Here comes the sun?

Back in the gloomy winter of 2008/2009, on these pages we asked a most difficult question: when will the crisis end? The industry leaders we talked to tended to be cautious, but there were also a few who were not afraid to cite an actual year. Back then 2011 seemed like the year when hope would return for good in our region

Abanker recently told ‘Eurobuild CEE’ that 2011 would definitely be the second year of overall market improvement across the region. And yet, as we enter the new year, the mood is changing. Polish-based construction companies expect to see their sales grow by 3.2 pct in 2011 – a good sign.  Nevertheless, this figure is down from the 5.8 pct predicted in March 2010, according to a survey by CEE Construction Research and KPMG. The study shows that the self-confidence of construction firms has unexpectedly deteriorated, with a visible decrease from the 75 pct of companies expecting to perform better than their competitors to the current level of 57 pct. At the same time  Romanian construction companies are still not seeing the light at the end of the tunnel, with signs of recovery expected to be visible on the market not earlier than in 2012. In general, there is still a cloud of insecurity hanging over the region. More new shopping centres were opened last year in Bulgaria and Romania, in an atmosphere difficulties for retailers, declining sales and historically low rental levels. On the investment side, for another year in a row Poland was the safest bet when it came to purchasing properties, with institutional investors still preferring to steer away from South Eastern European property markets. Transaction volumes in Q3 2010 – the last available data prior to going to print – reached app. EUR 655 mln in Poland, a more than six-fold increase on the same quarter of 2009. In terms of investment activity, 2010 saw the highest transaction volume for two years, with the total for the whole year expected to come to EUR 2 bln – a figure not seen since before 2008. There are positive signs for the other markets too. “In 2011, the European Bank for  Reconstruction and Development is expecting a positive – albeit only modest in some cases – growth in all of its countries of operations for the first time since 2007,” says Erik Berglöf, EBRD’s chief economist. However, there is also a but: “There can be no return to the region’s pre-crisis dynamism without further reform. The challenge for policy-makers is not just to ensure that the future becomes more secure, but to do so in a way that sustains convergence in Europe,” Mr Berglöf concludes.

Dr. Karl-Joseph  Hermanns-Engel
member of the management board,  Union Investment Real Estate

All about the quality
Poland has enjoyed impressive growth over the past ten years and its economic structure increasingly resembles that of the original 15 EU member states. For us the Polish market was the most attractive market in the CEE region in 2010 and will also be on our watch list in the next few years. We have done several transactions in Poland in the last two years, for example the Horizon Plaza office building and Lipiński Passage in Warsaw and the Radisson Blu hotel in Kraków. We go strictly for quality – also in terms of sustainability – and would also like to diversify our portfolio in Poland in the sectors where we are already active, such as hotels and retail with the focus being on shopping centres and offices. The Warsaw office market will remain the most interesting investment spot. In terms of retail investment we are also concentrating our CEE activities on Poland, which is the only retail market in Central and Eastern Europe that has not seen any notable rental decreases in the last few years.
Since 2003 our average acquisition volume per year has been EUR 1.7 bln. In 2010 we expect to perform transactions of roughly EUR 1.3 bln. That, or maybe a little bit more, is also our target in 2011. We would be happy to carry out two or three deals in the CEE region this year – but the challenge is to find the right products.

Maximilian Mendel
associate director of the strategic consultancy department, REAS

A certain measure  of optimism

The residential market in the CEE region is at the beginning of its growth phase, even though a stabilisation process can be observed in some countries. We should not expect the growth to be as dynamic as at the height of the residential boom in 2006–2008. The current demand for homes is coming mainly from individual buyers, not from investors. The biggest and the strongest markets, such as Warsaw, Kraków, Wrocław and Prague, will remain of interest to investors. Meanwhile the demand for apartments in Bucharest, Sofia and Bratislava will definitely be lower in 2011. I believe that only now has the time come to buy land for residential development in virtually every big city in the CEE region. Some developers bought sites when the market was at its most heated.
But the prices of apartments in most cities are now stable. Since the end of 2008 they have dropped by several or even up to several dozen percent, particularly in the Baltic States and big cities in Ukraine and Bulgaria. Nevertheless, I believe that it is worth waiting to buy an apartment in Kyiv, Vilnius, Riga, Bucharest or Bratislava. The prices in these locations are still not adjusted to the demand and will probably decrease a bit more in 2011. After the crisis we are faced with a surplus of unsold apartments in nearly all the residential markets. This will last until the old stock has gone, but this supply will certainly not be running dry in 2011. However, prices will probably not grow rapidly over the next 12 months. On the contrary, we can expect a decline in average prices in all cities because new projects can be offered by developers at cheaper prices. The crisis, which is now coming to an end, was mainly caused by the lack of financing – and this factor had the highest effect on the demand side. In Poland the ‘T recommendation’ has been in force since the beginning of this year, which limits access to financing in foreign currencies. However, the percentage of non-performing loans in the CEE region has not grown too much. Currently the problem is the high currency exchange rate of the Swiss franc, which many mortgages are denominated in, predominantly in Hungary, but also to a large extent in Poland.
The number of launched projects is now on the rise again across some markets. We noticed this in Poland last year. We can expect an increasing number of launched projects from stock exchange listed developers, because they have to show that they are still active. In general terms, we enter 2011 with a certain measure of optimism, although we are not getting carried away. The fact that the whole market is starting to bounce back does not mean that things will be easier for every company. Some might not survive; still, most of these should be isolated or invisible cases, because this will mainly apply to SPV companies.

