On and off the beaten track
Meanwhile, EU membership could prove the making of the Bulgarian and Romanian markets, while Russia and Ukraine continue to pose a thorny problem for investors in the region.
Capital cities are usually the jewels in the crowns of countries in Central and Eastern Europe, but investors now need to look beyond the main cities for more profitable investments.
Warsaw, Budapest, Bucharest and Kiev are no longer the obvious hot spots when it comes to investment in the region. Investors in Poland are directed towards the Warsaw suburbs of Zšbki, Marki or Janki, which, according to the capital's chief architect, Michał Borowski, will soon become part of the capital and thus have huge potential.
"There is probably no unemployment in Warsaw at all. Now we actually have problems with labor," says Borowski. "The population of the city of Warsaw (an area of 512 sqkm) is now around 1.8 million and it will double in the next 20-30 years," he stresses. The reason for this, according to Borowski, is because the average European capital contains about 10 percent of the country's population and Warsaw currently has only five percent.
The chief architect also expressed his satisfaction about investors speculating on land and constructing new apartments. "They gain 20 to 40 percent profit per year," Borowski said, adding that in 2006 at least 15,000 new apartments will be sold in Warsaw and 20,000 in 2007.
Growing pains
Borowski says he is aware of the difficulties investors face in Warsaw. He admits that the lack of architects and builders, poor land availability and public transport, and the inefficiency of the legal and public administration are serious barriers to investment. "Even if the system of structural funds from Brussels promises a lot, the question is whether the efficiency of the administration will allow us to use all those possible funds," he says.
Borowski also assured investors that spatial-planning regulations in Warsaw are being reformed. "The Warsaw urban area is 60-70 percent covered by master plans, which makes 100 plans in total. The next 100 plans are currently being processed. A study of Warsaw's overall zoning will be approved by the city council in July or August."
Bulgarian boom
EU membership is crucial for investors, who are keen to get a degree of stability in their markets. Countries are now classified according to EU membership, namely those that belong to the EU, those aspiring to join, and those still on the outside. For Bulgaria, EU membership could set the country's real-estate market hot on the trail of its CEE neighbors.
Boyko Borissov, the mayor of Sofia, told WBJ that 61 percent of all investment in Bulgaria is concentrated in Sofia. "Right now the investment environment is wonderful," he said. In Bulgaria, foreigners can buy land through registering a company, which is "very easy" according to Borissov.
"After we join the EU [on January 1, 2007] the price of real estate will be higher," Borrisov says.
Romania rising
Romania is also enjoying strong growth as it moves close to membership of the trading bloc.
Property prices are already going up, and some analysts expect the country to follow the same path as Poland in the 1990s.
"Prices increased a lot in 2003-2006, especially in the northern part of Bucharest," says the vice-president of the Romanian Association of Real Estate Agencies (ARAI), Dan A. Negulescu. For example, the cost of agricultural land increased from EUR 200 (zł.816) per hectare in 2002 to EUR 3,500 (zł.14,280) per hectare in 2005. Due to the development of mortgages and demand for stylish villas, especially among foreigners, Romania's residential market is doing well. So too is the retail real-estate market. Negulescu claims that retail units, which the country had an excess of in 2004, are now ready to receive customers.
Only the office market remains a tough sell in Romania, which had take-up of 130,000 sqm in 2004 and has an 11-percent vacancy rate now. "It is too early to say whether the investment for institutional investors has paid off in Romania because they have not started selling yet. From the developers' point of view, Romania is definitely a market they would love to be in. With fast yield compression and stable rents, the demand is there. We see a lot of investments financed by equities," says Paweł Dębowski, a partner at Clifford Chance.
Russian roulette
"All major cities in the region are recording significant GDP growth, which translates into a wide spectrum of opportunity in the region. Companies want to open or expand their offices in cities such as Warsaw and Moscow," says William Kistler, president of the Urban Land Institute. But supply in Moscow cannot meet the demand for modern office space, and the market remains very challenging for investors and developers.
"Very few international developers are there. This is why there is a huge lack of supply of high quality space," says Peter Hensby, a senior surveyor of the capital markets at Jones Lang LaSalle, who adds that only five office buildings in Moscow could be considered of A-class standard.
