When it comes to the crunch

We’d never had it so good – BUT THEN along came the US CREDIT CRISIS. However, Dr Nassos Manginas, associate director of research institute IPD, feels there is no need to panic

Nathan North, ‘Eurobuild CEE’: How would you characterize the state of the CEE investment markets in contrast to the more established ones that have been rocked by the financial crisis on the US sub-primes mortgage market?

Dr Nassos Manginas, IPD: The Czech Republic, Poland and Hungary have been converging quite rapidly towards the level of western countries in terms of investment yields. Further yield compression is expected, possibly at a modest rate, but continuing with premiums that are still reasonable relative to the main European markets. The less transparent markets – e.g. Russia – are still going to offer higher returns to account for the higher risk-taking there compared to Western Europe. One particular aspect of the CEE real estate industry at the moment is the dominance of the market place by international investors. Local investors exist of course, but their importance is still relatively small given the fact that most companies are joint ventures or subsidiaries of major foreign firms. Local companies have started to emerge in the last two years and the development of a legal framework allowing the creation of real estate funds and other property vehicles is going to have a positive impact.

NN: You mentioned transparency. How big an issue is this, and how far down the road towards optimum transparency are the CEE markets?

NM: Transparency in the core CEE markets has been largely driven by the presence of international brokers, agents and consultants, followed by regional and international investors and the adoption of open market valuation standards. This is obviously not a static process; but generally speaking, countries that still do have cases of unclear property rights or issues of restitution are going to be ranked lower in any transparency comparison. And foreign investors are more comfortable with a set of transparent rules. The first group of CEE countries to join the EU clearly enjoy a time advantage, as transparency is constantly improving. The next wave of countries, such as Bulgaria, Romania, Russia and the Ukraine, are possibly some way behind. A lot will depend on how stable the political and economic climate is and as to whether competition will form a key aspect of the marketplace. Institutional investors enter markets where they expect a sustainable growth pattern, stability and predictability of returns.

NN: What effect, if any, do you think the credit crunch and the turbulence on the world stock exchanges is likely to have on investment in the CEE region?

NM: If you look at the stock markets recently, what I find interesting is that since the beginning of the year there have been strong falls of between 10 and 20 pct in the key indices of the US, the UK, Japan, France, Germany and other major economies. Globalization and the ensuing patterns of synchronized movements are clearly evident here and you would expect the real estate industry not to be completely isolated from these developments. Therefore, on the lending side, negative effects from the global credit crunch could be anticipated, at least to a certain extent. Whether these negative effects will be of the same magnitude across all European markets remains to be seen. But it is essentially the same banks – or their subsidiaries – that provide property financing in the CEE region as they do in the other main European countries.

nN: How long are the repercussions going to last of all the market uncertainty? Will the effects be as deep and long lasting in the CEE as they are likely to be elsewhere?

NM: If, as at the moment, the international credit markets are in a difficult situation and banks are not necessarily behaving solely on a trust basis, this clearly means that the corporate lending markets will operate with more restrictions and/or that the effective lending rates have increased to reflect more uncertainty. During this adjustment phase of risk re-pricing, loan-to-value ratios are going to fall and equity investment is going to become more important. At the same time, asset management and the quality of assets in property portfolios are going to gain in importance. This period of adjustment to a new equilibrium between risk and return is widely expected to last until the end of the second quarter of this year, and possibly even later.

nN: Some of the more pessimistic voices in the industry have been muttering about the possibility that there might have even been a decrease in the total investment volume last year. Is this at all possible? And if not, how sure can you be that it hasn’t taken place?

NM: IPD’s coverage is based on data from investor portfolios that are valued at least once a year. Private equity investment or real estate assets that are not regularly valued cannot be reflected in our figures. There is a high level of interest in real estate in the CEE region and I expect this to grow in the near future. Investor interest in these markets is bound to increase – driven primarily by above-average economic growth prospects, convergence and harmonization with the rest of the EU, as well as by an improving level of transparency. Therefore, it would be a surprise if any significant decrease in the total investment volume in this region were to be recorded.  n