High inflation and rising interest rates have increased the banks’ caution in financing the real estate sector, but the commercial property market in Romania remains stable, with limited adjustments of the capitalization rates. In a context where the upward movement of yields in the region has been more pronounced, there has also been a decrease in the gap between the local benchmarks and the other CEE markets, according to data from the Cushman & Wakefield Echinox real estate consultancy company.
Bogdan Sergentu, Head of valuation & Consultancy Cushman & Wakefield Echinox: “The central banks injected record amounts of money into the economy in 2020 and 2021, while keeping interest rates at very low levels. These measures had also been preceded by a very long period of “quantitative easing” and very low interest rates. 2022 represented a radical change of this paradigm, with inflation and rising interest rates and therefore with a reduced appetite for less secure investments. The banking system has been impacted, with several banks in the United States dealing with bankrupcy, and the system’s reaction translated into an increased caution towards real estate financing. However, the Romanian commercial property market remained stable, with limited adjustments of the capitalization rates which, due to the more pronounced growth recorded in other countries, have started to close the gap with the yields in Central and Eastern Europe”.
The commercial real estate (office, retail and industrial projects) market is still undergoing a period of price recalibration. Lower liquidity is a natural result of these periods of uncertainty. Sellers are reluctant to dispose their assets at a discount and they tend to hold on to their properties until they have a clearer view of the general market outlook or until a forced sale is required, which occurs on very limited occasions. Buyers also want the increasing financing costs to be reflected in the pricing. This results in a mismatch between buyers and sellers, which tends to reduce the number of transactions.
The polarisation of prime and secondary assets will continue going forward, with the yields for the latter being expected to rise further than in the case of prime assets. Investment volumes are forecasted to remain moderate on the short term, picking up in H2 2023, once interest rates will stabilise.
The prime yields have seen an upward movement across all segments during 2022, due to the increasing financing costs, as the office and retail ones recorded a 25 bp spike, reaching 6.75% for both asset classes, with a 15 bp rise for industrial & logistics properties respectively,
The valuation department of the Cushman & Wakefield Echinox real estate consultancy company appraised over 400 properties with a total value of €5.7 billion in 2022, while a 15% increase of the valuation volume is estimated in 2023.
The office market continued to register a relatively high vacancy rate, while owners propose new occupancy options such as “all-inclusive” workplaces or high levels of flexibility in terms of the occupied area or of the contractual period.
Rising financing and construction costs, along with the structural ramifications of the hybrid and remote work models remain key challenges for the office sector on the short term.
The retail segment appears to be stable, registering increases in sales and turnover, coupled with a significant growth of both rental and operational expenses, amidst the backdrop of inflationary pressures.
Looking ahead, H1 2023 will not be any different. Consumers will be deal with lower real incomes and purchasing power, higher interest rates, and with still-sharp levels of inflation. The inflation should decrease starting from H2 (allowing the real wage growth to resume) and therefore the consumer confidence, and subsequently consumer spending, should improve.
The residential market has seen less transactions being closed in the last few months, a matter which has not yet been reflected in lower asking prices.
In the industrial market, we expect demand to moderate on the short term before picking up in H2 2023, as more clarity emerges around the consumer outlook. Even with this moderation, occupier demand will remain robust and should continue to surpass the pre-pandemic levels in the coming years. The search for prime logistics buildings which are strategically located near transportation hubs and well connected to the road infrastructure will intensify, as occupiers strive for operational and cost efficiency in a challenging economic environment.