In one respect, this European market is beginning to look predictable. Just like the early to mid-2000s, competition for prime assets in Western European cities has become so intense that it has provided a reason to shift attention to Central and Eastern European (CEE) markets, particularly Poland and Russia.
Richard Ellis issued an interesting report in the middle of August suggesting that very trend, as illustrated by investment data for the first half of 2011. The report made a direct link between competition in prime Western markets and increased deal activity in CEE markets.
Indeed, both Moscow and Warsaw were included in the report’s 10 hottest investment markets. Moscow placed in fourth position behind Central London, Paris and Manchester with €1.7 billion in deals, while Warsaw was in the ninth spot with €1 billion. The report also noted that Moscow has seen a 213 percent increase over the first half of 2010, while Warsaw has witnessed a 243 percent rise.
Here is the part where CBRE made the link: “The presence of Moscow and Warsaw testifies to the growing level of activity in the main CEE market. With competition for prime assets in Western Europe intense, both markets offer large, relatively liquid alternatives, with the added value of a yield premium.”
It may be too soon to say whether there is real momentum in the CEE markets, but there are certain circumstantial pointers over and above the data.
Taking Russia as the largest of the emerging markets in Eastern Europe, Russian banks anecdotally are beginning to open up to international sponsors that want to buy real estate in Moscow. That is quite a development given to the way Russia’s lenders burned their fingers making property loans to Russian companies, some of which weren’t even in real estate as a main business. According to at least one professional that has been in Moscow since 1993, the Russian banks could become at least as competitive as international ones.
Another sign of reactivation in CEE markets is The Blackstone Group’s hiring of Dmitry Kushaev as a senior advisor in Russia as part of its plan to seek real estate investment opportunities in the former Soviet nation. Generally, where Blackstone hires, Blackstone buys.
Also adding to the unscientific pointers, the increased number of press releases related to CEE transactions seems to suggest movement towards emerging markets again. Very few deals seem to have been announced in the region late in 2010, but there are noticeably more to report on at the moment.
Europa Capital Partners, based in London, bought the Mall of Sofia in Bulgaria for €100 million on behalf of two existing funds. BPT Asset Management, which is based in Copenhagen, bought an office in Tallinn, Estonia, for a new Baltics fund. Meanwhile, Poland continues to attract substantial capital despite moans from some fund managers that yields had declined too much.
The CBRE report mentioned earlier said the CEE region overall attracted €3.7 billion in cross-border investment in the first half of the year, compared to €1 billion in 2010. Even more impressive, Poland accounted for almost half of this year’s total.
The report also concluded the UK and Spain were “weakening” markets. Southern Europe has witnessed a decrease in activity amid the sovereign debt crisis and prospects for the Euro. Total activity in Spain, Portugal and Italy dropped to €3 billion in the first half of the year, while the cities of Moscow and Prague combined nearly matched those three countries put together.
The Nordics remained strong, as did Germany, due to “strong fundamentals,” according to the report. A footnote on Germany should be added at this point, however, because the market could be set to disappoint foreign investors, as has so often been the case in the past.
For the past 12 months, Germany has impressed with economic figures that have led many to invest in the country, but this growth seems to have petered out over the summer. Economists were expecting 0.5 percent growth. Instead, Germany announced in August that its economy was at a virtual standstill at 0.1 percent – data that came too late to be captured by the CBRE report.
Reflecting much of this, CEE is now beginning to get recommended by global investment houses. Partners Group, which manages direct, debt and secondary deals on behalf of investors and has been critical of those buying prime assets in Western European markets, recently said that the CEE region with an average GDP growth of 3 to 4 percent was projected to outperform most developed countries over the next several years. But – and it is a big but – it said the region tended to correlate substantially with Western Europe, such that risks will be to the downside as long as the European debt crisis continues.
Indeed, that is the elephant in the room – the European sovereign debt crisis. Having seen the frightening events of this past summer, it is ultimately very hard to say whether CEE is a buy. Indeed, it is hard to say anything in Europe is a buy based purely on economic data and sentiment.