Theories of relativity

Is the worst over? Yes. No. Maybe. There are as many answers as there are possible scenarios for how the credit crunch will unfold. looking at the macroeconomic signs, many seem to believe that the storm is well behind us. or not, as the case may be. in fact, some of the real estate players ‘eurobuild cee’ spoke to admit that for the region the worst might even be still in store

Mladen Petrov

We all remember September 2008. It was the bankruptcy of Lehman Brothers – one of the largest and oldest American banks that had managed to survive the Great Depression of the 1930s – that made it clear that we have a problem. A global problem. The participants of the 2008 Expo Real Fair in Munich will remember for a long time the atmosphere, a weird mix of uncertainty and furtive hopes that the crisis would somehow spare continental Europe.

In the year since the world financial crisis was officially announced lots of things have taken place. For the real estate sector, the crisis resulted in a massive cut in the pipeline of all kinds of real estate projects, which some say is actually a good thing. Some large companies, such as Immo Industry Group, became victims of the crunch, while the rest had to take drastic measures, such as large-scale redundancies. All the market players suffered from dramatically limited access to financing, as the banks locked their safes. The effect of this policy can be now seen in the very heart of Warsaw, where the construction of Orco Property Group’s flagship project Złota 44 has been put on hold.

In addition, in the midst of the turmoil, the activity on the capital markets in the CEE region practically disappeared, due to concerns about the potentially far-reaching effects of the crisis in the region. While Romania, Bulgaria and Hungary are mired in recession, the Czech Republic and Poland have also succumbed to the general fear that the region will be one of the hardest hit by the crisis. Some figures seem to contradict the doomsayers, however. Poland, for example, is the only EU country to achieve positive GDP growth in 2009 of 1.1 pct. Not too far away from Poland, the three Baltic tigers Estonia, Latvia and Lithuania, once absolute regional leaders in terms of economic growth, now set the pace in a new, less appealing category – that of countries hit particularly hard by the crunch.

There are, however, some positive signs, such as improving consumer confidence and investor sentiment. The massive bail-out and stimulation programmes put in place by governments all over the globe, after some initial criticism, seem finally to be working. The first signs of improvement are coming from America – the source of the first bad news. In September, the US Federal Reserve reported that it had been seeing signs of the economy recovering over the last few months. Fed chief Ben Bernanke went further, saying that the recession in America is “probably over”.

But how about the rest of the world? Dominique Strauss-Kahn, managing director of the International Monetary Fund, believes that the economic crisis is still with us. “Let’s not fool ourselves. The end of the tunnel has not yet come into view,” he warns all the optimists.
 We may have avoided a global depression, but many analysts say we have failed to learn the lessons from the last few traumatic months. We asked some leading market figures if the crisis is really over.

Markus Leininger

head of corporate banking Northern, Central and Eastern Europe, Eurohypo

Not so fast  

Is the storm over? Well, it really depends. When looking at the CEE region, differentiation is the key. Investors often make the mistake of perceiving the region as one entity, but the figures show that they are wrong. While for example Poland is doing relatively well, given the circumstances, and is actually enjoying GDP growth, Romania, Hungary, the Baltic states, Ukraine and Russia are being hit considerably badly. But even within that group one can observe some differences, in my opinion Ukraine is a particularly bad case due to its ongoing political instability. Russia, after realizing the significance of FDI, is trying to make its legislation more investor-friendly, something which we don’t see in Ukraine, a lost country for the next few years. The differences between the good performers and bad performers can also be seen in our portfolio in the region – we have absolutely no problems in Poland, but I also have to point out that given the complexity of the crisis we are still seeing our Hungarian portfolio performing relatively well. Regarding Poland, I think there is more to come and this might not be good news. The Polish economy is largely dependent on the German one, and that might backfire on Poland as soon as the elections in Germany are over. This is when we are going to hear about some significant cuts, lay offs and rising inflation. As everyone is waiting for the election, not much is being said on these issues. Obviously, there will be repercussions for Poland too as Germany is a major trading partner of the country. So, I am also monitoring Poland with increasing caution. What will the future bring? I wouldn’t be as optimistic as some of the market analysts seem to be these days. After couple of recent big refinancing deals there was a great deal of excitement on the market, but we need to look at the pre-crisis financing volumes. I am positive that we are not going to get even close to these numbers over the next two years, with the long-term financing remaining problematic. The liquidity, however, is back on the market, but investors are still afraid to invest. Real estate is still considered over-priced and risky.

