EUROPE - Investors will target Balkan states for returns fast disappearing from Central and Eastern European (CEE) property markets, judging by an Serb acquisition announced last week by Merrill Lynch.

Optimistic forecasts for the region came from Roger Barris, European head of Global Principal Investments (GPI) - the bank's real estate capital arm - as it announced it was to acquire, through GPI, a "significant" if undisclosed minority interest in Serb developer MPC Properties. The acquisition will be GPI's first in the former Yugoslavia.

"Serbia is at least 5—10 years behind the Czech Republic and Poland," Barris said from Belgrade. 

The bank, which has $1.8trn (€1.2trn) in assets under management, will likely increase the size of its investment over time.

"It depends how quickly opportunities materialise," said Barris. "We'll likely remain a minority investor, though it could end up close to 50% but MPC will want to be an equal partner."

Barris confirmed Merrill views the investment in the Belgrade-based retail specialist as a beachhead in a region that, until recently, was politically far too volatile to attract the kind of investment that has instead gone to CEE.

"We view the potential for regional expansion as a big part of the opportunity. Because of the [earlier] conflict the Serb market is way behind," he said, citing 7% GDP growth over the past few years.

"There is a degree of political risk but, having been a pariah nation for years, Serbia realises that there's no way forward on that basis. Violence is not a feasible strategy. Serbs recognise that integration is the only way."

He added: "Serbia is an investment platform at least for the markets of the former Yugoslavia and the Balkans. There's a huge opportunity in Serbia, and Merrill Lynch has strong relationships throughout the region. We're doing in Serbia what we did in Turkey; combining a local partner and an international bank gives competitive advantage."

The deal, which gives Merrill Lynch representation on MPC's board, will provide the primary vehicle for any further investment.

"It's too painful to do deals one by one," he said.  "It's always difficult in emerging markets to find an appropriate partner."

Barris cited MPC's track record, which includes the in-progress development of the regionally significant Usce Shopping Centre in Belgrade. "MPC's track record is equal to that of any Serb real estate company," said Barris.

The focus at least in the short term will be on major cities such as Belgrade and Novi Sad - Serbia's second largest city - and on retail. He said the fact that MPC's finder has a retail background was "significant".

"We like retail as an investment, especially mid-market because of rapidly growing consumption." Belgrade, he pointed out, has lower per capita retail space than anywhere else in the region.