Central & South Eastern European Real Estate investment opportunity
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Many investors exited out of CEE/SEE real estate in the aftermath of the Global Financial Crisis, as perceptions of risk led many to revert to more traditional asset classes. Today, CEE real estate is showing signs of resurgence, as some investors are returning, with increased investment volumes in the past two years. The majority of flows have been absorbed by Poland, Czech and Hungary, with yields showing significant compression, while SEE real estate markets still offer a significant yield advantage.
Strong Global and Local Macro Backdrop
There is a broad based consensus amongst investors that global growth is on the mend, with asset volatility being at record lows of recent years.
CEE economies stand in a significantly stronger position today than they were when the financial crisis hit. CEE economies have benefited from several years of stronger growth than the rest of the EU, with strong growth forecast to continue in the medium term, and recent positive growth surprises. With inflation in check, unemployment rates near historical lows and public debt levels significantly below EU average of 91%, CEE economies are well positioned to continue benefiting from political and economic convergence with the EU.
CEE currencies have in the last few years shown very low volatility relative to past history, as well as major western currencies such as the GBP. Despite recent political problems in some countries such as Hungary, investors continue to regard political uncertainties as transitory and the implied volatility on currency futures remains low.
Against the backdrop of this improved macro environment, and after years of credit contraction post GFC, domestic banks have restarted to increase their lending to households and businesses, which we expect will continue to support the local property markets.
A significant increase in prosperity relative to the 1990s, low unemployment and attractive taxation regimes, along with targeted government measures aimed at attracting reverse migration from Western European countries are all expected to help maintain strong demand for housing and retail facilities.
Commitment to reforms to boost productivity and strengthen institutions provides a supportive business environment. The long-term goal of convergence with the EU indicate continued direction of travel to higher levels of institutional integrity and transparency throughout the region.
Increasingly a destination of choice for high tech outsourcing, CEE and SEE countries provide a home to many global blue chip and high tech companies, including amongst others Oracle, Siemens, Bosch, Amazon, HP and Huawei. With their high education levels, competitive wages and friendly tax regimes, Romania and Bulgaria top the global outsourcing rankings.
While institutional investors have taken advantage of the current low interest rate environment to explore yield and total return opportunities in Western and Central European real estate, some real estate markets and segments in SEE remain largely ignored and may offer a significant yield advantage to those investors who are prepared to look further afield.
While the global investor community was distracted with the aftermath of the GFC and developments out of China, economies such as Romania and Bulgaria, have quietly continued to grow aided by a strong government commitment to reforms of the judiciary, and an influx of multinational companies keen to take advantage of high education levels of the local populations, solid broadband infrastructure and attractive wage and taxation levels.
We believe that investors should closely look at these markets and commit to having long-term exposure to real estate asset in this region.