Tiit Roben

CEO, Merko Ehitus

The weather forecast for the Baltic states? Still stormy! 

 The situation has continued to worsen, with a decrease in construction volume and declining of profitability seen in the first half of the year. The economy has decreased 18 pct in Latvia, 15.6 pct in Estonia and 12.6 pct in Lithuania since Q1 2008. There is no hope of the situation improving in 2009. Additionally, it should be remembered that the construction sector will lag behind for every rise and fall of the market – during a growth period, contracts are made for construction work that will be completed in the future; during a downturn, contracts for future work are put off until the economy has recovered. The downward trend of construction prices due to decreasing volumes and tougher competition has continued, bringing prices down to the 2005 level. New construction projects can be considered successful if revenue equals costs. In order to get new projects, tenders are frequently made at lower than direct costs. Such activity is clearly unsustainable, involving higher business risks for tenders, execution risks for clients and credit risks for potential suppliers. Since construction costs have come down significantly, the public sector has taken the opportunity to initiate projects in the infrastructure and environment sector, funded mostly by European Union structural funds. However, excessive bureaucracy and the inability of local governments to produce the required self-financing is restricting the more active use of European funds.

What is going to happen in 2010 depends on the decisions made today and the conditions these decisions are made in. And we all know the conditions. Stricter financing terms and negative expectations have brought investment activity in the region to a standstill. Most expansion plans have been postponed indefinitely and the private sector is focusing on the management of costs and cash flows. The fall in consumption and income has substantially damaged the revenue base of the public sector and the public sector’s capacity to initiate new projects.

Reinhard Schertler

managing director of S+B Gruppe

Slowly moving forward 

There are signs that things are improving: the figures are better than two months ago. The fact is, however, that there are still many companies struggling and the banks are still reserved about giving them loans. So there is still less office/retail space needed at the moment. The same goes for hotel rooms. If you are asking me privately: yes, things are getting better, but very slowly. It will take one or even two more years for the real estate market to fully recover. I think that the old ‘Western countries’ suffered more because their economic connection to the US is stronger and, to be honest, the standard of life was too high for the work that people really do. The unemployment rate will stay high in the old ‘Western countries’ even after the crisis. There is still investment activity, especially due to the big German funds. But they are looking only for prime locations and fully-rented buildings. So the market for “A1” real estate never really stopped. But for properties of a poor quality and with bad infrastructure, things are getting even harder. Also, tenants have more choice now. When the crisis finally comes to an end there will be less players, less speculative money, and the market will focus more on the customer (the tenant) and not only on the investors. All in all, things will be clean and fresh!

Grzegorz Czaus

partner, Ozone Architectural Studio

The crisis – its bright and gloomy sides 

I’m not sure whether you could claim the crisis has come to an end. The market is definitely in recession, we have much fewer orders – which means less work to do. That is most true of residential sector projects. The only large and interesting projects we have to tackle from time to time concern IT, new technologies and innovative production. Gradual movement is being noticed on the commercial market, although these are mostly talks about talks, trials and analyses. Much has already been said about the end of the crisis, but we shall really have to wait and see what 2010 brings. One can only hope that the positive indicators concerning the Polish economy that are emanating from Strasburg will take the form of greater economic health and new investment.

The severest crisis-generated woe experienced by architects are the reduced prices offered at public tenders. We are simply unable to draw up projects of an appropriate quality at such low rates. Such cut-prices can only be met by individual architects or smaller architectural studios which do not have to cope with the high fixed costs of larger offices. The fixed price lists for architects’ services which are the rule in Western Europe are not the practice in Poland. Such set prices are a guarantee that adequate payment will be made for services rendered and that a designer is selected on the grounds of concept quality or references. During crises, architects frequently take part in public tenders due to the absence of other orders. But in the longer term such projects may often entail additional costs. The only positive feature of a crisis is the greater discipline required and displayed by the designers we work with, who rate highly the possibility of working in a high-class architectural studio. In a boom period designers often change work, while market rates just seem to keep on climbing.

