A group of Korean institutional investors has made its first real estate acquisition in Slovakia, driven by strong fundamentals in one of Europe’s fastest growing economies.
The group, led by London-based real estate investment manager Valesco and Seoul-headquartered asset manager AIP Asset Management, has bought Twin City Tower, a new commercial building in the capital Bratislava, from international workspace provider HB Reavis for €121m ($135.7m). According to a press release, the acquisition yield is estimated to be 5.75 percent.
Twin City Tower is located in Bratislava’s new central business district. Amazon is the principal tenant of the fully leased building, in which other multinational companies have also taken space. According to a source familiar with the transaction, the asset is expected to generate a double-digit IRR for the consortium. The source said that Korean institutions typically expect minimum cash-on-cash net returns of 6-7 percent when investing in Europe.
London-headquartered real estate investment manager The Valesco Group is responsible for originating and underwriting the investment.
Shiraz Jiwa, founder and chief executive of Valesco, said: “Having agreed the deal at the end of last year, we were able to agree on a price before the wave of international capital came in, which, in turn, is compressing yields.”
According to a JLL report, real estate transaction volumes in Slovakia touched $820 million in 2018.
PERE understands from the source close to the deal that Twin City Tower’s yields are likely to have contracted by around 25 basis points since December because of growing investor demand.
Until recently, most investors only eyed Prague and Warsaw while investing in Central Europe. However, Jiwa says some European and US investors are now interested in Slovakia, given the strong fundamentals of its real estate market and a quality tenant base. The country is one of Europe’s fastest growing economies and posted GDP growth of four percent in 2018.
“In Europe, yields are tight,” said Jiwa. “We spend a significant amount of time trying to unearth those compelling opportunities and pricing dislocations where, to be frank, either the capital hasn’t got there yet or the capital doesn’t fully understand the opportunities as yet.”
The source believes there is scope for the yield on Twin City Tower to compress over the five-year holding period to below five percent. Prime office yields are currently estimated to be 4.5 percent in Prague and 4.75 percent in Warsaw. According to another JLL report, the figures for Frankfurt and Munich are much tighter, at 3.25 percent and 3.2 percent respectively.
Korean investors have been active across Europe, including in countries across the eastern half of the continent. JLL believes this interest is driven by Korean investors’ current preference for investing in Europe over the US from a currency perspective. Given the higher competition in other major European cities, it is a natural move for Korean investors to look into the less institutionalized markets in the east.
According to JLL’s report, asset manager Shinhan Investment bought an office building in central Prague for $58 million, making it the first deal by a South Korean institution in the Czech Republic last year. South Korea’s Fire & Marine Insurance and Kiwoom Securities jointly invested $162 million in an office property in Warsaw in the same year.