Vladimir Bolek (IAD)
Which economic indicators or trends will have the biggest impact on the investment market and your own strategy this year?
Generally, I’m following indicators like GDP development (creation on the demand side for space), the cost of financing and yield curve development (hedging cost and financing cost impact projects cash flow), employment rate and consumer spending level and finally the nearshoring trend (slowly growing demand for industrial space in CEE). Finally, the big question which could change everything is the geopolitical situation, given the rapid growth of tension, the creation of geopolitical blocs, war scenarios, etc….
Will this year be a busier one than 2023 for investors? What was holding them back?
I don’t expect a big shift in investor behavior this year. Investors were definitely holding back last year because of the spread of instability and uncertainty, because of the increase in financing costs, and the re-pricing expectations. This year could be a bit different, especially when it comes to the expectation that the central bank will take steps to decrease base rates and other related borrowing costs. However, we expect this to have only a modest impact, because the banks will only implement any rate changes in their own products over time. Ultimately, we don’t expect that banks will significantly change their lending policy.
Given what we now know about rates, inflation and economic growth, how will financing be different than pre-Covid for real estate investors?
My view is quite simple: The lending market has entered a new phase and all market participants must accept the fact that financing will be harder to get and that there will be stricter bank criteria (LTV, occupancy, etc..), higher margin and higher risk premiums.
Iain Fanthorpe (Bluehouse Capital)
Which economic indicators or trends are you tracking most closely?
Interest rates and lending terms are the current key sensitivity for us, followed by macro level indicators/economic growth/CPI (helps gauge the occupier landscape and exit outlook). However, as we are a more counter-cyclical investor we’re not waiting for a certain uptick in indicators but more if and when. On this basis, we are currently more active sourcing opportunities today.
If you believe investors will be busier this year than in 2023, what was holding them back last year? And why will this year be different?
The mathematics simply didn’t work last year, resulting in large ask/bid differences. The result was a “sit and wait” position taken last year on both sides – driven mainly by not knowing how far interest rate/price corrections will go and (dare I say) no one wanting to make a wrong move. I think we will see more of the same for 2024 but with sector-by-sector dynamics coming into play – there are signs of smaller price discovery gaps in certain sectors/geography. Of course, the key to it all is the buy/sell strategy of the specific counter parties. We would expect pockets of liquidity this year but overall, still well below yearly averages.
What will happen to interest rates during 2024 and how will this affect your investment decisions?
The recent moves from the ECB suggest interest rates have topped out with further nominal cuts in 2024 depending on inflation trends. But we’re not going back to the cheap money times. This does provide a certain level of clarity which assists underwriting inputs and ultimately more nuanced pricing/expectations.
Do you see evidence of financing related difficulties leading to increased sales of real estate assets?
There are funding gap requirements out there (i.e. owners looking for alternative sources of finance) but not to the extent that funding difficulties are leading to fire sales. Banks have been (rightly) conservative and not overleveraged and they will always opt to extend rather than call-in loans. This also works for the borrower: why commit today at high, all-in costs if you can wait for lower interest costs and then refinance at that time? Nonetheless, it is very case-by-case specific. Maybe some pre-emptive sales will happen in 2024 and we might see more transactions being “agreed subject to” certain financing terms being achieved.
Given what we now know about rates, inflation and economic growth, how will financing be different than pre-Covid for real estate investors?
Priced at more sustainable interest rates and terms – Lower LTVs, focus on DSCR’s, borrower track record – we are reverting to norms rather than entering a period of unknowns. Banks are and will remain conservative, which is a good thing for the market generally. However, such retraction on lending terms will lead to funding gaps in certain cases – we are likely to see a growth of private funding options.
Radim Bajgar (Mint Investments)
Which economic indicators or trends will have the biggest impact on your investment strategy?
I’m following the dynamics of 5Y EUR Interest Rate Swaps and 5Y CZK IRS (debt costs and inflation), German and CZ GDP change (worrying), CZ Nominal wage growth (income)
If you believe investors will be busier this year than in 2023, what was holding them back last year? And why will this year be different?
Last year there was uncertainty regarding EUR and CZK inflation development and EUR rates hikes, increasing vacancy in the German office sector and elsewhere. You had pressure on office and other valuations and an unwillingness by on the part of owners to admit the lower valuations (higher yields) required by willing buyers. Also the market was dry.