Mariusz Kozłowski
board member, Globe Trade Centre

A landlord’s market  is on the way
The Warsaw market achieved the best results in 2010, whereas development in the smaller towns was less noticeable, at least from the point of view of GTC, which is active in Poland, Hungary, Croatia, the Czech Republic, Romania, Serbia and Slovakia. As it was in 2009, the Hungarian office market was the most difficult one.  Despite the fact that two out of our Budapest office properties (Centerpoint and GTC Metro) are fully-leased, the occupancy rate in the Spiral building only amounts to 30 pct. Last year the vacancy rate in Budapest grew once again, rising to 18.2 pct. Current rents in Poland outside of the capital city are in the region of EUR 12–14, while in Warsaw itself (outside the city centre) they stand at around EUR 14–16. In good locations in Bucharest the rate is EUR 18 and in Budapest  between app. EUR 10 and EUR 14. This year we will open new office buildings in Warsaw and we believe that we will obtain better rates than for the buildings completed in 2009. At the end of 2009 the office yields used in the valuation of our  portfolio fluctuated between 7.3 pct in Warsaw and 8.2 pct in Budapest. Last year we sold two Warsaw properties: Nefryt and Topaz, at yields of around 7.2 pct. In the last 2–3 years developers have generally not built much in our part of Europe, so the office market will show signs of improvement due to the lack of new supply. This year we are planning to launch another four buildings in Poland and we are also considering the launch of office projects in Romania and Serbia. We are gradually moving to a landlord’s market, at least in Warsaw.

Martin Sabelko
managing director for Germany and the CEE region, ING Real Estate Investment Management

No more funny money
One of the major trends in the retail sector in the last year has been that the old conflict between tenants and landlords has become a thing of the past. We have been willing to provide help for them under our ‘Partnership Programme’ – but they can’t expect something for nothing. They also have to give something in return, to be more transparent and make a greater commitment in terms of signing longer leases.
I don’t believe that we will return to the pre-crisis levels of investment activity in the next two years. There is still very limited access to finance for developers, but the situation has brought them back to the ‘location, location, location’ rule. The crisis is also limiting the number of shopping centres being built in secondary cities in the region. In such locations there sometimes might have been three or four malls, but even this was not enough to deter developers from starting other projects. This is a phenomenon that we won’t be seeing returning in 2011. New development will be limited for the next few years, so at the moment refurbishment is the name of the game. Poland will still be the most attractive country in the region for developers and investors, because of its relative size and stability compared to the others, such as Hungary, which are much more vulnerable to international events. The big cities in Poland still have the potential for retail development, but in other countries in the region refurbishment will be the main activity.
Banks are now (re)financing again – our existing banking partners have stayed with us and have been very fair to us during the crisis. As a result we have succeeded in obtaining re-financing whenever we have asked for it. However, the situation is more difficult for smaller, single-project developers, who may now need rather longer than the pre-crisis minimum of two years to demonstrate the profitability of their schemes to potential buyers.
When it comes to what the make-up of the investors active in the region is going to be in 2011, this will remain the same: pension funds, banks, insurance companies. However, a cleansing of the market has occurred: all the “funny-money” – the “cowboy investors” – has now gone elsewhere, leaving the field open for professional developers and investors. In a sense this is unfortunate, because it is always nice to have – let’s say – more “exotic”, newer players on the scene. But in the next year or so, the majority of zoned plots will end up in the hands of the big established names.

