London-based manager Revetas Capital is seeing increased support from debt providers to fund projects in Central and Eastern European markets.
“The CEE region benefits from macro fundamentals which compare quite favourably to Western Europe,” founding partner Eric Assimakopoulos has told Real Estate Capital Europe, citing lower levels of unemployment, higher economic growth, lower consumer indebtedness, high levels of infrastructure investment funded by EU and FDI and well-connected cities.
“[Additionally, the region offers] market yield spreads of 200-400 basis points and capital values below Western Europe, all of which in combination provides higher-yielding returns.”
The manager believes the region’s well-developed banking market is resulting in a strong support environment for commercial real estate lenders. This could lead to a rise in real estate debt market players entering the market.
“Since the mid-2000s the region has been well-banked by European financial institutions from Austria, Germany, Italy, France and the Netherlands who actively acquired local banks and successfully rolled out their corporate banking and commercial real estate platforms,” said Assimakopoulos.
Revetas has operated across the CEE region since 2003, focusing predominantly on Poland, Hungary, Czech Republic, Slovakia and Romania. The region has a combined population of 100 million people and a GDP of $2 trillion.
“In most countries, five to six out of the top 10 banks are international banks,” added Assimakopoulos, citing Raiffeisen, UniCredit, Commerzbank, Erste, ING, BNP, SocGen, Intesa, Deutsche and KBC as key examples.
Of the leading American banks, Citigroup has been active in the CEE region since the 1990s. There are also several established national players with commercial mortgage lending activities.
“In addition, PE credit funds are now taking a foothold and institutional investors often look at investing in multiple layers of the capital structure,” said Assimakopoulos.
But the response of national central banks to inflationary pressures has created a sharply rising interest rates across European markets, negatively impacting investor confidence and market activity.
“[This is] of course a challenge, but we have been here before through multiple economic cycles and as the markets continue to mature, we have begun to see positive signs in rental growth,” he added.
Despite macroeconomic factors changing the investment landscape, Assimakopoulos has a positive outlook.
“The broader expectation is that inflation will normalise in 2023 and that rates will begin to come down,” he said. “While we have not yet seen a major impact on liquidity, banks are becoming increasingly selective in their lending both in terms of asset quality and LTVs.”
Assimakopoulos continued: “Absent [of] any material increases in NPL ratios on banks’ balance sheets, we believe that liquidity in the bank markets will remain good and that real estate overall will continue to constitute one of the preferred lending allocations, especially in an inflationary environment. Good deals will always find financing.”
On the financing side, while the terms are beginning to widen the main regional lending banks remain fully committed to the CEE region and are open for business. This message was reconfirmed by banks including Erste Group, UniCredit and Raiffeisen at the annual CEE Property Conference in Vienna at the end of September.
Despite ongoing uncertainty about the future of the office sector across Europe, Revetas believes that Central, Eastern European office markets offer long-term investment opportunities, particularly high-quality sustainable office developments in Poland, Hungary, Czech and Romania.
“A lot of things have changed in the office market in the last few years,” said Assimakopoulos. “But we are diligent in carefully balancing our strategy based on all macroeconomic factors and rental demand.”
In September, the firm secured financing from Hungarian bank OTP to complete the second phase of a €150 million Budapest office development Millennium Gardens – a community of office properties which forms the largest part of the city’s Central Pest business district. The development provides office space for companies including Morgan Stanley and Hungarian bank K&H Bank.
The first phase of the project is complete with the second phase expected to finish in Q3 2023.
Separately, Revetas is working on developments in Krakow, Bucharest, Wroclaw, and Bratislava where a combination of regional and local banks are providing financing.
Within these markets, Revetas is focused on university cities where it sees continued growth from blue-chip companies targeting low-cost, multi-lingual college graduates.
Of Revetas’s current €1.6 billion portfolio, roughly 29 percent is offices.
While the office sector is attractive to the firm on a selective basis, Revetas’s main target markets are residential and logistics.
“While we continue to have strong faith in prime, class A, sustainable offices as an asset class long-term, we are currently focusing on residential, industrial and logistics portfolios where we know there is a major structural under-supply and particularly strong macro demand fundamentals,” said Assimakopoulos.
A key area of focus is multifamily housing, with Revetas witnessing noticeable demand drivers in Poland as a result of its estimated shortage of two million apartments.
“This presents strong organic demand, underpinned by a population of more than 38 million, a growing urbanisation rate of 60 percent versus 72 percent in the rest of the EU – one of the highest overcrowding ratios across Europe. Such factors determine a highly adaptable investment focus,” Assimakopoulos said.
Revitas funds its investments through traditional debt and equity, facilitated by long-standing relationships with investors and financial institutions.
Meanwhile, on the equity side, the firm is investing capital from its third fund and is about to launch its fourth vehicle, which will be tailored to institutional investors, endowments and family offices looking to capitalise on the higher return profile offered by CEE compared to Western Europe. The manager anticipates a large proportion of existing investors who participate in its predecessor funds will reallocate capital.