This year will be better, with more transactions. 5Y EUR and CZK IRS have stabilized and inflation seems to be a bit more under control, though the future inflation outlook looks substantially higher than 2% central banks’ target, which is reflected in 5Y IRS. But there will be more forced sellers on the market (funds maturing, outflows from others) and there is still equity willing to buy, based on valuations that are now reasonable.
In addition, an increasing number of investors understand better the pressure to invest in green or light-green buildings. Sellers also seem to be beginning to understand that they have to create contingencies for CAPEX costs as part of the exit process. But this realization is coming slowly. The EU green deal will prove very costly.
Where do you think interest rates will go during 2024 and how does your prediction affect your investment decisions?
I never look at short-term 3M rates but I follow 5Y IRS. These are crucial for investment. I think EUR IRS can gradually improve/fall slightly in 2024 5Y from 2.7% at the moment to around 2.4-2.5%. CZK 5Y IRS will also fall slightly. We have to get used to higher long-term inflation and higher rates. The past decade of no inflation and zero rates will not repeat. It led to a major misallocation of capital and ultimately to this crazy “Lady Inflation”. There’s too much of a global mess, the Green deal will be expensive, and deglobalization is underway. I see the current level of 5Y EUR and CZK IRS as a good basis for deriving and extrapolating valuations for new long-term investment.
Do you see evidence of financing related difficulties leading to increased sales of real estate assets?
Refinancings can be a problem, as major CZ banks now require some 60% of new deals/extensions to be green or light-green buildings. It will force some holders to consider exits within a couple of years, unless they want to take on high financing or invest a lot — if they can and if they know how.
Given what we now know about rates, inflation and economic growth, how will financing be different than pre-Covid for real estate investors?
First, major banks want to go green/light-green. They shape the market. Benko’s crash spooked major Austrian and German banks. Banks will be very careful about where they lend and at what margins. Financing is not going to be cheap for some years. This has to be taken into account for new investments and together with green pressure has to be reflected in yields on non-green buildings, which is a majority of the market.
Lenka Kostrounova (ČSOB)
Which economic indicators or trends will have the biggest impact on the investment market?
One of the main trends in 2024 will be the crucial focus on the ESG agenda, followed by conservative structures (meaning LTV round 50 – 55%) allowing banks to fund reserve accounts for the possible upgrade of financed asset (to enhance sustainability).
The third new element is the recent successful massive green bond issued by CTP and P3 with interesting margins (ranging between 207 – 220 bps). This initiative could influence the loan market during 2024 in that top players with green assets could have more than just relatively expensive bank loans as a source of finance.
Will this year be busier on the investment front than 2023?
My guess is that investors will be little bit busier in 2024 – there is still a lack of projects to be sold, but the expected decrease in interest rate might help the market.
What will happen to interest rates during 2024?
I expect a further decrease in CZK (currently being 6,25%), followed by EUR by the end of the year.
Do you see evidence of financing related distress leading to increased sales of real estate assets?
One can expect to see a financial gap in the market – given relatively high inflation, rising yields, a decrease in values and the focus on ESG: difficulties with refinancing is expected particularly for older/non-sustainable assets. Sooner or later, we will see sales of older assets which might have difficulties with refinancing due to non-compliance with ESG.
How will financing be different than pre-Covid for real estate investors?
There will be limited appetite on the market to finance “older” assets – particularly non-ESG compliant assets whose owners are reluctant (or unable) to upgrade. On the other hand, prime projects prepared by experienced developers/investors that meet all quality and sustainability standards will have full access to financing. My guess is that even the margins might be slightly lower, particularly for EU taxonomy-compliant assets.
Richard Wilkinson (CTP)
If you believe investors will be busier this year than in 2023, what was holding them back last year? And why will this year be different?
The main issues were fear and paralysis.
What will happen to interest rates during 2024?
I think short-term rates will probably fall in the second half of the year, while long-term rates will trade in a relatively tight range.
Do you see evidence of financing related difficulties leading to increased sales of real estate assets?
Not generally, there are some specific cases where companies need to deleverage that create some opportunities.
How will financing be different than pre-Covid for real estate investors?
Banks will continue to support their larger and stronger clients with longer track records bond markets will reopen for stronger credits smaller players will get financing, it will just be less, more expensive and a worse structure.
Pavel Streblov (Penta Real Estate)
What was holding back investors last year? And will this year be different?
With respect to residential sales, we see a pick-up in demand, a lot of end-users and investors are trying to lock in current prices with the hope that they will be able to secure more advantageous financing at the time of delivery of apartments in 1-2 years. With respect to the commercial segment, I do not expect any major change on the side of international investors. For them other markets will likely remain more attractive that the Czech Republic. I expect that the market will remain dominated by local investors.
