Early birds

An increasing number of investment deals in Central Europe has generated awave of confidence, which is now moving further east. The first transactions are now afact. There will be more tocome bytheend of theyear, but some challenges remain thesame.

Mladen Petrov

F                     office space market.

Reality check

This is certainly good news for theBaltic real estate markets, which were left devastated in 2008 and 2009. After afew years of steady growth fuelled bycredit, asharp decline in theGDP in theregion followed. Tallinn, once apreferred destination for second home buyers, saw residential prices decline byup to60pct from thepeak of themarket in 2007. Things are now starting tochange slightly. But make no mistake about it –theBaltic economies and property markets still remain vulnerable, but analysts and investors have new hope that arecovery is already underway. After a15pct decline in its GDP, Lithuania expects 1.6pct growth this year, Estonia’s growth is forecasted tobe -0.1pct –asignificant improvement on its GDP growth of -14.5pct in 2009; while Latvia, thebiggest victim of thecrisis in theregion, is expected tohave anegative GDP of -4pct, but still better than the18pct slump last year.

The three markets, according toRe&Solution’s Baltic property market report 2010, saw rent levels decrease byat least 20 to30pct and yields increase byup to250-400 percentage base points. As aresult, property values across the region have slumped byaround30-50pct, sending themessage topotential investors that thetime has come for acquisitions. With theeconomies now coming out of recession, theinterest of investors will also increase, believes Neringa Rastenytė, head of theinvestment and analysis department of Re&Solution International Property Advisors. “Not asingle deal over EUR 10mlnwas completed in 2009, therefore there is plenty of room for yield speculation. Investors are not going tobuy actively this year, but theimportant thing is that they are back. Westrongly believe that thebest Baltic properties are currently strongly undervalued. The first tostart buying this year will be local funds looking tospend up toEUR 20mln. The big players still perceive themarket as rather volatile. When it comes topreferences, large investors, Scandinavian or German, will be looking at portfolios across theregion. Weare already seeing aninterest in supermarket and hypermarket chains, with offices coming second,” reveals Neringa Rastenytė.

Scandinavian perfectionism

Helsinki-based investor Citycon, theowner of Rocca Al Mare, thelargest shopping centre in Tallinn, is also getting ready for ashopping spree, as long as there is interesting product on themarket. Harri Holmström, vice president and head of Baltic operations, also believes theBaltic markets are slowly getting back on track. High unemployment figures are one of thereasons why investors are still cautious. In thethree countries unemployment is expected tocontinue its rising trend, eventually reaching 21pct in Latvia, 16.7pct in Lithuania and 14.8pct in Estonia.

“Yet, in thelong-term perspective, weare optimistic, especially when it comes toEstonia         .” As Mr. Holmström reveals, his company is mainly interested in well-performing retail properties, preferably in thecapital cities. “Weare very selective and in no hurry. Our long-term strategy includes expanding across thewhole region, even if that means that wehave tobuy assets and invest additionally in their total refurbishment.”

Fussy or not, Scandinavian investors are screening themarket for opportunities. According toMartin Seppälä, apartner at theExcedea consultancy, as quoted bythe‘Äripäev’ daily newspaper: “The interest of Nordic investors in Estonia is now thehighest it has been in thelast five years.” Excedea is currently advising on two other projects in addition totheTechnopolis Ülemiste deal, with announcements expected after thesummer. The investment value of thetwo deals is expected tocome toaround EUR 20mln.

Those vendors across theregion who are not currently being pushed against thewall still have huge price expectations. “Some properties were built at thepeak of themarket, therefore not every owner is eager toadjust theprice tothecurrent conditions,” explains Neringa Rastenytė. She goes on toadd that: “In addition, it is hardly possible that theacquisition of distressed properties will be asignificant phenomenon this year. The best properties, which will be taken over bythebanks, will go through arecovery process rather than being disposed of immediately. The good thing is that theprice of these properties is based on their current cash flow, which has obviously been affected bythedownturn on themarket. Weshould be starting tosee more transactions in 2011.”

Bad memories

The investment markets of Bulgaria and Romania are waiting for arevival this year, after theannus horribilis of                                         2009 atotal investment volume of less than EUR 200mlnwas recorded in Bulgaria –more than 300pct down on 2008.

The reasons for thegloomy reports from Bulgaria and Romania are similar. As Blake Horsley explains: “There was significant uncertainty surrounding where yields lay, thesustainability of rents, as well as acertain amount of bank pressure on vendors and acomplete lack of financing on theRomanian market in 2009. Romania has been quiet recently, although weneed tobe careful with whom weare comparing ourselves. Poland is now adeveloped economy as opposed toadeveloping economy. It was theonly EU country not toenter recession and thus is in some way not comparable toRomania  and Bulgaria, though for all of these countries 2010 and 2011 are likely tobring asignificant improvement.”

In Bulgaria, Andrew Pierson, country managing partner of King Sturge, feels thesame way. “Weare speaking toanumber of foreign buyers who have funds in place for theSEE region. Private equity funds from theUK                             Republic                                         From adevelopment perspective, it can be challenging toassess planning risks, and wehave tobe cautious about theultimate beneficiaries of our money.”                                                   and higher levels of investment will not occur until at least 2011,” believes Blake Horsley. In Sofia, Andrew Pierson is trying toremain positive. In his opinion, this year mainly office and industrial properties valued at up toEUR 100mlnwill change hands in Bulgaria. “Idon’t think it is wrong tosay themarket is undergoing arevival. Both Romania and Bulgaria should have improved markets this year, and there are already signs of this happening. Values have stabilized, and when you look at thelevel of activity in 2009 there is only one way for themarket togo in 2010 –and that is up.”