Mark Robinson, CEE research specialist, Colliers International, comments: “The faster march of domestic money helped mitigate the fall in 2017 from 2016’s record volumes from South Africa and Asia. South African funds may step back a little further in 2018; Asian money may become more active again, perhaps through portfolio deals or corporate M&A.

The mission and access routes

Further growth of domestically-sourced investment depends on the relative attraction of the asset class locally and the availability to investors of access routes. We see capital city prime real estate yields as attractive, especially relative to sovereign bonds and also relative, with the exceptions of Prague and Bucharest, to the dividend yield of equities. The baskets of listed real estate stocks we assessed have dividend yields in the range of 4% presently.

New sources sustain: Asian, South African and CEE money

Asian and South African volumes fell last year versus 2016’s breakthrough year but remained healthy at EUR 1.4bn and EUR 1.8bn respectively. It was 2016’s third new source, CEE money that performed most impressively in 2017, rising 32% to a combined (domestic and cross-border) total of EUR 3.3bn.

Momentum in cross-border flow hit an all-time high of 7% of 2017’s rising investment total for the CEE-6 of EUR 13.1bn, which itself overhauled (just) 2007’s previous record high of EUR 13.0bn.

The CEE’s net flows almost tipped positive in 2017 at just –EUR 220mn, due to that 32% jump in buying activity by regional players and an EUR 1.2bn shrinkage of sales by investors and developers. These net flow data we present for the first time show the recent leap in (net) buying by the Asian and South African funds. The USA flipped from a large net buyer of CEE-6 commercial real estate in 2014-15 to a large EUR 2bn net seller in 2017. Europe and the UK were net sellers last year, continuing recently established patterns.

The rise of the local investor

We see the rise of the local investors as a long-term positive for the CEE-6 real estate investment markets, as a core base of domestic owners provides stability and depth of knowledge. This situation pervades across G10 and Asian real estate markets. In the CEE-6, domestic buyer volumes hit cycle highs in Poland (EUR 421mn), Hungary (EUR 708mn) and Romania (EUR 35mn) last year. The Czech Republic remains out ahead with EUR 1.08bn of purchases in 2017, representing a healthy 29% of the country’s total volume, in line with long-term averages. Hungary’s 39% proportion ticked up, as did Poland’s to 8% last year, also a cycle high.

Cross-border money - the Czech cup runneth over

Czech investors represented nearly one in every seven Euros of total investment (13.5% market share) in the CEE-6 countries in 2017. This was the second-largest share of any country globally (after South Africa). The EUR 1.77bn total grew 43% year-on-year. It was the cross-border flows that accelerated, rising to EUR 691mn from just EUR 84mn a year before.

Ample money to spend saw liquidity literally spilling over into the surrounding CEE countries and Czech buyers appeared on the transaction ledger both in the CEE capital cities and purchasing assets in the regions, especially in Poland.

The other country that contributed in size to cross-border flows in 2017 was Slovakia. Slovak cross-border purchases (EUR 141mn) were over 3x domestic purchases (EUR 44mn).

What one gives one gets as Slovakia and the Czech Republic are amongst the most popular cross-border destinations for CEE-origin flows.

Will local flows rise?

Will domestic investors choose to increase their investments in commercial real estate assets? Looking at their situation overall vs. GDP, there may well be room to grow. The capitalisation of the investment opportunity in the capital and key cities is at reasonable levels, in a band between 7%-19% of national GDP. We predict a high likelihood of further growth in capitalisation: the healthy growth of nominal GDP across the region in 2018-19 we see as creating room for upside.

We see a good chance that the higher investment to GDP ratios recorded in 2017 can sustain. Czech Rep., Hungary, Bulgaria and Poland were all in the 1.0%-1.8% of GDP range last year, consistent with higher GDP per capita readings.

The most liquid market relative to its size last year was Bulgaria, where national investment amounted to one sixth of our capitalisation figure for the Sofia commercial real estate marketplace.

The access routes to market for the end investor are arguably most-developed in Hungary and Slovakia, both with significant pools of domestic mutual funds investing into commercial real estate. Mutual funds investing in commercial real estate are by contrast largely absent from the two largest markets in the region by population Poland and Romania.