The underpinning of liquidity in CEE real estate
As yields across western European markets are now either at or below the record lows seen during the last real estate cycle, investors continue to look for opportunities in markets where higher risk generates higher returns.
More or less, this has meant that capital has actively sought out the higher risk premiums, stronger growth and competitive pricing that accompany low liquidity and transitional economic structures of emerging Europe.
In this short article, we look at how this flow of capital is playing out and what this implies. We argue that in these economies, the sources of capital that are underpinning the robust growth in the real estate market are broad and varied. Over time the depth of this capital will drive risk premiums lower as the improved liquidity attracts institutional investors.
There is now escaping that big story for the emerging economies of Central and Eastern Europe through the last two years has been the weight of new, predominantly South African, capital that has flooded in. However, to focus on this story alone is to miss the bigger story of the gradual institutionalisation of emerging Europe as a real estate investment market and the broad base of global investors who have become active in the region.
Undoubtedly, CEE has been an outperformer in EMEA real estate investment over the last year. Overall volumes in the region in 2016 grew by 82% to EUR12.8bn, the fastest rate of growth in EMEA. This momentum has carried on into 2017 with a 40% growth in volumes in Q1 against the same period last year.
Almost a quarter of this investment was from public market investors – either REITs or publicly traded real estate companies. This is almost three times the level of investment from this source of capital than was recorded in the rest of Europe. Of this EURO 3bn of investment from public market investors, some 92% came from South Africa alone.
This is not the first time though that REITs in particular, have been active in the region. South Africa has arguably been following the lead that was set by CA Immo, Unibail, Segro, Atrium and others in 2010 – 2012 when public market investors were the largest investors in the region. Indeed in Q1 2011 European REITs invested just shy of EUR 2bn in CEE.
It is little wonder that South Africa captures the headlines, yet the country accounts for 21% of total investment volumes in CEE last year. Beneath this headline is a story that suggests that a rapid acceleration in investment from other capital sources, including, importantly pooled funds and institutional capital.
To break the numbers down in detail, EUR3bn was invested by public market investors in the region last year, which was a 267% increase on 2015. However, a greater EUR 5.6bn was invested by pooled funds which was a 159% increase from the year before.
Industrial conglomerates, notably the Chinese, were also active in the region, picking up assets in Croatia and the Czech Republic for almost EUR450mn. In the five years preceding this the Chinese invested just EUR 18mn. Institutional capital has also been active in the region with Allianz and GIC’s investments in Slovakia supporting almost EUR800mn of investment in 2016, compared to just EUR67mn in 2015.
Whilst undoubtedly the numbers above attest to the major role that South African capital is playing in the region, a more complete understanding of the source of capital that is investing in the region is helpful. Over time, the greater the liquidity that comes to the market as the region becomes increasingly institutionalised, the more the risk premiums that are associated with the region should begin to narrow. Particularly given the comparatively robust economic backdrop. The natural evolution of a maturing market should over time draw in private equity investors looking to rework existing assets. At the same time institutional European capital that is crowded out of core markets will look for higher returns in markets that are becoming increasingly stabilised.