Always look on the bright side

In his recently published book ‘The New Paradigm For Financial Markets’, George Soros, one of the world’s most successful investors and richest men, argues: 
“I consider the credit crunch to be the biggest financial crisis of my lifetime 
– a ‘super-bubble’ that has been swelling for a quarter of a century and is now finally bursting.” Yes, it is bursting - and it is not only in America and Western Europe that the effects can be seen. ‘Eurobuild CEE’ spoke to DTZ Poland & Central Europe’s managing director Alan Colquhoun to find out how investors in the CEE region are sleeping these days and if it is really the case that the region is a safe haven for investors

Mladen Petrov, ‘Eurobuild CEE’: It seems as though a day doesn’t pass without reading or hearing about the impact of the credit crunch abroad – even in the CEE region, which many seem to believe is not affected by this crisis. Two of your major competitors have just announced their financial results and, to put it mildly, they weren’t that satisfied with them…

Alan Colquhoun, DTZ: I guess you want to ask me how long I think the credit crunch will be in the headlines? I think the honest answer to your question is that no one really knows. The general concern is that at least when it comes to the banking industry the credit crunch is only part of what we may call a wider global finance problem. When we hear global financial gurus such as Alan Greenspan and Warren Buffet describing this situation as the biggest single event since the great Wall Street Crash, I think the consensus is that it is a much deeper longer-term problem. There are three schools of thought. It would be easier if you imagine these as lines on a graph shaped as a \'V\', a \'U\' and a \'W\'. The V-shaped graph represents the credit crunch as a short-term issue, followed by a quick recovery. The U-curve represents the view that the fall in activity will be followed by a longer period of inactivity before the recovery kicks in. The W-graph represents a more volatile scenario, involving a quick rebound followed by another downturn and a final rebound.

Which of these would be your credit crunch letter?

I would put myself in the ‘U’ category! I think there are a few of the ‘V’ persuasion in Poland, but I would add that initial estimates of Q2 investment transaction volumes in Poland would suggest that we are just at the start of the dip in the ‘U’. In terms of Poland in relation to elsewhere, I would add that the bottom of our ‘U’ might be slightly higher. The one sentence that sums up my general feeling on the credit crunch situation is: “Thank God I work in Poland!” And yet, we cannot pretend that we are not part of what is happening just because we are in the CEE region. Here are a few questions that could make people look at the situation from a better perspective: In the Polish commercial real estate market, for example, do we have mainly domestic companies as tenants or international companies? Have most of the majoir players that have invested until now been Polish-based funds or international funds? Are the main lending banks that have financed these investments been Polish or international? Now we are in a position to see the picture more clearly, right? No matter how we measure this – in terms of capital transactions, occupiers, development or investment funding – the majority of all of these transactions involve multinational players. So, this is truly a global issue and we here in the CEE region can’t pretend that we are not affected.

Poland as a safe haven – is this true? When we talk to people off the record, they are not afraid of sharing their fears with us. However, on the record everything seems to be just fine. Where does the truth lie?

Well, you are right to be sceptical – I believe there is no such thing as a safe haven anymore. Nevertheless, the conditions for continuing economic growth are still fairly bright. Let’s compare some figures. Madrid, the capital of Spain, a country that is not necessarily in good economic shape just now, has around 10-11 mln sqm of modern office stock, while Warsaw has only 3 mln sqm of office space. It’s an oft-stated comparison, but you get the point – there is still room for more supply in Warsaw.

So Poland as a big market should make it. But what about the rest of the countries in our region – are they going to turn out to be as lucky too?

The Czech Republic has a few political instability problems it is currently dealing with, but they are not of such a serious nature and investment activity has remained buoyant in 2008. Hungary, on the other hand, has been struggling with very low economic growth and higher inflation than elsewhere. Rents have been stable for a long period of time, but now we are finally seeing some growth, as the austerity measures are now apparently starting to work and so there maybe a ‘turnaround’ story in that market. For investors looking for a good balance of critical mass and stability within an investment climate that is not overly risky, such as the Ukraine, then I think that Poland meets the criteria.

Romania is also a big country…

Correct. However, Romania may now be facing a period of much lower activity due to the sheer speed at which the Romanian market has grown and attracted many investors, causing yields to compress even more quickly than in the ‘core’ CEE markets of Poland, the Czech Republic and Hungary, which Romania caught up with almost overnight. That market is therefore more exposed to a downturn.

So, are your clients in the CEE region 
sleeping sweetly after all?

First of all we are trying to give a sensibly measured response to the existing circumstances. It is vital to be aware that no one is immune. Part of my advice is almost a golden rule you can tell every investor, that when the investment market is experiencing some turbulence concentrate on quality and prime product, as it is this – no matter how unstable the situation is – that always comes off best at the end of the day.

You seem to be quite optimistic about the whole situation…

Certainly, the companies that have global reach and global networks will be able to react to these crashes faster and more efficiently than the ones that lack this global scale. Secondly, we are now one of the biggest international...

I am sorry to interrupt, but being the biggest, however, doesn’t mean being the best…

I agree, but our business portfolio is quite diversified with half of our income derived from non-transactional work. As a result, companies like ours are not overly-dependent on one particular business line. The more diverse we are, the easier it is to respond to these challenges. This is what makes me feel optimistic.

Well, the recently published DTZ financial results don\'t seem to reflect that optimism…

DTZ’s interim results for the full 2007-8 financial year that ended on 30th April 2008, were exactly in line with expectations that were announced to the stock exchange earlier in the year. After allowing for exceptional items, profits were 45 pct lower than the year before, which is a more positive result than some of our main competitors. As with other property companies, the lower results this year are related to the downturn in investment markets, most notably in the UK and USA.

I can\'t help noticing that you are not yet present in the currently ‘hot’ countries of Bulgaria and Serbia. Why is that?

I would agree that Bulgaria and Serbia may have interesting markets, but I’m not sure I agree that they are ‘hot’ ones. I can say that DTZ continues to look at opportunities in other countries and we have recently firmed up affiliate arrangements in Croatia and Kazakhstan. Bulgaria, Serbia, Slovakia and the Baltic States are also on our radar screens and in fact we already have property management activities in Slovakia. No announcements about any new offices in these countries is to be expected soon, however. In the short-medium term, DTZ is concentrating its expansion activities in the Middle East. Together with our recent expansion in the Asia-Pacific region and Canada, this means that DTZ is very well placed for tapping into new sources of investment funds, such as sovereign wealth funds and Canadian and Australian pension money. I am sure that this will also be of benefit to us here in the CEE markets. ν