More than 100 people attended Portfolio’s first property investment conference in London, co-organised by RICS. Speakers at the CEE Property Investment Briefing included Europe’s biggest investors. The exclusive half-day conference in London focused on CEE markets such as the Czech Republic, Hungary, Romania and Poland.

In his keynote speech Dr. Neil Blake MRICS, Head of EMEA and UK Research at CBRE highlighted that while property investment volumes in Western Europe have almost reached their pre-crisis levels, Central and Eastern Europe still has a long way to go reach those levels. There are several reasons for this: less capital is reaching the region, there is often a lack of quality investment products, while political and economic risks are significant. High volatility characterised the region’s politics during the years of the financial crisis, and many countries have seen their competitiveness drop. This has led to falling rental fees in many markets, which does not support investment activity.
 

Despite these problems, the region displays many advantages, according to Blake. Strong internal demand, economic growth prospects exceeding Western European expectations and strong demand projected for office space all make Central and Eastern Europe attractive to investors.

Blake considers high vacancy rates on regional property markets a risk for investors. He believes that high vacancy is a result of a loose regulatory environment. “One can develop property too easily in Central Europe", says the expert. This causes high volatility on the market which can be alarming for those who prefer low-risk investments.

Central and Eastern Europe is small, but attractive

The first roundtable discussion at the CEE Property Investment Briefing in London tried to answer the question: why invest in Central and Eastern Europe? Robert Martin, Head of Central Europe at Europa Capital in London believes that while high yields on property investments and strong economic growth make the region attractive to investors, they are still held back by the lack of transparency. These markets are a lot smaller than those in Western Europe, so liquidity is also an issue, added Florian Nowotny, CFO of CA Immo in Vienna. The lack of transparency also makes it difficult for investors to enter these markets, as having a team present in every single country is necessary.
 

Otis Spencer MRICS, Managing Director at Peakside Capital emphasised the importance of economic growth: as long as the economy is growing, so is demand for real estate. He believes that yields in CEE should converge to Western European levels.

The size of markets seems to be important in the eyes of many investors. While Eastern Europe (including Turkey) represents approximately 50% of Europe’s population, the eastern part’s share in the continent’s GDP is only 20%, said John Verpeleti FRICS, Chairman of the Management Board in Eastern Europe at Colliers International. Even worse, Eastern European investments only account for 10% of all European investment Dr. Walter Hampel, Managing Director and Head of Origination CEE at Deutsche Pfandbriefbank AG made another interesting comparison. The total stock on the modern office market in Warsaw (the region’s biggest city) equals the amount of vacant space on the Paris office market.

It is not always evident which countries are considered Central and Eastern European. Most investors agree that while Russia is a big and active market, it is not part of the region, as different types of investors operate there, added Evan Lazar, Chairman of the Board of the Europe region at Dentons. Before the crisis, CEE usually included the V4 countries and Romania. After 2008, investors started to consider the Czech Republic and Poland as more stable and developed markets, while Romania and Hungary became only as attractive as South Eastern Europe. During the last 12 months, however, Romania and Hungary have come significantly closer to the Czech Republic and Poland from an investor’s point of view. Walter Hampel believes that Hungary is undervalued because of the political risk, and warned that in light of the latest election’s result, Poland may have to face similar challenges.

What is worth buying?

In Otis Spencer’s eyes the most attractive investment products in CEE are outlet malls, and student housing also presents great potential. According to Robert Martin, office buildings in Budapest and Prague are worth buying these days. He tries to avoid buying retail as the expansion of e-commerce presents a huge downside risk for the market. Karol Pilniewicz, Head of CEE at Valad Europe thinks the industrial property market is too closed in the region, as a handful of big players dominate the market. They keep the best investment products for themselves, so it is very difficult for others to enter the market.
 

The conference’s experts agreed that capital is coming to Central and Eastern Europe from places that is has never come from before. According to Otis Spencer, Asian investors are mostly attracted by high yields. However, they usually remain invisible, as they bring capital into the region through big Western European asset management firms, says Walter Hampel.

A recent development is that over the course of the last 12-18 months, competition among banks has increased LTV ratios to 70% in the region, added Péter Számely MRICS, Head of CEE Real Estate Finance at HYPO Niederösterreich.

Cooperation or competition?

Árpád Török MRICS, CEO of TriGranit, based in Budapest, believes that there is no such thing as a Central and Eastern European property market any more. Instead, there are different markets with very different fundamentals. On one end, there is Poland that has proven to be a resilient and stable market over the years of the crisis. On the other end, there is Romania, which has seen corrections so severe they are unprecedented in the region.

Morgan Stanley Real Estate Investment simplifies the question of what is part of CEE and what is not. According to Ulf Pleschiutschnig, Managing Director of the company, their Central Europe is purely geographical, so it contains Austria and it does not contain Russia. Péter Számely believes that Austria has a very peculiar place in Europe: it is geographically part of the region, but economically it belongs to Western Europe.
 

Tomás Salajka, Director of Acquisitions, Asset Management and Sales at CPI Property Group in Prague says that it is in the interest of regional firms that CEE function as one market, because individually each market is very small. Noah M. Steinberg FRICS, CEO-Chairman of WING believes that it seems that in the future individual cities will compete for capital, both in Western and Eastern Europe. All experts have agreed that in CEE competition among markets is a lot more common than cooperation and they think that there will not by any change in that in the foreseeable future.