Investment Market

As in the past, what tends to make or break a year is the presence or lack of major deals. And while some were on the agenda at the start of the year (and some fell through later), one major transaction that closed last year helped freshen the overall result. It was the sale of Mitiska REIMs 25 retail assets portfolio to a new entry, British fund M Core, for €219 million. The latter is particularly important as it is the most significant new name we have seen on the local market in a while, particularly as we have seen many Western European funds circling Romania, but not pulling the trigger on any deals.

Overall, many market participants remained in a wait-and-see mood, partly reflecting also the more difficult financing context (more on that below).

Transactions

As previously stated, the year’s biggest deal by far (and also the biggest retail transaction in Romania for many years) was the sale of Mitiska REIM’s retail park portfolio, made up of some two dozen properties. The year’s second biggest transaction was the sale-and-leaseback of FM Logistics industrial portfolio, a deal we estimate roughly around €60 million, purchased by CTP, the leader of the local I&L market. The third biggest deal saw the sale of One United’s One Herastrau Office to a new name for the local market, Latvian group Vincit Union, for around €21 million.

Other standout deals saw state entities purchasing real estate assets for various purposes (like the Sibiu City Hall buying a building for the local theater or the medical university in Bucharest purchasing a building, likely for educational purposes); while these are by no means comparable in size to private investments and make up a small share, it is noteworthy that up until a few years ago, public institutions’ presence on the local market was even lower. Another such sector largely absent from the investment market was that of local asset managers, though 2023 did see one of the big players locally, BT Asset Management, pull the trigger on a few medical clinics in a sale-and-leaseback transaction.

Prices and funding conditions

The greatly reduced funding availability coupled with the higher interest rates have been largely driving prices lower/yields higher over the last year and a half throughout much of the world, including in Romania. It is worth mentioning, however, that Romania largely missed the downward move in yields over the last decade or so (particularly in the initial phase of the post-pandemic recovery story), and now it is also seeing a shallower correction than other countries. That said, we still see that yields have moved outward a bit last year; given that we lack major benchmark deals that would actually show where the market is, we prefer to quote yields via an interval presently. Consequently, we see prime office yields in Romania at 7.25-7.75% at the end of last year (versus 6.75% at the end of 2022), prime retail yields at 7-7.50% (versus 6.75% at the end of 2022) and prime industrial yields at 7.25-7.75% (versus 7.50% at the end of the previous year).

When looking at the funding conditions, there are quite a few changes compared to a few years ago. Firstly, availability is far from a sure thing as certain aspects weigh more than they did in the past, like the sponsor or how future-proof a real estate project is given its ESG credentials. Furthermore, the banks’ appetite is quite limited for certain real sectors, offices in particular, though, again, a lot depends on the sponsor and exceptions can be made. Industrial assets rank much higher on the banks’ list, followed by retail and residential, where decisions are rather on a case by case basis. Loan margins are some 300-350 basis for a prime asset when a loan is offered, but it is worth pointing out that two years ago, the market was 100 basis points lower.

Outlook

It is quite difficult to say where the market will land over the short term and in spite of our quite bullish view for the Romanian economy (which translates to optimism regarding the country’s real estate markets), we cannot help but have a cautious approach regarding the this year. Interest rates in advanced economies are set to start moving lower sometime by the middle of the year, including EUR interest rates which are of great importance to the local market. However, central banks shall not be moving the cost of money lower at the same speed with which they hiked rates over the last year and a half, so any expectations of a material relief are unfounded, in our opinion. Rather, there is room for the second half of the year to look slightly better and for funding conditions to ease a bit.