Ian Worboys
CEO, PointPark Properties

Time to make decisions
What will be the key driving factor on the market in 2011? First of all, it will involve companies’ growth plans, which have been postponed for two years. Decisions that have been postponed so far finally need to be made. The time has come for some tenants to re-negotiate new conditions concerning their presence in warehouses and extend current lease terms. This is a great time for such moves – it is the last moment for obtaining the advantageous conditions that now exist on the markets. However, this state cannot be sustained for much longer because vacancy rates have been decreasing ever since 2009. In our facilities they range, depending on the project, from 10.2 pct in the Czech Republic to as much as 20 pct in France. They will definitely be lower at the end of 2011, as the demand that we now see results in the signing of deals.
We expected 2010 to be better than the previous year – and that is exactly what happened. However, the growth was not as strong as the most optimistic players on the market had been predicting. Throughout the whole year, news emerged about other countries threatened by the economic crisis. Even today, nobody can say for sure that the recession has finished. But we can see encouraging signs. Such facts are not unconnected with the actual behaviour of the market. In spite of this we have signed a number of interesting contracts and secured a deal with Europa Capital fund for the development of their 250,000 sqm site in Cluj-Turda, Romania. We also have an agreement in Slovakia with INVA Group in Košice for 63,000 sqm and with Optima Consulting in Žilina for 41,000 sqm.
Despite a relatively positive approach, we are still planning to extend our activities into new European countries next year. We own a site in Bulgaria and although we do not have plans to build anything on it at this point, we can carry out a project there provided the demand exists for it. We do not have ambitions to take on our competitors in terms of having the biggest land bank developed. We all build warehouses of comparable quality. And we will compete with regard to signing the best contracts, rather than holding the greatest amount of space.
I have no doubt that the conditions on the warehouse property market in 2011 will show sustained improvement, particularly in such countries as Poland, the Czech Republic and Slovakia. I expect more leasing, sale and purchase transactions. What will yields be like? They will fall. But by how much, nobody can predict.

Andrea Sartori
partner and head of real estate, leisure and tourism in the CEE region, KPMG Advisory

Where is the sunshine?
There is some good news.  According to the UN’s World Tourism Organization (UNTWO), there was a visitor growth of 2 pct for the whole of Europe in H1 2010, which is remarkable considering the 100,000 flight cancellations due to the volcanic ash cloud. Hotel performance showed an overall improvement in Europe. Nevertheless, CEE countries are still suffering due to the crisis and are currently performing worse than Western countries and the rest of the EU. Occupancy is showing signs of stabilisation and even slight improvement in certain markets in capital cities such as Warsaw. However, average rates still lag far behind pre-recession levels. These depend very much on the category of the hotel and its location, but they have declined overall in the CEE region. We are observing a strong price war for guests, and hotels are struggling to maintain occupancy at profitable levels.  On the financing side, banks are even more cautious than ever, and due to the restrictions on finance only those projects with great locations, an experienced developer and a solid business case will have the  potential to succeed.
When it comes to developing new hotels across the region there are a few hot spots. Due to its large domestic market, the upcoming Euro 2012 football championships, its growing economy and the low number of rooms per inhabitant, Poland could certainly be identified as a hot spot for hotel development. Belgrade also provides opportunities for development, due to its limited supply and with EU accession in sight. Neighbouring Montenegro is also a country that has great potential, representing an untapped market, offering sun and sea, pristine beaches and a unique natural beauty. And where are the cold spots? Bratislava is currently an oversupplied market, dependent on foreign demand. Due to Slovakia’s adoption of the euro, Bratislava is a rather expensive destination for the average CEE traveller.  On the list of oversupplied markets, we will also find Prague and Budapest. The latter is also marked by economic instability. In general, hotels in major cities with a strong business focus are preferred to tourist resort hotels, which are more seasonal, by both banks and developers.
What will the new year bring for the hotel industry? We should see continued improvement with slight growth eventually accelerating to moderate growth. There is a hope on the market that rates will finally bottom out, as they have done in some Western European destinations, and can begin to rise to improve RevPAR and profitability. Nevertheless, there is still a big question mark over the economy. Is a double dip recession possible? Will new toxic assets put more strain on the financial system and break the fragile growth we have seen? Back in 2009 a recovery was expected in 2011. This might now be pushed back a year to 2012. The austerity measures undertaken, for example in fiscally troubled countries such as Romania and the Baltics, certainly do not encourage spending on tourism.
Let us look at the positive signs first. The market seems to have stabilised, and the occupancy trend has turned, with rates set to bottom out. The German economy, the CEE region’s strongest feeder market, is now standing strong. Germany’s business confidence index grew 11.5 pct last year – the highest since 1990! Funds are also becoming more active. Transaction activity is increasing (it is worth mentioning the sale in 2010 of the Prague Hilton and LeMeridien Budapest), while the price gap between buyers and sellers is narrowing.
On the negative side, most CEE markets are still very vulnerable to a potential global or EU economic shock. Financing remains very limited, hotels are not particularly favoured after a number of bad cases. There has also been a demand shift towards Western Europe and traditional markets. Unfortunately, the CEE region is not seen as such an attractive novelty as it was in the 90s.