"In Moscow there is a lot of local development, and also Turkish and Israeli, which have a slightly different standard," says Jacek Wachowicz, vice president and director of CEE acquisitions at Heitman Poland. "The main difference between the CEE countries that have joined the EU and the non-EU ones is a different quality of product."
Quality counts
The Ukrainian market also suffers from a difference in quality.
"Forget about CEE specificity in the case of Ukraine," says Alexander Shkarupa, the director of Alacor, a property developer and investor based in Kiev. "Ukraine is similar to Russia - Russian investors know the Ukrainian market. Local players have a different business strategy and a different perception of the risk level."
Shkarupa says that in order to operate successfully in the country it is best to "get assimilated" or use a local partner. "Finding the right partner is the key. Even investment funds cannot do business alone - they have to cooperate," he says.
How difficult it is for foreigners to operate on the Ukrainian market can be seen by the example of Echo Investment, a Polish real-estate investor and developer. The company has been trying unsuccessfully for four months to find business opportunities in Ukraine. But according to Vitaliy Chernov, director of the Cit Group, there is something to fight for as construction is the fastest-developing sector.
"In 2005 and 2006 there was a 50-percent growth in property prices. The Ukrainian real-estate market is still behind Russia but it is growing fast," says Chernov.
Win or lose?
The burning issue for participants at EMPEX 2006 was whether those who have already invested in the CEE region have been successful and whether their investments have paid off.
"Originally the real-estate market was a developers' market. Previously there was hardly any good quality product in the office, retail, or warehouse sector," explains Wachowicz. "At the same time FDI was developing very quickly in the mid-1990s - so there was quite a lot of demand. Stock has grown tremendously from practically zero to more than two million sqm of office space. The demand-supply balance has changed dramatically. The investment market has evolved and yields have now fallen to, in some cases, below six percent."
Wachowicz clams that, in general, investments have paid off, but with different results depending on the real-estate sector. "A sector that has been most lucrative is retail - where rents have been stable and capital growth has been the strongest."
So how can CEE cities learn from the past few years and ensure continued investment in the future? "Keep retail in the city center, do not let it escape to the suburbs," says Kistler. "You can be proud of the improving environment but do not be complacent. Deal with your aging infrastructure and public transport."
Experts view of the market
Wiliam Kistler, president of the Urban Land Institute
CEE has undergone a phenomenal transformation, everything has changed. Your competition is now not the other CEE countries but the rest of the world. The trend is urbanization and if we do not understand the demographic implications of the decreasing population we will have a rough ride ahead.
In 2010 50 percent of the globe's population will be living in the urban areas. Western Europe is still more urbanized than CEE but this is changing rapidly.
[CEE] can be proud of the improving environment but do not be complacent. Deal with your aging infrastructure and public transport. Keep retail in the city center, do not let it escape to the suburbs. Look at the regional challenges.
Michał Borowski, Warsaw's chief architect and deputy mayor
Warsaw has delivered what it promised. The city is growing fast - as fast as the efficiency of the management and governance in the public sphere develops.
On the retail market: There is one sqm of retail space per person; the average capital of Western Europe has about two sqm per person. This means that the modern retail space will be doubled. This will be the same with modern office space and apartments.
On the residential market: People are speculating on land, constructing apartments, selling them and they have 20 to 40 percent in profits per year. In 2006 at least 15,000 new apartments will be sold. For 2007 it will be 20,000.
On development: The main land reserved for development in Warsaw is not the green areas along the Vistula river, or our forests, or our parks. It is the Polish industrial area, the post-military areas, the post state-railway areas. All those together are thousands of hectares. They are not easy to obtain.
The large borders of Warsaw are divided by state and rail-owned tracks and land, which is not used for any purpose. This will be used for the development of the city.
The efficiency of governance in the public sphere is not as good as we would like to have it. Even if the system of structural funds from Brussels is promising a lot, the question is if the efficiency of administration will be such that we can use at least a part of those possible funds.
Alan Colquhoun, managing director, DTZ, Poland
Most of our clients would pay even more than we would advise them to pay.
There is no such thing as the Polish, the Czech or the Hungarian market any more, at least for the countries that are within the EU.
No one expects yields to go below 5.5 percent. Rents in retail will be more stable, and there will be more international retailers coming in.
