Crisis points

Peter Damesick
EMEA chief economist, CBRE
The euro crisis is pushing investors towards greater caution, most often by avoiding specific euro zone markets and/or focusing on lower risk assets. This crisis has driven a polarisation between prime and non-prime property across European markets. Prime assets in core markets continue to attract strong demand relative to lesser-quality assets, which are suffering from low liquidity and deteriorating pricing. In a deepening euro crisis, real estate has important attributes that can make it advantageous for investors to hold relative to other asset classes. These apply particularly to prime quality property. More generally, in environments of high uncertainty and inflationary threats a flight to "hard assets" such as real estate is an understandable investor response. A deepening euro zone recession would be widely felt in European occupier markets, but would most severely affect southern markets. Transaction volumes in real estate investment would be depressed by a worsening euro crisis, with less cross-border activity and investors avoiding sovereign debt risk markets. The shift in favour of non-euro markets and perceived safe havens would become more pronounced. Secondary property values would be hit, with further reinforcement of the polarisation that currently characterises the market. The real estate markets will not be immune to the adverse effects of a worsening euro crisis. However, prime real estate has significant defensive and positive attributes relative to other assets, which should continue to attract capital to European property markets through very challenging times.

Colin Dyer (left)
chief executive officer, Jones Lang LaSalle
Midway through 2012, the cyclical recovery in real estate markets is continuing, but at varying speeds in different regions of the world. Real estate demand remains strong across Asia, is relatively steady in the Americas and the CEE region, and has slowed significantly in Western Europe. The big question on everyone's mind is how and when the euro crisis will be resolved. The situation is difficult, but Europe's leaders are working hard to find a way through the crisis. The better news is that the world is in the second or third year of what is likely to be a six-year cyclical upswing. While we all might wish for a more rapid recovery, opportunities do exist to make progress in this environment if we approach markets with realistic confidence and always have plans in reserve should conditions change abruptly.

John Duckworth (right)
managing director for the CEE region, Jones Lang LaSalle
We are operating in very sensitive and volatile times in Europe, and Poland/CEE is certainly not immune to the key events that are taking place outside the region. At the beginning of the year (Q1) there was a fragile sense of optimism that the green shoots of a recovery were visible. The recovery of the US economy and some initial signs of confidence amongst corporates seemed to suggest a path to increased activity, suggesting we had turned the corner in terms of the availability of finance and liquidity. Sadly, the impact of events in Greece and the wider economic malaise felt in other nations, such as Spain, has meant that the oxygen the real estate industry thrives upon - confidence - is once again missing. The good news is that as I write a pro-bail out government has been re-elected in Greece. It is true that Poland and parts of the CEE region do benefit from their independence from the turmoil that impacts countries to the west on a daily basis. The fiscal control and levers finance ministers can deploy gives us the impression of a level of autonomy that frees us from the stifling straightjacket of the euro. But this perceived benefit is delusional. If the contagion from a euro collapse spreads it will wash over our shores quickly. The result will be an immediate hold by corporates and investors around investment plans in the CEE region and even tighter restrictions around financing. One positive paradox may be that if stronger economies such as Poland and the Czech Republic can maintain their run, they will continue as relative safe havens for investment struggling to find a home. That, though, feels like an argument based on hope as opposed to hard facts. My view is that there will be a slow and variable recovery and that the drama will be, if not avoided, then managed. In our sector in the region, activity will tick along, and we must be very grateful where we benefit from at least some positive economic news. Places of calm and stability will be highly valued over the next six months, and the successful players (assets, companies, countries) who can capture these ingredients will be best placed for the inevitable recovery in time.

Hadley Dean,
managing partner for Eastern Europe, Colliers International
Europe faces a number of structural challenges, with uncertainty weighing heavily on investment and corporate sentiment. Despite a number of high profile banking mishaps over the past 18 months, the EBA regulators have effectively given Europe's banks a clean bill of health in their recapitalisation programme. Yet the economic, political and financial challenges remain, meaning many more forms of risk are factored into companies' scenario building. I would rather Europe faced these problems head on now - and Eastern Europe would benefit enormously from this. In H1 2012 we have seen a fall in demand from institutional investors across Europe, with activity restricted to largely core and strategic assets. In Eastern Europe there are definitely fewer buyers on the market, with transaction volumes at app. EUR 2.5 bln for H1 2012 - somewhere between post-Lehman 2009 and 2010 levels. The ones that are active tend to be chasing the same properties in the same markets - basically, in Poland and Russia. The key thing is that debt financing is relatively easy to obtain - as it is in the Czech Republic - but elsewhere it is much more difficult. Currently around 70 pct of our business is in Russia or Poland. Hungary, Romania, Bulgaria, Serbia and Slovakia are all finding it difficult to attract institutional investors. At the moment there is the continued divergence between core and secondary, as it's easier to get debt financing for core product. In the outsourcing and off-shoring world, companies have also come to realise that it is much safer and accessible to have back offices in Eastern Europe rather than in Asia. There is still a lot of occupier demand in Eastern Europe, and this goes for manufacturing and logistics as much as it does for offices. Warehousing is booming, especially in Russia, due to the difference the road network is making. Retail in Eastern Europe is still big, but new activity is moving to the smaller towns and cities. The next 18 months is going to be a challenging period, but it will also be an excellent time to invest and for business to grow.

