In the midst of the COVID-19 pandemic, the global debt markets experienced a surge in activity during Q1, accompanied by intensified competition, marking the second consecutive quarter of expansion in the lender pool. Despite recent inflationary pressures and rising interest rates in the United States, the global debt markets remain firmly ensconced in a favorable, historically low interest rate environment, buoyed by improving vaccination efforts and positive economic indicators.

The year 2020 will undoubtedly be remembered for all the wrong reasons, with the advent of the COVID-19 pandemic in March causing ripple effects across all sectors of the Central and Eastern European (CEE) real estate market. While some sectors, such as logistics, witnessed positive gains, others, notably retail and tourism, faced clear setbacks. The office occupational market became a subject of debate, with falling demand, rising vacancy rates, and increased sub-leasing activity. However, optimism is on the horizon, as the successful vaccination rollout in 2021 is expected to drive the office sector’s recovery. Despite these challenges, the CEE markets continue to allure investors, both domestic and international, even though volume declines have been observed across nearly all markets due to a shortage of available products and the lingering impact of COVID-19.

Romania stood out as the sole country in the region to report an increase in transaction volume in 2020, primarily attributable to AFI’s acquisition of NEPI Rockcastle’s office portfolio.

In Romania, 2020 commenced with a robust pipeline of transactions, including several high-profile office deals in advanced negotiation stages. While the outbreak of COVID-19 had a substantial impact on the investment market, the total transaction volume for 2020 marked a significant uptick from the previous year, making Romania the only country in the region to demonstrate growth. This growth was primarily driven by AFI’s acquisition of the expansive NEPI/Rockcastle portfolio. However, Q1 2021 saw property investment volume in Romania estimated at €73.5 million, approximately 50% lower than the figure recorded in the same period in 2020. This decrease follows a relatively healthy 2020, when transaction volume reached €892.5 million.

In Q1 2021, offices accounted for nearly 50% of the total investment volumes, followed by hotels at 32%, and industrial properties comprising the remaining 19%. This trend emerged during the COVID-19 pandemic, as office and small industrial property transactions continued to advance, relatively unaffected compared to other commercial property types.

Despite ongoing uncertainty surrounding the conclusion of the COVID-19 pandemic, there is a steady pipeline of potential deals, totaling over €700 million, poised to potentially close in 2021. The office sector remains liquid, constituting approximately 50% of the potential pipeline volume.

Poland maintained its dominance, commanding 57% of the total CEE volume in 2020, with a notable emphasis on logistics.

Poland’s investment market kicked off 2021 on a strong note, fueled by robust activity in the office sector. The total transaction volume in Q1 approached €1.4 billion, ranking as the third-best Q1 opening in history, surpassed only by Q1 2020 (€1.9 billion) and Q1 2018 (€2.1 billion). Office investors played a pivotal role, committing €605 million, with a noteworthy portion invested outside Warsaw. Warehouses emerged as the second-best performing asset class, constituting 29% of total turnover, affirming sustained interest in the industrial sector. The retail segment, claiming a 14% share, witnessed a significant portfolio deal exceeding €100 million—the most substantial since the COVID-19 pandemic began. Additionally, the burgeoning living sector contributed 11%, while hotels, with their first transaction since the end of 2019, accounted for the remaining 2%.

Over the past 18 months, the evolution of the real estate market and property investment has influenced the behavior of banks.

In Romania, banks have adopted a more cautious approach when it comes to financing real estate acquisitions. Lenders are directing their focus toward core assets with strong track records and cash flow. Office and retail assets undergo a rigorous selection process (excluding convenience parks, which have performed well during the pandemic and still attract bank interest). However, hospitality has seen minimal financing due to evident challenges. Conversely, banks display a strong appetite for logistics and residential properties, perceived as more resilient.

In the realm of development financing, banks exercise even greater caution, giving particular attention to the pre-let and presale ratio. Financial institutions aim to minimize commercial risk surrounding development projects, resulting in financing primarily for experienced owners and developers with proven track records. Romania shares with Poland a focus on logistics and an exacting approach to retail and office properties. This translates into less borrower-friendly conditions, particularly in terms of loan-to-value ratios (LTVs), which currently stand at 60%, compared to the 65% pre-COVID-19 levels, and pricing, marked by an increase of approximately 25-50 basis points compared to pre-COVID-19 levels.

Compared to Poland, Romania offers less attractive financing conditions from a borrower’s perspective, as banks there exhibit more flexibility in loan reimbursement while offering lower costs. The Polish market benefits from greater diversity in terms of stock, investors, and lenders, fostering higher competition between stakeholders, resulting in more competitive yields and lower funding costs. This is partly attributed to the nature of banks and investors (a higher presence of institutional investors and western banks, particularly German banks) and Poland’s superior resilience during the 2008 financial crisis.

Notably, international banks are showing increasing interest in lending in Romania. The primary hurdle is the minimum ticket size for investments, which is typically around €100 million, as few assets meet the criteria. In the medium to long term, a new breed of lenders may enter the market as insurance companies and pension funds increasingly extend loans against real estate assets, drawn by low bond market returns and favorable treatment under the Solvency II Directive. Banks are also issuing more green bonds, with a strong focus on financing or refinancing eco-friendly assets, as green certification gains prominence.