cee investment briefing...3 colliers international 2019 economic growth cooling across europe cee...

CEE Investment Briefing

Kevin Turpin

London, November 6th 2019

Regional Director of Research

CEE | Colliers International

Colliers International 20192

CEE Headlines …

…Economies & Cycles…

…Brexit / Czexit?...

…Cost & Availability of Labour…

…Sovereign Ratings…

…Rising construction costs…

…Political noise…

…Upward pressure on rents…

…CEE’s car industry…

…Flex Space & Co-working…

…Growth of online sales…

…Alternatives…

…Shortage of housing / Price Rises…

…Trade wars… …Supply chain & fulfilment…

…Data & Technologies…

…Land availability & Permitting…


Economic Growth Cooling Across EuropeCEE remains positive but risks are present

GDP (Real)

Growth Forecast

2019-2022 (%pa)

< 1.0%

1.0 - 2.0%

2.0 - 3.0%

>3.0%

Source: Oxford Economics


Retail Sales Outlook is PositiveCEE markets have experienced strong wage growth

Total Retail Sales (US$ PPP)

Growth Forecast

2019-2022 (%pa)

<2.0%

2.0 - 3.0%

3.0 - 4.0%

4.0 – 5.0%

>5.0%



Unemployment a Double-edged SwordMany markets face a war for talent

2019 Unemployment Rate (%)

<3.0%

3.0 - 5.0%

5.0 - 7.0%

7.0 – 9.0%

>9.0%



CEE Investment flows by Country – 9M 2019Investment flows remain healthy at ca. €9.0 bn … How long will this last?

Source: Real Capital Analytics, Colliers International


CEE Investment flows by Sector - 9M 2019Another record year despite the drop off in Retail? Offices dominate with 59%

Source: Real Capital Analytics, Colliers International


Sources of Capital - 9M 2018 vs. 9M 2019CEE domestic players, WEU and a lot of noise about South Korean capital

Split of purchaser capital by region of origin

Biggest players in past 10 years include:

NEPI Rockcastle, Union Investment, Globalworth, GIC, CPI

Group, Deka, CA Immo, CIC, Pimco, Redefine, Invesco, Reico,

Blackstone, Mapletree, Starwood


Private Equity is Chasing Returns

Source: Preqin

CURRENT PRIVATE EQUITY “DRY POWDER”


Consolidation of Capital

HISTORICAL PE FUNDRAISING FOR EU REAL ESTATE

Source: Preqin


CEE Prime YieldsAlmost all yields have well surpassed pre-GFC levels


CEE PRIME OFFICE YIELD (%) SPREADS ACROSS TO GERMANY AND 10 YEAR EURO BONDS

CEE Remains Attractive Despite Further CompressionHow low can we go?

150 - 500 bps spread to Germany415 - 765 bps spread to 10 year bonds

Source: Colliers International, Oxford Economics


◼ECB to continue with

negative interest

policy

◼Real estate continues

to be viewed as

attractive asset class

vs. bonds (low-yield)

and equities (hi-

volatility)

◼CEE is seen as

attractive given the

current risk / reward

profile

Low Interest Rates & Excess CapitalWhat does this mean for CEE?


Freedom of movement has left some Countries stuck. Return mobility for CEE … is it realistic?

% of CEE6 population residing in EU – 2008 vs. 2018

Source: Eurostat

• Government action and private sector investment should play a role in the boomerang

• Benefits of returnee workers to economic growth and on real estate demand will be material

Factors that could provoke return mobility

Income: faster wage growth in CEE

Costs: cost of living rising faster in W Europe

Currency: FX appreciation vs EUR and GBP

Taxes: Lower personal income tax / CIT in CEE

The “Quality of Life” factor:

Overcrowding, language, status, environment


CEE residential markets continue to inflate rapidlyIt will take interest rate rises or a substantial banking crisis to derail markets

House price inflation as of June 2019 across the EU (year-on-year, %)

Source: Eurostat


What makes CEE so attractive to Corporates?Although narrowing at a fair pace, a significant gap remains.

Estimated Hourly Labour Costs - 2018

Source: Eurostat


The Coworking and Flex PhenomenonA driver or disrupter for CEE?

Source: Colliers, April 2019


The E-Commerce & Supply Chain Impact on Retail & LogisticsCan retail strike the right balance?

Source: The Sequoia Partnership, Prologis


2019-2020 CEE OutlookPositives and Negatives

Negatives

• Despite some headwinds CEE economies are doing well

• Headline rents are increasing in offices and rising across

other sectors (also typically linked linked to EU CPI)

• Wage growth positive for retail

• Development pipeline is strong

• Effect of rate rises on CEE is not immediate as funding

“yield gap” is quite wide. Yields therefore have a little

more room to compress

• Strong occupier markets for office and industrial

Positives

• Rates rising and risk of inflation spike

• E-commerce risk continues for retail (opportunity for

logistics?)

• Wage growth negative for the business services

(BPO/SSC) and industrial

• EU funding reduces as punishment for “populism” or

as a result of EU political instability

• Product availability vs. seller expectations

• Demand > Supply as owners hesitant to sell without

opportunity for redeploying capital


Colliers International Slovansky Dum

Na Prikope 22

Prague 1 11000

Czech Republic

Kevin TurpinRegional Director of Research | CEE

+420 606 725 032

[email protected]

Thank you!

cee investment briefing...3 colliers international 2019 economic growth cooling across europe cee...

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