Post crisis, the CEE is once again presenting itself as major growth market, Barbara Ottawa finds at this year's Real Vienna

Real estate markets in the central and eastern Europe (CEE) region were hit hard by the crisis financing for projects dropped by around a fourth between 2008 and 2009.

According to research by Austrian Erste Group's real estate company Immorent CEE, investments in 2009 amounted to €2.5bn, which is one fourth of the investments made in 2008 and one sixth of those the year before.

"We virtually discontinued our investment activities in the entire region since 2008," confirms Martin Sabelko, CEO of ING REIM CEE and Germany.

But Sabelko believes that the virtual halt in investor activity is not all bad. "For some retail markets in Eastern Europe the crisis was almost a stroke of luck, because the lack of financing prevented the construction of redundant shopping centres," he argues.

"Prices for land have returned to an ‘understandable' level, while during the ‘gold-digging phase' they were at times higher than those in western markets," says Michael Griesmayr, owner of development company IC Projektentwicklung.

Similarly, Andreas Ridder, CEO Austria and CEE at CB Richard Ellis, points out that investors have become more careful about investments in the region, demanding high-quality property, preferably with a high degree of pre-letting.

Analysts agree that the times of speculative investments in the region and ‘pioneer investments' such as buying in virtually ‘uncharted' areas will not be happening again any time soon.

And Gerhard Breindl, head of group real estate at Austrian Erste Group, adds: "We saw a professionalisation in the real estate business and much more focus is now laid on sustainability of financing as well as construction, which also means that ‘green' is becoming more and more of an issue."

According to Breindl the crisis accelerated this trend as sustainability and environmentally friendly buildings are not only something that investors are demanding but also in the interest of a country's economy and jobs market. "Road building is done by machines but refurbishing houses and making them ecologically sustainable can only be done by hand - that creates jobs," notes Breindl.

With the new focus also on prime locations and sustainable projects investor perception of the whole region is changing. While pre-crisis CEE was seen as a good diversifier and guaranteed growth area, investors are now differentiating between the countries in the region more - and also between the various real estate sectors. "There are huge differences between cities in the region regarding the office market," Ridder points out.

"In markets like Bucharest, Budapest and Kiev too much has been built and the vacancy levels will remain high or get even higher," he explains.

"Budapest is somewhere in the middle as vacancies are currently high but construction has been slow and with increasing demand those vacancy levels will fall," Ridder adds. However, Breindl is more cautious: "Buying offices in Budapest is not interesting because vacancies have gone up to 20% despite prices having dropped by 12%. Zagreb, on the other hand, is an interesting office market."

The Croatian capital is a market with low office vacancy levels, along with Warsaw, Prague and Bratislava.

For the retail sector Ridder does not want to give an outlook for certain countries, as developments in this area are "different for each city. There are too many shopping centres in Zagreb, for example, but other cities might be interesting," he says.

Breindl says that there is huge demand in Hungary for affordable housing and maybe also lower standard hotels. "At the moment there are many empty unaffordable flats, so either prices have to go down or new ones will have to be built because the demand is there - so we are looking into residential developments."

ING's Sabelko also notes that "we had forgotten the most important lesson - location, location, location".

Currently Poland and the Czech Republic are the markets where the largest deals are happening and interest is highest, with yields in Prague and Warsaw already below 7%.
"And investors are almost literally fighting over good quality objects in those two markets," says Ridder, stressing the importance of quality.

"Problematic properties with vacancies are not in demand in the region, even in Poland and the Czech Republic where prices are rising again," Ridder says.

In Warsaw, on the other hand, yields of around 7% will be sustainable say analysts. Poland was the only EU country to show positive GDP growth of 1.7% in 2009, against -4.7% for the EU as a whole.

The IMF forecasts 2.7% growth in Polish GDP for 2010 and 3.2% for 2011. This growth potential also feeds into the EBRD's 3.7% prediction on GDP growth in the whole CEE region for 2010 compared with 1% for the EU as a whole.

Hungary, Russia, Turkey and Poland are the markets were the EBRD sees the most growth potential.

However, CB Richard Ellis expects demand to increase this year only in Hungary and Slovakia, with interest in Poland and the Czech Republic continuing.

"For the rest of the CEE region demand will only come in 2011," Ridder says.

Other companies like Raiffeisen also include Moscow and to some extent Kiev in the ranks of interesting investment opportunities for 2010.

And Breindl points out that demand for CEE real estate will be fed by "non-speculative institutional and private investors", as an 8.5% yield in Budapest compared with 6.5% in Vienna and 4% in London combined with a much better economic outlook will draw investors' attention.

"The region's catch-up process with the West will drive growth for another 20 years and the crisis will be just another point in history when we look back in a few years' time," says Herbert Stepic, CEO of Raiffeisen International.

Stepic himself remains cautious regarding the recovery of south-eastern Europe, mainly because of the rising joblessness in some countries.

Unemployment, in turn, hits office markets harder than, for example, retail markets and ING has shifted its focus accordingly. "We will only be doing retail from now on in CEE," Sabelko explains. "During the crisis we saw that retail is exciting, more dynamic."

Austrian real estate company CA Immo has re-integrated its CEE-subsidiary CA International and its managing director Bruno Ettenauer explains why. "CEE could not detach itself from the world economy in the crisis, and it will not do so during the recovery - that is not a problem unique to the real estate sector. But it was a mistake to separate things which belong together."

Ettenauer also narrows down the focus of CA Immo to core markets in central Europe as "some mistakes had not been apparent in the boom phase of the market" and the company does not want to be invested "everywhere and at the same time nowhere".

Similarly, troubled Austrian real estate company Immofinanz has almost completed the merger with its CEE subsidiary Immoeast and will now concentrate on core markets Austria, Germany, Czech Republic, Hungary, Slovakia, Poland, Romania and Russia (Moscow and St Petersburg only).

Eduard Zehetner, spokesman for the Immofinanz management board, confirmed that the company will be selling its US, western European and south-eastern European holdings and focus on office, retail, logistics and residential properties only - and no infrastructure.

For CB Richard Ellis on the other hand a wide-ranging presence in the market is important "as our clients are international customers which need us in all markets", says Ridder.

Breindl argues that "the focus on core markets and core business is a natural development. Everybody is looking for security but we all will realise that it makes sense not only to invest in large markets. And investments will shift to certain markets because of yields, because there is a risk premium being paid."

According to Ridder yields in CEE show stronger growth and the yield spread has widened from 19bps at the peak of the crisis to 141bps again.

"That is positive, as risk in the CEE region is higher but you also get paid for it," says Ridder.

But while there are some signs that investors' risk appetite might slowly be returning - albeit nowhere near what it was before the crisis - developers are still facing financing problems.

"It is difficult to get financing and the huge problem will start once interest rates go up again and inflation kicks in as banks' extra charges for CEE loans has increased to up to 300bps," Griesmayr points out. "This is a difficult environment for developers and I see a consolidation into a few larger companies in this area." Griesmayr ends: "Developers are getting more cautious, which is positive. Three years ago some would have built without having any tenants - those days are over."
 

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