Central and Eastern Europe’s time in the sun may have only just begun

Dimitris Raptis
Jan-Evert Post
Joost Uwents
Yovav Carmi
Globalworth Tower, Bucharest, Romania
It would be fair to say that before the pandemic hit in the Spring of last year, the Central and Eastern European (CEE) region was one of the continent’s biggest success stories. The region averaged over 4% in GDP growth in the three years leading up to 2020, and central to this has been a thriving listed real estate sector; 2019 alone saw a record EUR 14bn in transaction value for the sector – the best result in CEE history.
With the region’s listed real estate sector booming, the pandemic bringing much of the global economy to a grinding halt couldn’t have come at a worse time. Very quickly, serious questions were being asked about whether the growth of the region’s listed real estate sector had not only plateaued but that its rapid gains might fall away with equally impressive speed.
However, fast forward eighteen months, it would seem these predictions couldn’t have been further from the truth. This is certainly the view of Dimitris Raptis, CEO of Globalworth Group, who was quick to point out that “the positive supply and demand dynamics that characterised the region over the last decade haven’t simply disappeared because the pandemic” but that much of what made the region such an attractive investment proposition still applies today.
And Raptis isn’t the only one making the case for the region. Jan Evert Post, Managing Director at CTP, is equally optimistic in his assessment, suggesting that “there are no signs of a demand imbalance coming anytime soon” and points to the region’s strong economic outlook and the continued levels of investment as key indicators of future success.
These bullish assessments of the sector’s prospects in the region are by no means grandstanding - the stats back it up. CBRE’s 2021 market outlook report showed the CEE region experienced a 5.3% fall in GDP in 2020, yet, despite this, the region’s real estate sector still saw nearly EUR 10bn in transaction value and the region is predicted to see 6.7% in GDP growth this year compared to 4.6% for the Eurozone.
So how has a developing market that is still in its relative infancy when compared with its western European neighbours proved to be resilient? “It’s simple, strong fundamentals,” says Joost Uwents, CEO of WDP. “We have unrivalled access to a strong, educated and affordable workforce, a low average cost of living and an improving GDP per capita.”
Post and Yovav Carmi, President of the GTC Management Board, agree. Strong fundamentals have been the backbone of the real estate sector’s success before the pandemic, and resilience during it. Carmi adds that it is these “great macroeconomic fundamentals” that have made the real estate sector in the region “significantly more pandemic-resistant than its neighbours”.
Clearly, the region’s strong fundamentals have helped it to weather some of the worst of the pandemic, but now attention will turn to what’s next. With investors looking to growth and recovery, what does the CEE region offer in the post-pandemic world?
WDP, Ursus Breweries' warehouse, Buzau, Romania
Turning a strong foundation into a strong future
From the outset, the pandemic has had – and continues to have – a significant impact on market dynamics. Where asset classes such as retail and hospitality have been forced to take a back seat, others such as logistics have been catapulted centre stage.
Similarly, financial constraints are causing many corporates to rethink their footprint, making markets with the strong fundamentals Uwents and Carmi eluded to even more attractive.
According to Uwents, “next to strong demand from retailers, markets within the region are also well placed to capitalise on a growing appetite to nearshore activities.” And it would appear that this is not just a prediction but an existing trend. “2020 proved to be the best-ever year for leasing of logistics real estate in Romania,” he adds, “with a take-up of over 900,000 m2 of leasable area, doubling the 2019 numbers.”
The opportunities that nearshoring is bringing the region are not just being felt by WDP. Carmi points to GTC’s recent sale of its Belgrade office portfolio for EUR 2 million above book value as a sign of what’s to come: “This sale marked one of the biggest real estate transactions in the CEE region over the last five years, but deals like this will fast become commonplace as we see a move from West to East.”
Like Carmi, Raptis believes office real estate is an area of growth for Globalworth and that nearshoring will be hugely beneficial for the company. He suggests that the office sector “will be the real winner of the pandemic” in the CEE region as cost-cutting in Western Europe starts to take precedence.
Although Carmi does not quite go this far in his assessment of the asset class, he does point to the unique dynamics of office real estate in the region: “There is really limited ability to work remotely in the region, which means the office simply hasn’t come under threat in the way it has elsewhere.”
What is interesting here is that nearshoring activities can have a hugely positive knock-on effect on certain asset classes that are otherwise struggling. Office real estate has been heavily exposed to the pandemic, with companies moving to remote working and many questioning the future value of the office as a physical asset. Yet, as the deal Carmi refers to illustrates, in the right environment, the office remains an incredibly attractive asset class.
Clearly, the CEE region is an area of real opportunity for listed real estate. Not only does it possess the necessary fundamentals to make it resilient, but it has the capacity for growth coupled with a global appetite for more affordable real estate. It seems fair to suggest it has all the ingredients for a strong future.
CTPark Bucharest West, Romania
Where sustainability leads, investment follows
There is no doubt that a resilient market is an attractive market, but resilience and returns alone are not the only things investors and operators are paying close attention to. The pandemic has placed ESG performance front and centre, and if the CEE market wants to capitalise on its strong showing over the last twelve months, it must embrace a green future.
A view endorsed by Raptis, who suggests that the focus on sustainability was steadily increasing amongst investors but that the pandemic “brought about a rapid acceleration” and that it is now the first question any prospective investor or tenant asks.
This increased scrutiny from the investment community is similarly being felt at GTC, with Carmi pointing out: “It is now critical for companies to be transparent not only financially, but socially and environmentally. Those that don’t will find themselves firmly out of favour.”
In practical terms, this means developing clear sustainability reporting frameworks to allow investors to scrutinise the claims of developers. For GTC, this means producing its annual ESG report to give investors a clear view of its progress in reaching its targets. Similarly, for Uwents and WDP, this means the development of its Climate Action Plan, which will “help the company action the 2030 and 2050 Climate goals of the EU and the European Green Deal”.
But it isn’t just about updating existing assets to meet LEED or BREAM certification but developing avenues for investors to channel funds into developments they know to be sustainable. In practical terms, for the CEE region, this means green bond issuance.
GTC Green Heart, Belgrade, Serbia
“The current demand for green bonds is substantial; they’re quickly becoming the only bonds investors are interested in,” says Post. “The vast majority of our bond investors hold green investment criteria”, noting that the CTP will only ever issue green bonds because its entire real estate portfolio qualifies as such.
It is easy to see why there is such high demand. Earlier this year, the European Commission committed to issuing over EUR 250 billion in green bonds, totalling nearly 30% of the overall recovery package, clearly showing that a green recovery was the priority.
This sudden clamour for green bonds resulted in Globalworth’s first green bond being two times oversubscribed back in July, with Raptis explaining that such high levels of interest “was previously unheard of” but predicts that “this level of interest will become the norm” before long.
These examples aside, the CEE region is by no means at the front of the pack when it comes to green bond issuance, but the early indications are that the demand is there. CTP has issued EUR 2.5 billion in green bonds in the eight months since September 2020, whilst GTC saw its EUR 500 million green bond issuance three times oversubscribed earlier this year. Both of these examples simply underline the scale of the opportunity in the region. It is vital that the real estate sector here sees sustainability not just as a box-ticking exercise but as a means of stimulating future growth.
In the summer of 2020, there was a prevailing narrative that the CEE region’s stunning success over the last decade would be consigned to history with the outbreak of the pandemic. In the 12 months since, the region has proved itself to not only be one of the most resilient markets in continental Europe but one of immense opportunity. If developers in the region can harness the opportunity that sits in front of them, then the regions time in the sun may have only just begun.