Ivan Valent

chairman of the Board of HB Reavis Slovakia

Slowly sinking 

We do not see any positive turn-around coming, but rather expect a further worsening of the situation, although less intense than in previous months. So far in the real estate business it is mostly the investment market that has been affected. In the months to come we expect a downward trend in leasing and a gradual worsening of tenants’ financial discipline when it comes to payments. There is also downward pressure on rents. As for the crisis, the worst 12 months still lie ahead of us. Despite the general belief, we think that Hungary will be the first to bounce back from the bottom. This is where the crisis first manifested itself and where it hit very severely. The remaining Visegrad Countries will probably keep sinking slowly in 2010. On the other hand, we expect a strong revival in the investment market, and a turn-around of the trend for yields to be corrected downwards. In the past we have developed basically all of our projects on a speculative basis. In the future we are certain to put more emphasis on the future tenants of our projects. As a matter of fact, this is more of a time for acquisitions than for mere development.

Aleš Mamica

CEO of Realitní společnost České spořitelny

Waiting for a delayed impact

The only positive sign I see is the better news from the origin of the crisis: the US, and from Asia. From the perspective of the Czech Republic, the worst time will come in the next 12 months. The biggest impact on unemployment and consumer demand is still ahead of us. If industrial production starts to grow within the next three months due to empty stocks, we can hope for a slow improvement in the second half of 2010. The impact on Poland and the Czech Republic has been delayed, certainly. In the case of the Czech Republic the initial reason for the recession was not the credit crunch, but the decrease in demand for our export goods. The start of the recovery will come later than in the West, because it will be driven by demand in Western countries, especially in Germany. But we will be quicker back onto the substantial growth track, compared to Western Europe. The potential for our growth is bigger, and the Czech labour market is more flexible. The Czech Republic is in a better position compared to Hungary due to better fiscal discipline; and the recession is not as deep as in the smaller and very open national economy of Slovakia. Poland is in a better position than the Czech Republic due to having a less open economy. In the case of the recovery of foreign demand, Slovakia and the Czech Republic will be back onto the growth track sooner, because they have more open economies. The basic drivers and mechanisms of the market will remain the same. Maybe the expectations of investors will be closer to reality, due to there being less money in the economy, and the bubbles will be smaller. But the imbalances caused by a quick recession will create tendencies to quick reactions and space for new bubbles. For example, if new housing projects are delayed until after the recovery of economy, demand will soon exceed what is on offer and prices will grow – once again – out of line with the real value of homes.

Thomas Schoen

area manager, Starwood Hotels & Resorts Poland

No surprise – Frugal spending in 2010 too

Everyone would agree that the hotel industry is one that has been particularly hit by the financial crisis, as a large number of companies have been focusing on cutting business and representation costs this year, where possible. We are talking to 200 companies, our clients, on a global level and the conclusion is that throughout 2010 they will stay in their saving mode. So what can we do as a 5-star hotel operator? Despite the global trend of decreasing rates – up to 17 pct in the first half of the year according to a global hotel rates study – our strategy is to maintain our rates, offering more services for the same money. There are competitive prices on the market, but this also depends on the season. We have noticed that due to travel cost restrictions, companies are downgrading from 5 to 4-star hotels, and so on, but this is a short-term vision. The current occupancy rate in Warsaw stands at 60 pct, while in 2008 it was 67 pct. Yes, this is a significant drop, but it should be stated that other destinations are doing worse. Looking at our portfolio in the EMEA region, hotels in Germany, Italy and the UK – London in particular – are suffering more. In 2010 we are not expecting the situation to improve significantly, with the first improvement in terms of hotel performance to be felt in 2011 and 2012. Together with local partners we are now working on the introduction to the Polish market of the Aloft and Four Points by Sheraton hotel concepts. You shouldn’t expect a wave of new hotels as we are being very choosy when it comes to location, but our plans haven’t changed.

