The eye of the storm

Emil Górecki, Gergo Racz, Matei Roman

Although the financial tempest is still raging, investors in Central and Eastern Europe feel more at ease than in other regions. So welcome to the investment oasis

The collapse of the financial market has for a year now been the main factor influencing conditions for real estate. Stock exchanges in New York, Moscow, Warsaw, Prague and Budapest have been hugely unstable. The Lehman Brothers investment bank in the USA folded. Merrill Lynch, the third largest American investment bank was sold for USD 50 bln to the state-owned Bank of America. American International Group, the giant insurance syndicate has also experienced no end of problems. Analysts are now scared that there is more turmoil still to come. But for the moment, despite these institutions being active all over the world, the CEE region seems to be providing some kind of shelter from the storm.

Crystal-ball gazing

Every real estate sector company could have lost out during the crisis, but some have actually managed to score successes by employing clever strategies. According to Jarosław Wnuk, director of the King Sturge agency and head of its capital markets department: “When the year started most investors were convinced that H2 of 2008 would be the turning point when the market started regaining its losses from the turn of 2007. That just did not happen. Some investors are afraid that the 2008 trend will continue into 2009. For the moment it is impossible to predict events.” This is also the opinion of the people running investment funds that had bought properties with a view to selling them on in 5 to 7 years and should be starting to do this in about a year’s time or so, but are now trying to get them off their hands as quickly as possible – even eighteen months earlier.

More difficult though quite good

Comparing the first six months of 2008 with the same period last year in Poland, the volume of finalized transactions has slumped by 57 pct. According to Cushman & Wakefield (C&W), the total value of all transactions was slightly more than EUR 907 mln, whereas it had reached almost EUR 1.81 bln in the same period in 2007. But the demand for office, retail and industrial space continues to be quite high, driving the market forward. Mathieu Giguere, head of the capital markets department at C&W, believes that: “A high demand exists for space in all sectors, helping to consolidate the Polish market, a fact which attracts investors. That does not mean that Poland has not been affected by the global crisis. This is the reason why a rise in interest rates and more restrictive investment financing conditions are currently in place.”

The volume of transactions in the shopping and industrial sectors has fallen, but when the figures for the first six months of 2008 and 2007 are compared, a 25 pct rise in the value of transactions in the office sector is revealed. The falls in the retail (52 pct) and industrial (47 pct) sectors can be explained by a temporary reluctance by investors to take decisions, since it is impossible to say how long the market collapse will last and what the immediate future will bring. C&W’s analyst forecasts that: “The value of this year’s transactions is well below that of the same period in 2007. It will probably be very difficult to reach a value similar to that of last year, which is far from suggesting the market has died. Although the number of businesses interested in purchasing property has diminished, investor appetite for attractive properties continues to be high. At the same time there are many new products on the market, with several large transactions to be finalized in the final quarter of 2008.”

Almost neck and neck

Romania continues to be a market that generates the interest of investors who are looking for reliable and profitable transactions. According to C&W Active Consulting, the value of transactions finalized in H1 of the year on the Romanian property market amounted to around EUR 815 mln, almost EUR 100 mln less than in the same period last year. By comparison, the value of property market transactions in the Czech Republic was EUR 235 mln and in Hungary EUR 135 mln, i.e. as much as in Romania in Q1 of the current year. Dan Ionascu of C&W Active Consulting remains confident: “We expect new transactions this autumn.” The total value of transactions at the end of 2008 is expected to reach EUR 2.2 bln.

When seen from the Eastern European perspective, the situation in Romania is better than might be expected. Western markets have also experienced substantial price corrections, with transactions and prices reaching their lowest points ever. Even if the Romanian market is not entirely unscathed by the crisis – since the financing conditions for small developers and investors have been toughened – it has still managed to improve its figures by several percentage points in the office and retail sectors. The largest Romanian transaction was “eaten up” by a group of foreign investors represented by Ioanis Papalekas and RREEF (an investment fund managed by Deutsche Bank). The German investor paid EUR 340 mln for the Upground Estate office and residential project in a northern district of Bucharest. Gabriel Biris, a lawyer acting for the purchaser, relates that: “This transaction had a complicated birth. The negotiations took nine months but we finally reached agreement. It must be seen as a major breakthrough bearing in mind the complex conditions on the financial markets. Banks have become very cautious, not only towards borrowers, but also when doing business for themselves.” Another large transaction worth EUR 180 mln was finalized in the retail sector, with the parties involved being the purchaser the Italian IGD company and New Century Holdings, the seller.

Hungary five years behind time

Hungary, too, has not been able to avoid the general economic slowdown, though most analysts think the situation is under control. The government’s stabilization plan seems set to help the real estate market to gather momentum in the near future. In the opinion of Michael Smithing, Colliers International Hungary’s managing director: “This trend is reflected in the huge demand for office and industrial space. The economy is again picking up speed, which is bound to increase the demand for retail space.”

Following the spectacular year of 2007 when EUR 1.8 bln was invested in Hungarian properties, H1 of this year was much quieter. Remi Couture, director of research at Colliers International Budapest, details some of the figures: “We have registered transactions worth a total of EUR 113 mln in all sectors since the beginning of the year. The potential transactions which we know about may increase the volume to EUR 400 mln, which means the market will then only have achieved the level of 2003.”

Although the first six months of the current year in Hungary’s real estate experienced a slow rate of growth, the global collapse on the credit market is not the main factor. The crisis that the USA and Western European markets are still embroiled in has only an indirect and limited impact on Hungary. David Nemeth, senior ING analyst in a report published by residential estate agent Otthon Centre, claims that: “Hungary reacted to the negative global events in a totally different way than those countries. The most important change here is the growth of the prices of bank loans.”

If it’s good you can’t go wrong

Poland’s largest banks were almost completely refusing to lend money for property acquisitions at the beginning of the year, but their policy has changed somewhat since then. Interest rates have grown and banks have increased their profit margins. This has also resulted in a correction for real estate prices. Being granted a loan is still far from easy – especially for large investments or portfolios worth tens of millions of euro. 
  According to Jarosław Wnuk: “High quality properties in the most attractive locations have suffered the least. Their rates of return have grown by 0.25 to 0.5 pct. Average and low quality properties without the potential for modernization, expansion and tenancy contract renegotiations, have had the worst time – falling even as low as 2 pct.”

Any analyst will point to differences in the approaches of foreign investors active in Poland. The British have become more cautious, while the Spanish and the Irish are not as interested as they once were. But German activity has remained steady. Their funds allow loans of up to 50 pct to be financed, while other investors want the banks to cover between even 70 to 80 pct of the transaction value. Of course banks, particularly today, are looking to finance investment more securely. Jarosław Wnuk is convinced that: “The way banks develop in the future will depend, among other factors, on the continuing rate of economic growth, but real estate investment will always be popular.”

Bulgarian market leaders

Fears expressed by foreign investors also open the way for local investors, for instance, as is the case in Bulgaria. In the first six months of 2008, EUR 745 mln flowed into the Bulgarian real estate market. According to Elta Consulting, the CB Richard Ellis agency’s local partner, this was the outcome of 20 transactions, 59 pct of which involved properties in Sofia. 
  Provincial cities were only attractive to shopping centre investors. The main Bulgarian property companies in the first quarter of 2008 were local (52 pct) followed by the Greeks (24 pct) and the British (14 pct). The crisis seems to have livened things up in Bulgaria, with their share of the market rising by as much as 8 pct compared with H1 of 2007.

Regional tiger

Poland and its economy compares favourably with more developed Western European markets, which would seem to be a