Ryan Wray (Avison Young): Market focused on Covid-proof assets

Ryan Wray set up the Avison Young office in Prague as the country was preparing to emerge from the spring lockdown. The company’s MD says investment patterns have been deeply affected by the experience of the past 18 months.  

How have the first months of the business gone, compared to expectations?

Difficult. We launched the company in April just after the peak in the Covid situation in Q1 2021 so the usual modus operandi couldn’t work. But that was expected. In fact, the impact of Covid-19 on the real estate market was partially the catalyst of our new venture. We forecasted major shifts in the market and built those into our business plan.

Now the country is in a much better position: the borders are open, people are getting their vaccinations and Covid passports, so investors can really get moving again.

What I find most interesting for the first half of 2021, is that despite there being fewer international investors able to come here, investment volumes aren’t significantly lower and domestic capital has really come to the fore. Across CEE, Czech capital has taken 17% of all transactions which is €750m and we’ve seen Hungarians come out and go to Poland, Slovakia and Romania and further afield in southern Europe. That’s a real shift in the market.

In 2008 to 2012 when we had a lack of international investors, a similar pattern occurred where the likes of CPI and other major Czech funds filled the void. But this time it’s different. Back then, local investors were using the void to buy assets at lower prices than the institutional funds had been bidding. Today, there’s no void, rather a growing number of domestics funds. With such competition, there’s no opportunity to buy cheaper. The Czech, Slovak and Hungarian funds are now outbidding the institutional investors. Great news for Sellers and a positive signal for the market.

In the last crisis, local money was used to take problems off the hands of Western investors who were regretting coming into the “eastern” markets.

Since 2008-2012 the market has matured and demonstrated that it has its own liquidity. It’s not liquidity based on foreign investors coming in. It stands on its own two feet and regardless of what happens in Western markets there will still be a liquid market here. The depth of investor is incredible and it’s all come in the past few years. This is reflected in current  pricing, it isn’t slipping. It’s not going down. If anything, it’s getting stronger.

Any other big surprises?
We expected the BTR and PRS markets to take off. It had been coming, bubbling away for a long time. But as Covid accelerated changes in the retail segment, it accelerated the attraction of residential rental as an asset class. Now almost every fund we speak to is trying to get into it.

Is that a function of any particular indicator like the sale prices of flats? Or is it about generational issues where younger people don’t necessarily want to tie down their capital into one location?

You’re correct, it is partially generational, but that was pre-Covid. Also, the growth in prices is pushing a lot of people out of the market. Then the mortgage-lending regulations were adjusted requiring higher deposits and more stringent controls on earnings. But again, all these factors were impacting the residential market pre-Covid.

The big shift is that residential has proven itself to be Covid-proof. And if you are a fund manager today you must look very carefully at the potential downside risk to your portfolio of another pandemic; or even multiple pandemics. Fund managers realize that people now look at home and work in a completely different light. When Covid hit, working from home was necessary; then quickly it became a feasible long-term option for a significant portion of the labor force.

People sat and looked at their four walls and they said, “I could really do with a garden, or a terrace or a home office.” Because if you’ve got two kids like me, and your wife is also working from home …we’re all sitting around the kitchen table on zoom calls, four of us at once, competing for the best Wi-Fi signal, muting and unmuting our headphones trying not to disturb each other. So, people value their home space much more now; and many intend to use it much more, both as a workplace and as a home.

This made residential Covid-proof; and it has proved that. Prices have held strong even when a surge of apartments for rent became available in Prague from the short-term leasing market. Rents took a short-term dip but values have been sustained.

So, I believe it’s more a function of funds looking for “Covid-proof” assets. It’s why retail parks suddenly became exciting. Until recently, retail parks were the “also-ran” of the retail sector. I wouldn’t say nobody wanted them before Covid, but they are small in terms of lot size. Which for the big funds means fragmented acquisitions and fragmented asset management. Generally, they don’t like that. Today, however, many more funds are seeking this asset class and they will pay similar prices for prime retail parks as they would for shopping centers or high street retail.

Arguably they could pay even more, the yields could be sharper…

It’s notional. We haven’t seen significant shopping center yield evidence. I’m always very cautious to state yields are moving out on high street and shopping centers when we haven’t actually seen it happen in Prague.

 

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