When East meets West

It was once possible to speak with some confidence in general terms about the Central and Eastern European real estate markets. However, since the financial crisis the picture of the region has radically changed, bringing into question the notion of there being a CEE region at all

Nathan North

Most of the countries in the region emerged from the communist era at around the same time (1989-91) and had similar levels of development and issues to deal with. Eight of those that were adjudged to have managed the transition to Western democracy best (the Visegrád Group of Poland, the Czech Republic, Slovakia and Hungary, as well as Slovenia and the three Baltic states) were admitted into the EU in 2004, to be followed by Romania and Bulgaria in 2007. Hopes were also once high that Ukraine and the remaining countries of the former Yugoslavia would soon follow suit. Real estate market reports were (and still are) written for the entire region by consultancies, which themselves have CEE departments. It was understandable, therefore, when investors from Western countries adopted the same mindset when it came to investing in such countries, given that they had progressed towards free market economies at similar rates.
And then came the credit crunch. Poland has apparently come through the downturn relatively unscathed, whereas the Baltics, Hungary, Romania and others have been engulfed by financial and economic turmoil. In such an environment, and at a time when investors are more wary about splashing out in unfamiliar markets, a catch-all term such as 'the CEE region' could turn out to be treacherously misleading. So in what sense does the notion any longer have a meaning?

More refinement needed
Charles Taylor, the managing director of Cushman & Wakefield in Prague, agrees that the countries of the region can no longer be lumped together in this way. "There is huge diversity, particularly in terms of market size and maturity, liquidity, economic growth prospects and EU membership," he asserts. He goes on to add that: "At a global level, the property investment industry continues to utilise the 'CEE' reference, in the same way as it refers to Western Europe; but in terms of assessing investment opportunities, the definition is more often refined to allow greater focus - for example the 'core markets of Central  Europe', i.e. Poland, the Czech Republic and Hungary, or specific countries such as Russia."
According to Tomasz Trzósło, Jones Lang LaSalle's head of capital markets and investment for the CEE region, although there is a geographic reason why the term 'CEE region' still exists, "in terms of the macro-economic picture and real estate markets it is now completely invalid." As he explains: "Now we can see that international banks are still reluctant to provide finance for investment in Hungary and Romania, but no longer have problems doing so for Poland. These banks have developed specific strategies on a country-by-country basis, rather than having general strategies for the whole region - and the same is true of investors."
When it comes to Romania and Bulgaria, in Tomasz Trzósło's experience investors such as German open-ended funds have turned away from the two Balkan states and are instead focusing on Poland and possibly the Czech Republic. "Looking at the macro-economic picture, Romania is currently viewed as much more risky than Poland. So there is definitely a pronounced differentiation between many of the countries in Central Europe."

Running the show
How could the different countries be ranked in terms of attractiveness for real estate investment? "Poland and Czech seem to be running the show," believes Tomasz Trzósło, "followed by Slovakia, Hungary and Romania in the second tier, and then Bulgaria and the Balkan countries. I think the Baltics - if we can call them CEE countries - would be included in the last group, although maybe Estonia could join the Romanian group. But Lithuania and Latvia would fall into the worst group due the heavy impact of the recession on these countries and the size of their markets. However, five years ago there was investor interest in the Baltic states." As for the remaining markets, Mr Trzósło puts Ukraine, Belarus and Moldova in the least attractive group alongside Bulgaria and the Baltic countries - at least for 2011. However, he adds that he would differentiate Ukraine from the others, "as its long term potential is undoubtedly very exciting, predominantly because of the size of the country." For him Russia is a special case - an investment hot spot, but a market quite different from other European countries: "I do not think it should be ranked alongside other markets in the CEE region. There is still the question of the political stability, but the country will certainly be attractive to investors."
Certainly it would appear to be the case that the relative sizes of the markets in the region make a compelling case for differentiating between them. Although in Tomasz Trzósło's view this does not apply so much to the Czech Republic, it remains the case for the other CEE countries. The main reason that investors favour the bigger countries is, in his opinion, that "it is maybe more possible to justify a presence in a market the size of Poland because it is easier to exit such countries. Although this is not actually such a big problem for the Czech Republic (...) there is still greater comfort in exiting from larger countries, which is why Poland is viewed so favourably and why Romania should eventually be perceived in a similar way."

Size matters
Size also very much matters for Charles Taylor: "Poland has the benefit of its size and will remain ahead of Hungary and the Czech Republic, but by the same token will not be considered in the same league as the UK or France. For many investors the Baltic countries and parts of the SEE region will remain too small to warrant attention, given the opportunities that exist elsewhere and the impact that market size has on liquidity."
If Poland and the Czech Republic, for example, can be grouped with other markets in Western Europe, then does this also mean that the term 'Western Europe' is no longer valid? "The UK and Germany are still very attractive markets, but Spain is less hot than Poland. However, Spain is typically regarded as being in Western Europe," says Tomasz Trzósło. As he goes on: "So maybe we should dispense with such terms altogether and speak only of the maturity of each market.  Poland and the Czech Republic could now perhaps be included in the group of the most attractive countries in Europe for investment, along with the UK, Germany, France, the Netherlands and Sweden. A couple of core investors I know are targeting the UK, France, Germany, Poland and the Czech Republic. So Poland is definitely having its moment of popularity, and hopefully this will continue into the longer term. However, this could change. If in two years' time the budget deficit gets out of control and inflation rises, it could affect investor sentiment, which is heavily dependent on the macro-economic health of a country. There are still certain macro-economic challenges that need to be addressed by the government that would have a serious impact if left unresolved," he warns.
Charles Taylor also points to a number of issues that should be addressed before Poland and the Czech Republic could fully qualify for the Western European club: "For the UK it is the currency risk against the euro that is the main worry, for Portugal and Spain it is the impact of - or the risk of - an EU bail-out, while in Italy there are political issues to address. For Poland and the Czech Republic, corruption - particularly in the development process - remains an issue, while in certain other CEE countries land ownership and restitution issues need to be fully resolved."
If the region is now such a patchwork of variously-sized markets with differing levels of development and transparency, then the term 'Central and Eastern Europe' would appear to be almost completely redundant. And not only that, but it logically follows that the old division of Europe into East and West truly no longer applies. As Charles Taylor concludes: "At the end of the day, investors will look at the level of each country, given the disparities that exist today and that are likely to continue into the future."