Monika Bornakova

head of Hays’ construction and real estate department (Czech Republic) for Central and Eastern Europe

Companies refuse to let workers go

From a head-hunting agency’s viewpoint, we can see a slight improvement in the market situation of the construction and real estate industry. Having said that, however, our customers continue to be very cautious when recruiting additional personnel – especially if there are still no guarantees that a new project will have access to finance. The heads of the companies with whom I talk expect a new wave of recruiting to appear in early 2010. Even so, several specializations exist in the industry that are in constant demand. These include property managers, being specialists who have been in painfully short supply on the market for many years. Road designing engineers are also much sought-after, for instance. A trend also exists for skilled workers to move between various areas of a sector. Laying off workers, as well as employing them, is strictly related to new projects and planned investments. Customers are expressing an increasingly positive approach to the possibility of raising finance for new projects in 2010, which means they will not be inclined to sack workers whose knowledge and experience is essential for implementing planned projects.

Denis Sokolov

head of the research department and partner of Cushman & Wakefield/
Stiles & Riabokobylko

Improvement expected this winter

No sign of improvement in the industry is visible in Russia at present, though I have to admit the situation is not as bad today as it could be and was envisaged in the grimmest forecasts. I am convinced the first signs of an upswing will be noticed no earlier than late 2009 when the number of sales and leasing transactions undertaken should increase. That should kick-start the market and make financing and new investments more readily accessible. Even so, difficulties in gaining access to finance will drag on throughout the whole of 2010. Not all the operators on the Russian real estate market are as conservative in forecasting as I am. It is difficult to say how many development and construction companies will continue to experience hard times in maintaining a position on the market. But there is a group of companies which can be expected to change owners for such reasons, for instance banks or more powerful holdings.

Alexei Govorun

deputy CEO for strategic development and marketing for developer TMM

Instinct keeps the market moving

Late last year was the time when fear was the predominant sensation felt by real estate operators. Since then the market has adapted to the new conditions and is beginning to operate on conditions different from those which were once the rule, though it is still in a stagnation stage. Not many signals of imminent improvement are yet visible; but, even so, a certain measure of optimism is being sensed. In the property sector businesses are starting to operate along new guidelines. To this may be added the animation traditionally sparked off by the end of the summer season. This year our company has focused on finishing its most advanced projects, although we have been forced to reduce our workforce by 20-25 pct and to have our profit margin slashed. We still do not know when we will be able to start constructing new projects, but even so we have already started designing and clearing our decks for the better times which lie ahead. We are still searching for a serious strategic investment partner.

Antoni Józekowski

board member of Hossa Investment Group

Trust required immediately

The current year is proving one of the best ever in our 20-year history in terms of apartment sales. A large demand for homes exists in the TriCity, which may be satisfied by making long-term bank loans available for flat purchasers. The great simplicity with which loans were granted in previous years resulted in an excessive demand being generated together with a huge upswing in the prices for homes, services and building materials.

At this moment, a large differentiation in the scope of what banks offer in financing homes for both purchasers and developers can be observed. The policy of excessive restrictions and protracted loan granting procedures may lead to paralysis in residential development. The real estate market will settle down to a state of normality when it finds support from a stable financial sector, a sector which possesses money and displays enough mutual trust to allow mutual loans to be granted. In our opinion, that is when sufficient money will become available to satisfy the operations of all participants in the investment process and for the residential market to achieve stability.

Alexei Strulev

real estate director of developer Panorama Group

Anxiety over old problems which lie ahead

There are very few, if any, really substantial pointers to suggest the economy is back up off its knees. The first harbingers will be the stabilisation of the Ukrainian currency, reinstating the possibility of granting loans and an improvement of the consumer’s sense of well-being. That will result in rising consumption and greater shopping chain profitability making a reappearance, which will enhance demand for retailspace. But it is still too early for this to be seriously considered. It is my view that the end of the present year and the beginning of 2010 will not provide the solution to satisfy the feverishly awaited market improvement. The construction sector should expect the same problems to continue: the instability of the national economic situation, expensive financing and also the absence of interesting projects. Our company corrected its development plans in early 2009 and focused on carrying out the most important projects with the greatest prospects, including the Sky Mall shopping centre in Kyiv, Inter Mall in Simferopol and the Solnechnaya Galerieya in Kryvyi Rih.

CEO, ING Magyarország Ingatlanfejlesztő