Which city in CEE offers best returns for a residential real estate investment?
Silverline Real Estate
Mezinárodní investi?ní fond realizující projekty v reziden?ním developmentu.
On a bi-annual basis, Silverline Real Estate is analyzing selected 20 cities in Central and Eastern Europe to rank their attractiveness for a residential real estate investment.
Why CEE remains to be an attractive region for (real estate) investments
Central and Eastern European countries are characterized by long-term convergence of their economy levels, including purchasing power or price levels, towards Western Europe. In our analysis, we include 20 cities from all EU members in the CEE region: Czech Republic, Poland, Slovakia, Slovenia, Hungary, Romania, Bulgaria, and Croatia as well as non-members: Serbia, Bosnia, Monte Negro, Macedonia, Albania, Kosovo, Ukraine, Moldova, and Turkey.
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“Over next 5 years, on average, CEE region is expected to continue generating higher returns on residential real estate investments when compared to Western Europe. This is driven mainly by expected higher real GDP growth rates and considerably higher rental yields.”
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With real GDP growth of 2.4% p.a. over 2015-19, CEE region enjoyed steeper economy growth when compared to Western Europe (1.2% p.a. over 2015-19). Growth premium of 0.8-1pp is expected also for the period of 2022-26, translating into additional purchasing power which can, among others, fuel also local residential real estate markets. Further, due to higher scarcity of investment capital in CEE, real estate typically generate significantly higher rental yields: 5.8% p.a. for our sample cities in CEE vs. 3.9% p.a. for our sample in WE.
On the other hand, 13 of 17 analyzed countries in CEE have national currencies, translating into a potential risk source when it comes to cross-border investments.
Methodology & results of our analysis
Of the 20 CEE cities in sample, based on robustness of legal frameworks for real estate (typically higher in the EU) and an attractiveness index composed of:
we have short-listed five cities for a deeper-dive analysis of expected investment returns: Bucharest, Sofia, Bratislava, Ljubljana, Zagreb (+ Prague for comparison purposes):?
The short-listed five cities and Prague are all located in EU member states and have diverse profiles in terms of sqm prices.
Shortlisted cities comprise both Eurozone members (Bratislava, Ljubljana), these days with very low interest rates, as well as cities in countries with stand-alone monetary policy regimes (Prague, Zagreb, Bucharest, Sofia) and diverse interest rates (responses to the currently high inflation).
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“Of the 20 selected CEE cities, Sofia, followed by Bratislava and Ljubljana are expected to offer the highest returns on residential real estate investments denominated in EUR, driven by low interest rates and solid economy outlooks & current yields.”
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Of the short-listed sample, highest returns on equity invested, denominated in EUR (relevant for international investores) can be achieved in Sofia, characterized all a great combination of low interest rates (also as BGN is pegged to EUR), strong economy outlook and solid current yields. Bratislava and Ljubljana follow, benefiting mainly from low interest rates (Eurozone) and moderate yields:
In Sofia, an expected gross return on equity denominated in EUR of ~32% p.a. can be generated on a residential real estate investment, vis-a-vis ~16% p.a. in Prague. Magnitude of such difference can be best demonstrated on an initial EUR 1 mn investment deployed over a 5-year horizon: while in Prague, investment principal reaches a value of EUR 2.13 mn (+113%), in Sofia, the same investment value shoots up by 304% to EUR 4.04 mn.
Returns can be further uplifted by selection of segment & asset perfectly aligned with demand trends and value-add activities, such as renovation of the real estate or its extension (e.g. add-on floor in an apartment house).
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Silverline Real Estate is a Qualified Investor Fund obsessed with finding sweet-spot segments for its investors in markets with robust legal frameworks in real estate, namely Europe and North America.
Constantly, we are reviewing performance of selected markets, segments and assessing opportunities within to deliver double-digit returns for our investors.