Borja Sierra
CEO for continental Europe, Savills
We are going through the traditional number of stages of reaction to a crisis: denial, recognition, action and recovery. The key point is that the denial stage has had different durations in different markets. If we take Ireland as an example, it was the first country to enter the recognition stage. It then took a long time to decide what action to take. Now it is taking action and immediately we can see the effect. The market has quickly absorbed the products that the country has introduced. For Italy, Spain and Greece the denial stage has been much longer. It's taken them two years more than Ireland, but similar action is now being taken to deal with the problems. In the CEE region, Poland and the Czech Republic are perceived as faring better than Western countries - and this is translating into strong investor interest. Central Europe provides a premium on the returns for the risks in comparison to other European countries. Central Europe will continue to be an over-weighted region for investors until Western Europe gets back - maybe this will be in a couple of years. The region is a terribly interesting part of the world for our clients. It has a highly trained population with lower prices for labour and a lower cost of living, but it also has consumption levels that are converging with Western European levels. This is why we have increased our business in Poland. Central Europe has been less affected by sovereign debt. It is easier to accept an over-leveraged government such as in Poland where GDP is growing. Such a country has a greater ability to pay its debts. As for Hungary and Romania, political changes are still required. When there is political instability there is less inclination for investors to come into a country. We follow investor demand and our job is to be where they want to be. When we look at Central Europe, investors want to be there, but they are extremely selective about which countries. As for the worst case scenario, European institutions could start to break up and Central Europe could be infected with similar problems, but this looks less likely all the time.

Philippe Mer
head of CEE territories and CEO for Poland, BNP Paribas Real Estate Polska
I don't see the same thing happening in Poland as in most other countries in the CEE region. Poland has good fundamentals and should be able to better resist a further global economic downturn. Smaller countries with more complicated political situations, such as Hungary and especially SEE markets, are going to suffer. GDP growth in Poland is expected to be 2.7 pct in 2012 and 2.3 pct in 2013 - will this be enough to cushion it from a global downturn? The Czech Republic is also a nice stable market to work in and has a higher GDP per capita than Poland, but it is smaller and will remain less attractive. What we are going through is what in France we call a ?teenage crisis' - after having behaved as we want for years thinking the world is ours, now we have to face up to reality, take our exams and clean our bedroom. Although each government has its own domestic political calendar which often doesn't match that of the others, I believe they will sort out the trouble because they have no choice. I think that finance should be available for key projects carried out by well established companies. When the number of projects coming onto the market slows down again next year, there will be a decent ratio of projects-to-finance. So there will be fewer projects and they will be more in-line with the market. Developers must demonstrate their competence, through higher equity and higher pre-leases. With fewer projects, the banks will be able to do more cherry-picking of projects when it comes to providing finance. It is my personal opinion that the banks probably have already made all the most necessary adjustments to their lending policies, so the structural reforms of the banking system shouldn't have a major impact on real estate financing.

Carlo Barel di Sant'Albano
CEO for the EMEA region, Cushman & Wakefield
We're now facing a very different environment than just after the collapse of Lehman Brothers. If you look at transaction volumes, in 2007 global investment reached over USD 1 tln, of which USD 423 bln was in North America and USD 371 bln was in Europe. In 2009 global investment was down below USD 400 bln. North America went down to USD 48 bln, while European investment levels fell to USD 114 bln. Now there is activity in Europe but it has still not fully recovered and current transaction volumes still only stand at around 40 pct of the 2007 high. The worst case scenario would be the collapse of the euro, but I am not a proponent of this theory. A break up is not feasible. It would be terrible for all the countries involved. As for the CEE region, I recently spent four days travelling through the Czech Republic, Slovakia, Poland and Hungary. In these countries there is still investor interest and expectations of growth, but at a slower rate. There's been tremendous activity in Prague, particularly in retail. As for Poland, many companies are looking to move their back offices there and Hungary is still a good environment. We've had to adjust the way we do business in the country. It now requires far more creativity, but the difference between now and 2008/2009 is that transactions are taking place. Many countries are tied to the euro and many investors are waiting to see what happens to the currency. Countries that are not tied to the euro have prospects for slightly higher short term growth. Everything hinges on the euro being stabilised. Eastern Europe, which previously saw growth of around 5 pct, can now expect growth of around 2 pct. If the politicians keep kicking the can down the road in regards to sovereign debt, it will be hard to predict when growth will return. Pre-crisis the banks provided the bulk of the financing. Now most have stopped or reduced their involvement in the business. Alternative capital has come in, which is not a bad thing, because the new investors have a better understanding of the risks involved on the property market.