Direct real estate investment in CEE grew faster than any other region in Europe last year. With investment into the region growing by 82% from 2015 levels of EUR 7bn to EUR12.8bn, the CEE real estate market is now close to that of Benelux in volume and well over half that of Southern Europe.
The macro-economic case behind this acceleration is clear. The region has enjoyed healthy economic growth with IMF estimates showing that real GDP growth in CEE has come in at 3.6% and 3.1% year on year in 2015 and 2016 respectively. Though still well below pre-crisis levels, growth levels have been roughly double that of western Europe. Driven by a strong consumption led recovery after the global financial crisis, thanks to improving wages, and accommodative fiscal policies, the region has stood out as a target for real estate capital.
Furthermore, the broader backdrop has improved too. The economies of the region’s largest neighboring countries, Germany and Russia, where there remain considerable supply chain linkages has improved. A supportive commodity price environment has helped the former to return to positive economic growth by the fourth quarter of last year. In Germany, though growth is still struggling to get beyond the 2% mark, business confidence is high.
The region now faces the challenge of how to maintain this momentum as output gaps start to close. Further investment, both public and private, will be one important pillar that can help to bring economic growth back up to pre-crisis levels and support the region’s further convergence with western Europe. Looking toward the real estate sector it is encouraging therefore that capital flows into the region have been so robust.
Importantly, underpinning these have been strong occupier fundamentals with net absorption levels suggesting a clear division between core western European markets where net absorption for the first quarter of 2017 and last quarter of 2016 has been comparatively weak. In the case of London, occupier markets have been extremely weak as corporates reposition themselves after the Brexit vote. Growing and emerging European markets are seeing the opposite trend though. Much like Berlin, which was perhaps the European market which beat expectations the most last year, CEE capital cities like Prague, Warsaw and Bucharest also showed considerable momentum over the last
Of course, there remain considerable challenges for the CEE region to maintain this level of momentum. Strong net absorption masks vacancy rates that are high relative to western European levels largely thanks to high levels of supply that have come into the market in recent years. Though of course this vacancy rate can come in when supply is limited, as the example of Budapest has shown. Nonetheless the fundamental case remains robust. Economic growth is well above that of western Europe, occupier markets remain robust and as long as yields remain compressed globally CEE is likely to an attractive destination for global capital.