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Cee Investment Market
Investment volumes in the CEE region printed at nearly EUR 6.3bn in the first semester of the year from just under EUR 6bn, which translates into a roughly 5% increase. Dig a little deeper than the headline and the good news starts turning sour: without the Residomo Czech residential portfolio deal (EUR 1.3bn) and the sale of the majority share of the GTC office and retail portfolio (around EUR 950mn), both of which are types of deals we do not normally see, the overall volume would be down quite significantly. Meanwhile, most in the region have seen increase in yields compared to end-2019 for office and retail assets.
Prime yields in CEE mid-2020, % (change in percentage points compared to end 2019)
Source: Colliers International
Romanian Investment Market
Overview
Similar to the CEE region, Romanian investment volume was up in the first half of the year, to EUR 408mn, around 18% above the first semester of 2019. Likewise, look beyond the headline and things do not look as rosy. Over one quarter of the volume came from the GTC portfolio sale to the Hungarian Optimum Private Equity Fund, which includes several office projects in Bucharest (deal estimated around EUR 116mn for Romania). Two similar-sized deals (in excess of EUR 50mn) came from the closing of the third phase of The Bridge office project (purchased by the owners of the Romanian DIY chain Dedeman) and Global City Business Park offices (purchased by Greek-owned Arion Green). In fact, nearly 86% of volumes were generated by office projects, mostly located in Bucharest.
Another reason why we cannot cheer too much the result is because we can visualize what could have been without the coronavirus pandemic. Several large big-ticket items (well in excess of EUR 100mn, including one that would have set a record for the local market in terms of size) have either been frozen or fell through. There is still some hope that if economic activity picks back up fairly soon and things return to somewhat of a normal state, some of these deals can be brought back to the table. But this is where the market has hit a major snag: while investor interest continues to exist for Romania, for sure, there is too much uncertainty regarding what will happen the future revenue stream to be able to actually do any math required to close a deal – this refers mostly to office, retail and hotels, as for industrial assets, things look much more positive.
A positive aspect we want to emphasize is that compared to the previous recession, there was no liquidity crunch this time, as banks have offered credit lines to their clients and money continued flowing towards the real estate sector, like for ongoing projects. This is also confirmed by central bank surveys: when asked, in April, how they viewed credit standards for property-backed commercial loans, the biggest local banks saw things worsening materially in the subsequent 3 months, but their responses still looked quite better than during 2009. This could also highlight the fact that banks consider yields to be more in touch with reality and there are no overheating fears for the market; lower leverage ratios than in 2008 also help, for sure.
At peak of current crisis, Banks were still not expecting to tighten loan standards as much as in 2008
Source: NBR
On the other hand, we cannot talk about the market without mentioning that Romania is probably in the least favoured position in the EU from a macrostability standpoint; it’s internal imbalances in the run-up to the coronavirus pandemic were quite worrisome and the crisis added more fuel to the fire. Consequently, from the end of the 2019 to July 2020, the spread between Romania’s 10Y Eurobond yield and Germany had widened by a full percentage point, with the country already trading in line rather with other junk-rated bonds. This is even ahead of a potential downgrade to junk from Standard&Poor’s and Moody’s (which is a real possiblity at this point in time).
In spite of a lack in benchmark trades in Romania, the CEE trend of higher yields as well as deteriorating sovereign risk for the country would have offered arguments to see a rise for both office and retail assets in Romania, but we increased only the latter. We base our decision on market talk to keep office yields unchanged (i.e. levels yet to be tested by the market in the new context) as well as the fact that before the coronavirus issue, quite a few large deals were in fairly advanced stages at sub 7% yields. And seeing as Romania has underperformed versus other CEE countries this cycle, there are just enough reasons for us to be more confident in keeping office yields flat versus a small bump. Provided the deal-making picks up, the next few quarters should confirm our thesis. Otherwise, prime I&L assets are also difficult to underpin due to a lack of major deals, but the sector’s better insulation to econmic woes does favour it a bit.
Outlook
Overall, 2020 may look like a sluggish year, with volumes in the EUR 600-700mn range, though a lot will depend on if and how the deals which were frozen or fell through during the lockdown period may be recovered. There is also potential to see some oportunistic or value-add transactions, though we would argue that it may take some time for the seller or his companies to hit trouble, requiring a fire sale approach to raise some cash quickly.
For Romania, which lagged CEE peers a bit this economic cycle in terms of real estate yield compression, this suggests a favourable starting point for when things return to normal, particularly as we remain fairly bulish on the local economy over the longer run. Still, internal risks which have led to a widening of the sovereign risk (and may lead Romania to junk-rated bonds from S&P and Moody’s within the next year) are certainly a medium-term risk.
Bond yields plunge makes commercial assets ever more interesting
Source: NBR