Why Resolution is betting on Bucharest offices

The London-based manager has decided a market boasting 7% yields is worth buying into, despite its high vacancy rate and today’s general uncertainty towards the sector.

London-based private equity real estate firm Resolution Property has bucked the current aversion to make sizeable office bets, with the €100 million purchase of a large office complex in Bucharest.

The firm, part owned by Chinese conglomerate Fosun International, teamed up with local manager Zeus Capital Management to acquire the 430,556 square foot Floreasca Park from a fund managed by GLL Real Estate Partners, the European and US real estate manager of Australia’s Macquarie Bank.

The deal is one the largest in the office sector in the Central and Eastern Europe region since the onset of the covid-19 pandemic.

The transaction reflected a yield of 7 percent, PERE understands. The capital invested by the Resolution-Zeus venture is also understood to have been provided by Resolution’s part-owner Fosun, a demonstration that Chinese capital remains an active investor internationally, despite political headwinds both home and abroad.

Scott O’Donnell, chief operating officer at Resolution, told PERE that despite questions being raised about the future of office demand amid changing working patterns, prime office schemes with strong fundamentals would remain attractive to investors.

He said: “The property is a modern office building with good floorplate located in a good submarket of a CEE capital city. It is well-let at reasonable rents to blue-chip tenants, providing a good income return.

“Well-located, high-quality offices still offer good value, with a positive outlook. Increased transaction activity has already picked up again.”

Stelios Zavvos, chairman and chief executive officer at Zeus Capital Management, said Romania’s economic prospects should drive the returns for the complex. The country’s economy had been outperforming the EU average GDP growth until the outbreak of the pandemic, at around 4-5 percent compared to 1-2 percent across the eurozone.

“The Bucharest real estate market is now viewed by the investment community as an underpriced investment market that still offers attractive risk-adjusted returns with significant capital appreciation potential, when compared to other CEE markets,” Zavvos told PERE.

CEE offices traditionally offer higher yields than those from its Western European counterparts. Mike Barnes, an associate within the Pan-European commercial research team at Savills, told PERE: “Prime Bucharest offices have remained resilient during H1 2020 and still offer a 250 to 300 basis point discount against Warsaw and Prague.”

Part of the reason for this greater yield could reside in its greater vacancy rate to its CEE peers. Indeed, while Prague has a 6.1 percent vacancy rate, Warsaw 7.9 percent, Bucharest’s stands at 10.5 percent, an increase from the historic market equilibrium of 9 percent during the year.