In collaboration with
This article was written in collaboration with Property Forum
According to the RICS' Commercial Property Monitor for Q3 2018, market sentiment remains positive in Central and Eastern Europe. Strong tenants and investors' demand persists in almost all market segments but the number of signs that some markets have reached their peak continues to grow. In particular, the Czech Republic is peaking but still leads the way in market sentiment.
In Q3 2018, the value of the RICS Occupier Sentiment Index (a combined measure of occupier market indicators) grew only in the Czech Republic, while it decreased in the other four markets surveyed by RICS (Bulgaria, Croatia, Hungary and Romania). Nevertheless, the value of the index remains firmly positive for all countries, signalling that the positive momentum behind the occupier market dynamic persists.
The Czech Republic and Hungary posted the strongest readings in the region and tenant demand continued to rise across all market segments in each of the five countries. The pace of growth remained unchanged or accelerated in three of the markets (Croatia, the Czech Republic and Romania). It is worth noting that at an all-sector level, the pace of tenant demand growth in Hungary was the slowest since 2015.
Looking at supply, the availability of leasable space declined in Croatia and the Czech Republic with respondents in the Czech Republic noting the sharpest quarterly decline since 2016. In Hungary, supply remained mostly unchanged, whereas in Romania the availability of leasable space reportedly increased in the office and industrial portions of the market but remained unchanged in the retail sector. In Bulgaria, availability increased at the fastest pace since 2010 driven by strong increases in the supply of office and industrial space.
Rental projections for the coming year slightly changed from the previous quarter in Bulgaria. Contributors in Croatia have upgraded their projections for the second consecutive quarter, although growth is only expected in the prime segments of the market. Twelve-month rental expectations were revised up in the Czech Republic with respondents projecting rental values rising by nearly 4% on average, which is the strongest annual projection since the series started in 2014. In Bulgaria, the Czech Republic and Hungary prime markets are expected to outperform their secondary counterparts in the short-to-medium term.
Contributors in Hungary and Romania revised down their rental value projections for the coming year. In Hungary, the near-term outlook still appears to be reasonably solid, while in Romania growth expectations are modest for primary markets and flat to negative for secondary markets.
The value of the RICS Investment Sentiment Index (a composite indicator incorporating a range of investment market variables) decreased in Bulgaria, Croatia and Romania, remained unchanged in Hungary and increased in the Czech Republic.
The Czech Republic posted the strongest reading in the region, signalling a strongly positive trend across the investment market. Overall investment enquiries continued to rise in all areas of the market across all CEE countries surveyed by RICS. The growth was driven by the office market in Croatia and Hungary, while in the Czech Republic respondents reported a particular uptick in investor interest for retail properties. Demand from foreign investors increased in four of the five countries. Only contributors in Bulgaria noted a pullback in foreign investor enquiries for the first time in three years.
The supply of property for investment purposes increased in Bulgaria and Romania, remained unchanged in Croatia and decreased sharply in the Czech Republic. Availability also declined in Hungary, for the first time since this series began in 2014.
Europe continues to show strongest momentum at the current time helped by the ongoing stance of the European Central Bank, whose key policy interest rate remains at zero percent while their quantitative easing programme is set to run only until December.
German cities such as Berlin, Frankfurt and Munich are still recording upbeat feedback on both occupier and investor segments of the market as is the Netherlands, Portugal and some CEE markets.
"The Central and Eastern European region is as attractive as ever among property investors. However, there are clear differences within the countries. In particular, the Czech market seems to have achieved a saturation point, while Bulgaria, Croatia and Romania show more opportunities to be exploited. This suggests that investors with various risk appetite still can find the right combination of risk and rreturn across the CEE region, at least in the short run. The fundamentals of regional property markets are strong, and if funding structures will not be stretched in the future, the longer-term outlook shall remain positive. As the overall economic growth expectation across the region remains high, stable occupational demand shall be strong enough to support the sustainable development of property markets," said Péter Számely MRICS, Head of Real Estate Finance CEE at HYPO NOE Landesbank für Niederösterreich und Wien AG.
In Bulgaria and the Czech Republic, 12-month capital value projections were revised up from Q2 2018. Expectations were unchanged in Croatia and Romania and scaled back in Hungary. Prime areas are expected outperform secondary locations in all five countries. The difference is most evident in Croatia where secondary sub-markets are projected to see only marginal gains. Hungary was the only country where contributors envisage the gap between prime and secondary areas narrowing.
Fifty percent of respondents view the Czech market as expensive while the majority of contributors feel that the market offers fair value at present in the other four countries. The proportion of respondents stating that valuations are stretched continued to grow in Croatia, the Czech Republic and Hungary, while in Bulgaria and Romania, the share of those who believe that commercial real estate is fairly valued increased significantly.
The majority of contributors in Bulgaria, Croatia and Romania believe the market is in the early to middle stages of an upturn. The picture is more mixed in Hungary, where the majority of respondents (50%) believe that the market is close to peaking, whilst 39% see the market as in the early to middle stages of an upturn. Almost all respondents (89%) believe that the Czech Republic’s commercial property market is in the peak phase of the property cycle.
On balance, credit conditions remained unchanged in Bulgaria and improved in Croatia and Hungary. Sixty percent of respondents in Romania reported deteriorating credit conditions. Respondents in the Czech Republic have now reported a marginal decline in credit conditions for four consecutive quarters with the highest share of respondents noting a deterioration since this indicator was introduced in 2014.
Regional Manager CEE and Austria
Anna Orcsik is the Regional Manager for RICS in Central & Eastern Europe and Austria. Anna has more than 15 years international experience in business development, strategy development and strategy implementation.
She enjoys working across countries and cultures and is mainly driven by creating value. Her strength lies in identifying opportunities for creating synergies between countries and sectors.