This soft result is not at all surprising to Colliers’ consultants who estimated since the beginning of the year that the deal pipeline will slow down compared to the exceptional years 2021 and 2022, given the already difficult deal closing environment. They believe the outlook remains quite mixed, explaining that although there is more clarity on inflation, this does not necessarily translate into more clarity on financing interest rates as well.
The year’s biggest deal was the sale-and-leaseback of the warehouses of FM Logistic, which is a 3PL operator and has a portfolio of roughly 100,000 square meters in multiple cities, purchased by CTP, the leader of the local industrial and logistics (I&L) space market. The value has not been disclosed, but it was estimated at around EUR60 million. Colliers’ consultants mention that in somewhat contrast to other segments, the I&L dealmaking is hindered significantly more by the lack of available assets up for sale, as most developers tend to be long-term holders. In terms of transactional activity, this sole I&L deal accounted for roughly 36% of the year’s volume, Offices remained also an active asset class, attracting deals worth 31% of total volume in the first half of 2023, retail generated approximately 23 percent of the turnover and hotels – almost 11%.
“The market is currently in a price-discovery mode, with neither buyers nor sellers willing to be the party that ends up proven wrong by market trends in a few quarters. Hence, the divide between the expectations of buyers and sellers is, for sure, wider than it has been in the recent past. The main sticking points here are, of course, the sharply higher interest rates and, equally important, the uncertainties tied to the path of interest rates going forward. On the more positive side, we continue to see interest in local assets, including from potential new names, though maybe compared to previous years, fewer of these inquiries move into more advanced phases. We would interpret this as confidence in the country’s longer-term potential coupled with caution regarding the current backdrop”, explains Anca Merdescu, Director Investment & Debt Advisory at Colliers.
The steady growth in rents, mostly due to inflation indexation, but, in the case of I&L, also due to a shift towards a landlord’s market, has helped put a lid on upward pressures on yields to a certain extent. With the all-in financing cost at over 5.5% in the CEE region, largely driven by the jump in money market rates (three-month EURIBOR is up from -0.6% at the end of 2021 to over 3.7% as of August 2023), the cost of money is the most relevant issue, as Romanian banks remain open to funding deals assuming the buyer is comfortable with these rates. That said, Colliers’ consultants observe a clear preference towards core, income producing and ESG compliant assets is visible.
Going forward, several large deals are currently in various stages and could close in the second part of the year, taking the overall volumes for the year towards EUR500-600 million, about half of last year’s EUR1.2 billion level. Retail volumes should be a bit higher than they were in previous years as major deals could close in the coming period, predict Colliers’ consultants, who highlight that with fewer office deals closing, this could be a more balanced year in terms of overall structure.
“Overall, this is like a breather year as investors and owners take stock of what’s taking place in financial markets. Following the latest round of rate hikes, the European Central Bank, as well as the Fed, seem to be done for the moment. This means that if the expected drop in inflation materializes, and we are seeing some encouraging signs, interest rates could start decreasing late 2023 or early 2024. Meanwhile, the global economy remains sufficiently robust, with advanced economies in decent shape, including European economies, and along with falling inflation the signs are becoming encouraging for the real estate sector as we move beyond this year. Consequently, assuming no major adverse scenario surfaces, 2024 should look better than 2023 for the Romanian investment scene”, concluded Anca Merdescu.
In Central and Eastern Europe (Bulgaria, Czechia, Hungary, Poland, Romania, and Slovakia), the total investment volume fell about threefold to EUR2 billion in the first half of 2023. At the same time, the total investment volume for the whole year is estimated at EUR5 billion, which is still one of the worst results of the last ten years and more than half behind the average of the last five years of around EUR12 billion.