Tracking Down Yields
Key Messages
Budapest Office prime total return may post +14.0%, one of the few double-digit office total returns in Europe, supported by a strong prime capital value growth +8.0%
Both the prime office (-13bps) and logistics (-10bps) markets in the CEE will see yield compression
Prime office rental growth will be strongest in Budapest (+5.0%), where demand is coming now through
2019 was a fantastic year for real estate markets in the CEE. A total of €12.5billion Euros, a record high, was attracted to the region from a diverse investor base. While foreign capital has been important, regional capital investing across borders is remarkably active. Prague is the biggest beneficiary with prime office yields falling by 75bps over 2019.
The near term outlook for total returns in the CEE markets remains impressive. Budapest (+13.2%) is among the few European markets that we anticipate could generate double-digit total return in 2020. A key driver for this is yield compression, as investors continue to search for higher yielding assets across the region. Warsaw (+9.5%) may also perform well over the 2020-2024 forecast period.
Beyond 2021, we see the level of returns tailing as yields flatten off. Although the occupational market will remain supportive, capital growth uplift will be limited. This means total return will be front-loaded and the average over the 5yr forecast period is weak for most markets: Budapest (+6.2%), Warsaw (+5.6%), Bucharest (+5.1%) and Prague (3.1%).
The occupational market will remain robust with good GDP growth and low unemployment. Over the next 3yrs the four top cities in the region will deliver approximately 2.5million sqm of new space. Prime rental growth may be positive in most markets over the forecast period. The only market expected to generate consistently negative rental growth is Bucharest due to the sheer volume of delivery.
The logistics market in the CEE is the fastest growing market in Europe. All the CEE logistics markets may generate double-digit total return in 2020, with the highest return expected in Bucharest (+13.2%). The average return in the CEE (+8.0% pa) market over the forecast period is higher than that of Europe (+6.0% pa).
Outside Stockholm, CEE is the only region where we see yield compression over the 5yr period 2020 to 2024. The key to this is developing connectivity between Asia and Western Europe running through the region increasing freight transport and demand for logistic buildings. In addition, the region is playing catch up with e-commerce penetration.
These factors are contributing to strong rental growth in the logistics market in the region. We see double-digit rental growth in Prague (+11%), Budapest (+10%) and Poznan (+9.5%) over the five year forecast period.
Similar to most of Europe, retail total return is expected to be anaemic, with yields largely unchanged at best, and rental growth limited. In Prague prime total return in 2020 of 3.3% is supported largely by income return. This is similar to Vienna, although over the forecast period average total return in Prague (+4.5%) may exceed that of Vienna (+1.0%).
The retail sector faces many challenges that are not unique to the region. In CEE new supply is limited, notably in Budapest and Prague, with increased move towards refurbishment and repositioning of older buildings amidst challenge from online retail. This trend causes polarisation in rental prospects. As such we expect prime rental growth (+2.0%) in Prague to be only in line with inflation.
Risk to the Forecast
The CEE region’s countries all have issues with external demand being highly dependent on manufactured exports. Trade induced slowdown may impact these countries more adversely because of high reliance on foreign direct investment
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
Samuel Duah