The waiting game

Investors, at least the ones with some cash in their hands, can’t wait for 2009. Property values across Europe continue to fall, but those looking to buy believe discounts are going to be even bigger. Does this also apply to the CEE region?

Mladen Petrov

Hank Greenberg, former chief executive of AIG and one of the company’s biggest shareholders, had a few incredibly bad weeks when he had to watch in horror as the value of the company’s stock plummeted. In an attempt to cope with the liquidity problem, AIG – just like pretty much every troubled company these days – has put a large number of properties up for sale. “To pay off the loan from the government, the company is going to have to sell assets, at a time when they are not going to get the best prices. The more assets you sell at prices that are not fair value, the more jobs you lose, the more pension funds lose enormous amounts of money. And the tax-payers will not get all their money back anyway. Nobody wins,” Hank Greenberg told The New Yorker.

In the mood for some shopping

Well, maybe nobody except for those who are on the market, looking to buy discounted property. For these players, mainly German open-ended funds (which, however, have taken a break – at least until the end of the year), as well as Middle Eastern private investors and sovereign wealth funds, the decreasing values of real estate property is certainly good news. “Interesting times” – was how one of our interlocutors summarized the situation. Leading valuation experts across the world agree that, despite some optimistic signs that the financial crisis might have been partly halted, 2009 will continue to see property values plummet further globally, with the CEE region being no exception. King Sturge, confirming in its recent European Retail Property Market 2009 report the continuation of the re-pricing trend, estimates that capital values of retail assets – particularly in Western Europe – will have fallen by over 30 pct between their peak in early 2007 and 2010. On the other hand, according to the ‘Money into property 2008’ global research report by DTZ, the expected yield correction of prime offices in the Q2 2007-2009 period in Poland, the Czech Republic and Hungary is more than 100 basis points, the highest in the region. These CEE countries, therefore, fall into the same category as the UK, Ireland and Spain.

The missing cure

That doesn’t sound too good. Without any doubt, 2009 will be a lean year for the whole CEE region, but as we have been assured many times while working on the story: “it will be bad, but we don’t quite know how bad. For sure it won’t be as dramatic as in Spain or the UK.” Bryn Williams, valuation chairman for EMEA region at DTZ, also thinks the region is not immune from falling values. In his opinion there is good and bad news for the CEE region: “Poland has the potential to withstand the financial crisis better than other countries, but cannot be left unaffected. The Czech Republic is another country that seems to be doing OK at present, but pricing seems high in comparison with many alternative market options across the region. On the other hand, the Baltic countries, Bulgaria, Romania, Hungary, Ukraine and Russia have the prospect of a very tough period ahead of them,” believes Mr. Williams. He adds that: ‘‘Land values across Europe are collapsing and we have already seen decreases as high as 60 pct in Romania and parts of Bulgaria, which will extend further if they have not done so already.”

According to him, throughout 2009 yields in the region – with the exception of Hungary – are to be corrected by at least 50-100 basis points at the prime end of the market, with the prospect of much greater falls in the secondary markets to reflect what is happening elsewhere in Europe. Back in July 2008, the majority of the markets in continental Europe seemed to be holding up without dramatic property value depreciation in comparison with the US and UK. Only six months later, the whole continent seems to be experiencing the same decline. With land values down by up to 80 pct in the UK and prime commercial property prices down by up to 35 pct, one has to ask who will be next?

The D-word

Hopefully, the region in general, with a few exceptions due to its modest exposure, will not see such dramatic property value decreases. Christopher Grzesik, managing director of Polish Properties, the Warsaw-based valuation and advisory services company, believes that: “For the first time in Poland, most valuers, myself included, don’t quite know where the market is heading. This is a time of great uncertainty. The next six months will be very important in the determination of longer term price trends and property values in the future.”

So far Polish Properties has not had a distressed property to value. Owners, hoping for the best, are still reluctant to openly put their properties on the market at a time when local and international investors with cash are sniffing around for opportunities. “There is a lot of psychology involved in the waiting game that is now taking place. The seller is thinking ‘does the interested buyer know how desperate I am to sell?’ Naturally, if the incoming investor possesses this crucial piece of information the seller is at a disadvantage,’ explains Mr Grzesik.

This crucial piece of information, however, is everyone’s best kept secret. Those who fail to sell their property for a good price might be faced with the worst option: all-foreclosure. Nevertheless, as Daniel Harris, head of CEE at the Macquarie Global Property Advisors fund (MGPA), points out, the number of foreclosures across Europe remains very low. “Distress is very difficult to access. Foreclosing is the last option and so far we haven’t had real distress in the deals we have done,” he claims.

The list of victims

According to the analysts we spoke to for this story, the retail sector may be the one which will suffer the least from devaluation. In fact, a further growth of rents by 10 pct, at least in Bucharest, Prague and Warsaw, is expected. Another good performer could be the warehousing sector. “Up to now we have observed that both retail and warehouse properties were holding up better than residential or offices,” Mr Grzesik observes.

The residential sector on the other hand, for a couple of months now has been the one seeing significant falls in valuations across the region. Bulgaria and Romania are only two examples of this ongoing trend. Just this month another residential developer, the US-based Copper Beech, froze its investment plans, worth EUR 130 mln, in Bucharest. The company explained that the demand for new residential space in the Romanian capital has been overestimated. The large number of residential projects, which have been put on hold, will certainly bring their value down at the end of the day. Is this true also for the more established residential markets in the CEE region?

Light at the end of the tunnel

According to a number of estimates, in Warsaw about 25,000 residential units are now on the market waiting for buyers. “In the long run we don’t see major problems for the Polish residential sector. As soon as the financing problems are solved, and I believe that will happen soon, the sector will bounce back. Nevertheless, we have some 18 rough months ahead of us,” says Daniel Harris of MGPA.

The fund, which has recognized the CEE region and especially Poland as among its European core markets, has USD 1.3 bln to spend in Europe. “Right now there are lots of opportunities for every fund, but our main focus at the moment is on prime office and retail projects. Due to