Patchwork Performance
by Samuel Duah
The Best in 2019
Prague logistics prime total returns are forecast to post 19.7%, the best-performing product in Europe
Prague logistics will show the strongest prime capital growth in CEE at 14.2%
The CEE region will still see some yield compression, particularly for offices and logistics in Vienna
Prime rental growth will be led by Prague logistics at 9.3%
Product in Central and Eastern Europe will show some of the strongest performance indicators over 2019 from yield competition leading to good capital growth. Market outcomes post-2020 vary making this region somewhat more 'patchwork in performance' over the forecast period.
Both Vienna (13.7%) and Prague (16.4%) exhibit the best prime returns in Europe in 2019, driven by significant yield compression already underway in Q1 2019. The returns will reduce considerably over 2020, and by 2021 may even turn negative.
The outcome means that the average returns across the forecast period will be lower for both; Vienna at 3.4% pa and Prague at 4.4%. More consistency is actually shown by other CEE markets over the 201-2023 forecast period, with Budapest (4.1% pa), Warsaw (4.2% pa) and Bucharest (5.2% pa) the best performing office markets.
Returns for the market as a whole are lower in 2019 than prime and led by Prague (7.7%). There is less volatility over the forecast period for market returns and the best will be recorded in Budapest (5.4% pa).
2019 aside, the majority of the forecast period for CEE markets is marked by falling capital values. No market will show consistent positive capital growth. Instead, returns are to be generated wholly by income return that will be mostly between 5% to 7% pa on average across the five-year forecast.
The lowest yield in the region will stand at 3.20% for Vienna offices. Yield decompression is very mixed for offices, ranging from 5 bps (Prague) to 50 bps (Warsaw). Prime rental growth is anticipated to be low or negative across many markets over the forecast period. The only market generating positive prime rental growth will be Warsaw (1.3% pa 2019 to 2023).
Prague logistics will generate the strongest return over 2019 at 19.7%, making it the best market in European real estate. It also fares very well across the whole forecast with an average return of 8.7% pa. it will be matched by Bucharest (8.7% pa) and overtaken by Budapest (9% pa).
With mostly low positive prime capital growth across the forecast period, prime yields are expected to remain unchanged in many markets. Rental growth will be positive, with Prague the top performer at 2.9% pa over 2019 to 2023. The exception is Warsaw, forecast to show no rental growth at all.
The retail market in CEE will probably show a final year of double-digit returns in 2019. Prague (15.8%) will outperform Vienna (10.9%) before falling sharply to negative in 2020. Over the forecast period Prague will average prime returns of 4.6% pa and Vienna 3.10%.
Prime yields are expected to remain stable at 3.25% in 2019 for both Vienna and Prague before decompression starts to occur, which we anticipate to be up to 25 bps in the CEE region. Although retail in CEE is catching up with other European regions in offer and brands, it is occurring at the same time as e-commerce development. Accordingly, we predict low prime rental growth for CEE overall. Vienna (0.2% pa) will be slower than Prague (2.3% pa) over the forecast period.
Risk to the Forecast
The CEE region’s countries all have issues with external demand being highly dependent on manufactured exports. Domestic demand varies greatly: Poland is expansive while Romania is facing sharp slowdown and Hungary at point of overheating. Potential for differing economic outcomes is large.
One economic commonality to the CEE region is extremely tight labour markets that may make recruiting domestically very difficult for companies, and this will possibly affect occupational markets