Behind the scenes of the deal of the year so far: How Bucharest made the cut

In a market environment marked by pricing inelasticity and shifting investor sentiment, Gránit Asset Management has made a significant move with the acquisition of Equilibrium 1, a landmark office building in Bucharest. Property Forum talked to Erik Wafler MRICS , Senior Investment Manager at Gránit Asset Management, to gain deeper insight into the strategic thinking behind this transaction, the challenges of sourcing institutional-grade assets in CEE, and the company’s broader ambitions in the region

What were the key factors that led Gránit Asset Management to acquire Equilibrium 1 in Bucharest?

We have been searching for the right asset matching our 5B strategy for a while, which meets the criteria to be a class A quality asset, fully let to strong covenant tenants, located in a well-established office hub and, most importantly, fairly priced. Indeed, at first this seemed to be a close-to-impossible task, however, I believe we can consider ourselves lucky when we stumbled upon Skanska’s landmark building ticking all the boxes. In addition, transacting with an institutional player that clearly understands investment risks and conditions has definitely served for the benefit of concluding this transaction.

How challenging was it to find a suitable asset at the right price in the current market environment?

Very. In general, and this is especially true in the CEE, commercial real estate prices are quite inelastic when it comes to corrections, i.e. an upward shift in the yield curve causing market values to decrease. Investors are reluctant to realise the trend and accept the unfavourable change caused by the otherwise quite natural and recurring real estate cycle, and rather hold on to their assets collecting the NOI waiting for the market to move in their favour again rather than liquidating at the actual fair market price and re-investing the proceeds into something else that could offset the decrease. This is also the case in the office market in Romania, where we often see and receive investment opportunities with completely unrealistic net yield expectations.

How does this acquisition align with your broader investment strategy in CEE?

Equilibrium 1 is part of our 5B Strategy, which aims to create a portfolio of sustainable and dominant Class A office buildings in the capitals of Hungary, Serbia, Romania, Slovakia, and Austria. We believe in this asset class provided their quality and location are prime. Our research has proven that, in CEE and in the long term, these types of assets are the most resilient to market fluctuation,s even despite the short-term impact of COVID. Notwithstanding, Granit Asset Management already holds, and our dedicated property and asset management branch, Grandum Real Estate, manages a substantial area of commercial office space in Budapest and Belgrade, therefore, we believe this is the asset class we understand the most.

Considering this acquisition, how does Gránit Asset Management plan to further expand its presence in Bucharest? Can we expect more deals this year?

Well, as mentioned, it all depends on finding the right product for the right price. We know that there are other quality assets on the market in dominant hubs that could be the target, but unfortunately, we experience a material gap between the expectations of their investors with regard to net yield and our perception of market net yield when considering the current uncertainties. Nevertheless, we are actively looking and are willing to investigate matching investment opportunities, hence, there is a chance we would enter into an exclusivity agreement for another office building in Bucharest, still in 2025.

With Equilibrium 1 now part of your portfolio, what immediate and long-term plans do you have for the property to enhance its value and tenant experience?

First of all, we will need to accommodate the needs of existing tenants who are firmly pushing for extending their leases in the building with expansion requests. Unfortunately, the key characteristic of a real asset is its limit in space; hence, in the short term, we find it the most difficult to meet these requirements. In the long term, we still have some leases running slightly below ERV, at least in our opinion, and our goal is to optimise the NOI with these adjustments in due course.

How do you perceive the current state of the Bucharest office market, especially compared to other capital cities in CEE?

Despite the inelasticity, offices in Bucharest are still fairly priced when compared to other capitals in CEE. The net prime yield gap is not justifiable when we compare offices, for example, in Vienna with Bucharest or Belgrade. We understand the difference normally lies in the perceived risk; however, as a local investor, we are certain these risks are often exaggerated by non-local investors, and a big part of them are only virtual. In the long term, market sentiment will shape the market of commercial offices as well, and, as a result, we share the expectation of some that in the long term these yield gaps will shrink and converge, providing investors holding assets in currently higher risk regions to benefit from yield compression.

The article was first published by Property Forum.