Allocator Quarterly Q1 2019

This AQ focuses on developments in the office and residential segments of the real estate markets in Central and South Eastern Europe. We invite our readers to consider new investment options available in these markets, driven partly by the emergence of the millennial generation in the region.

[CITE AQ – Q1 2019]

Real estate has long been considered an established investment asset class, part of alternative investments alongside hedge funds and commodities, and often an important element of institutional investors’ portfolios. While investing in real estate in the US and Western European markets has been very popular, especially in the extremely low interest rate environment of the last decade, real estate in the Emerging and Frontier Markets has been considered a more marginal investment proposition. Indeed, as far as Emerging Markets are concerned, investors tend not to venture further than equities and EM debt, which together typically make up the bulk of the EM allocation in an institutional portfolio.

However, real estate can often be a viable alternative to gain exposure to high-growth economies and use of the leverage element inherent to real estate investing, even at conservative levels, can make a significant contribution to total returns potentially available from this type of investment.

The significant fund flows that have been absorbed by Western European real estate since the Global Financial Crisis, compressing yields to record low levels, seem to have only selectively benefited a handful of Central European property markets. Some of the high-growth South East European markets have gone largely unnoticed by real estate investors, despite strong fundamentals and booming economies. In our Allocator Quarterly from Q3 2018, we discuss in more detail the fundamentals of economies such as Romania and Bulgaria in some detail , and venture to suggest that investing in real estate in the South East European region may be a viable alternative to gaining exposure to these vibrant economies.

It is also worth noting that in 2018 Romania came close to being upgraded from a Frontier Market to an Emerging Market by index providers , suggesting that its markets in general may begin to benefit from a higher level of investor interest going forward.

One of the main reasons why investors may not look at Central and South Eastern Europe closely as a viable source of real estate exposure is lack of knowledge of the regional real estate markets and understanding where opportunities may actually lie. Those investors who attempted to participate in these markets in the past may have entered at the peak of the global boom in 2007-2008, prior to the GFC, and have obviously suffered disproportionately as hot money vacated the region entirely in the years that followed. Also, strategies involving chasing prime assets, or focusing on very large luxury residential developments did not fare well in the extreme cycle, as such assets may have been out of sync with the needs of the local population.

For an investor, willing to take a second look at the Central and South East European region today, there is a case in selectively examining certain real estate segments in the region, as some of the more adventurous investors have already begun to do in the last couple of years. These include a number of specialist companies who raised their funds via capital markets , and have been among the first institutional investors to return to these markets post GFC.

And as far as understanding the real estate opportunity in the region, unsurprisingly it is not too dissimilar to what investors are used to expect in more established markets. To illustrate the point, in this edition of CITE Allocator Quarterly, we discuss two trends observed in Central and South East European real estate markets:

  • the increasing use of co-working spaces in capital cities in Central and South East European region, and the related need for investors to consider this trend when evaluating office space investment opportunities;
  • the emergence of the new version of the “Private Rental Sector” in the region, and the new opportunities it may create for investors wishing to gain exposure to the region’s economic growth.

We hope to hear from any of our readers with whom these topics resonate and who would like more information on any of these trends and related research.