a percentage point below last year. Prague has the lowest availability of offices with 4.6% vacancy, followed by Budapest at 5.9%, Bucharest at 8.0% and Warsaw at 8.2%.
Competition for the best assets has caused continued yield compression over the past few quarters in the region. The average prime office yield in the five countries fell to 5.24% in Q3, 30 bps lower than last year and 14 bps below the previous quarter. Prime office yields are lowest in Prague at 3.9% followed by Warsaw (4.5%) and Budapest (4.9%), while higher yields of 5.75% and 7.0% can still be achieved in Bratislava and Bucharest respectively.
Stuart Jordan, Managing Director and Head of Investment at Savills Czech Republic, says: “We have seen an increasing willingness of diverse sources of international capital to enter the Czech Republic, led by the comparative access to good quality product and healthy fundamentals. Keeping a lid on investment is the tighter supply of prime product, which is reflected in prime CBD office yields in Prague being the lowest in CEE at 3.9%, while prime logistics yields in the Czech Republic, after the latest long-lease 'big box’ transactions involving Amazon and Makro, now begin with the number 4."