What will happen to interest rates during 2024 and how does your prediction affect your investment decisions/advice to clients?
I expect the interest rates to decrease both in the Czech Republic and in the Eurozone. This should have an overall positive impact in the market, it should contribute to the stabilization of yields and narrowing of the gap between sellers and buyers’ expectations.
Do you see evidence of financing related difficulties leading to increased sales of real estate assets?
No, however higher rates make it more challenging to achieve historical LTVs. I see issues with respect to refinancing of existing projects among asset holders who might require additional equity or mezz-financing.
Given what we now know about rates, inflation and economic growth, how will financing be different than pre-Covid for real estate investors?
There will be a medium-term higher risk margin for real estate (especially commercial), however in the long-term I do not expect any major changes.
Omar Sattar (Colliers)
Which three economic indicators or trends will have the biggest impact on the investment market and your own strategy?
I’ll be keeping my eyes on (i) inflation, (ii) the base interest rates of EU, CZ and US (given that the US generally leads off) and (iii) GDP growth.
If you believe investors will be busier this year than in 2023, what was holding them back last year? And why will this year be different?
I think there will be a marginal improvement in investor activity i.e., a modest uptick. There were a series of factors that “held back investors in 2023”. To name just a couple, the recent rise in interest rates has made borrowing more expensive, which impacts investment returns for those relying on debt. These higher interest costs made investors re-appraise the price they were prepared to pay for an asset, as higher debt costs mean you either accept lower returns or offer a lower purchase price. The fact that lower risk investments such as long-term government bonds now produce reasonable returns also puts downward pressure on real estate prices.
In 2023, pricing for real estate was being “re-priced”. Since not everyone adjusts their attitudes as quickly as the financial markets seem to, the expectations of buyers and sellers were often misaligned, thus slowing down transactions. Similarly, buyers are generally seeking to time the market, even if this is often more a matter of luck than of design. This year, I expect buyers and sellers to have absorbed the new reality, increasing the chances that more transactions could be concluded.
What will happen to interest rates during 2024 and how does your prediction affect your investment advice to clients?
I think a drop in interest rates (especially coming from the ECB) will materialize in H2 2024. This will serve as a “watershed moment” for an increasing number of investors to begin acquiring property again. This will occur first in more western or developed markets but will also feed into the CEE and Czech markets.
Do you see evidence of financing related difficulties leading to increased sales of real estate assets?
I do in some instances. You generally don’t see property prices peak and then drop without some owners of real estate ending up in financial difficulties. There will be owners who simply timed it wrong. Others will be hit by an unforeseen negative event. I am not expecting the market to be awash with distressed sales, however I do expect to see some. Real estate moves in a cycle and a distressed market situation is one of the phases of a typical cycle.
Given what we now know about rates, inflation, and economic growth, how will financing be different than pre-Covid for real estate investors?
I expect banks to be more conservative on their LTV ratios. From what I’ve seen, banks are currently focused on the debt service coverage ratio. They expect the annual income from a property to be 20% higher than the amount of the annual loan repayment cost. Also, the long-term future of the asset -operationally and from an ESG perspective is high on the bank’s agenda when considering whether to finance property.
Ryan Wray (Avison Young)
Which three economic indicators or trends will have the biggest impact on the investment market and your own strategy?
Inflation: this will impact borrowing costs and directly real estate pricing and returns.
GDP: in combination with inflation, this will give foreign investors a picture of overall economic performance particularly on the manufacturing sector. A strong indicator here will attract FDI and encourage expansion of companies.
Wage growth: this will encourage renewed interest from retail investors in the local retail funds.
If you believe investors will be busier this year than in 2023, what was holding them back last year? And why will this year be different?
They will be busier. Since year-end 2023 values have been adjusted to current market pricing, investment and asset managers can again exit without impairment. In short, the expectations of sellers and buyers are now more aligned. There is also a lot more optimism about the speed at which interest rates will come in, also encouraging investors to commence the acquisition process today.
Do you see evidence of financing related difficulties leading to increased sales of real estate assets?
Absolutely. Older assets that have large CAPEX needs, driven in part by ESG compliance, will struggle to secure best-available finance terms. In general, rates are much higher than in previous years, as is the need for amortization, and lower LTVs. This combination of higher rates and the need for a CAPEX loan facility could mean the property can no longer service its debt, and the result can be the landlord must sell to repay the balance of the loan.
