In 2007, the overall European real estate environment, even when it involved some risk for investment opportunities, regained its equilibrium, especially in countries ascending to the European Union. In those countries that joined the EU in 2004 (Hungary, Poland, Czech Republic, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Malta, and Cyprus) new construction volumes increased by 7.7 percent in 2006 and 7.6 percent in 2007, and it is estimated that construction volume will grow by 9.2 percent in 2008, and by 7.6 percent by 2010.

Development is Booming
Commercial development is highest in the urban areas of Poland, Hungary and Czech Republic, while rents for modern industrial space continue to decrease. The office sector continued to be the most active investment sector in 2007, but interest in commercial and warehouse space had also increased. In countries like Czech Republic and Slovakia, the availability of affordable skilled labor, both in the booming cities and the industrialized regions, looks as strong as ever, making these countries attractive to real estate investors.

In Romania and Bulgaria, which joined the EU in 2007, the increased interest of investors cannot be ignored, because of the high development potential. The availability of modern office space has increased as much as four times within the last five years. Residential, land, and offices markets were the most dynamic segments. Good profitability for investment funds in Romania—7 to10 percent, compared to 5 to 8 percent in Eastern Europe and 3 to 6 percent in other European nations—foretells a promising future for real estate markets in that country. Where previously, interest had been concentrated in speculative investments from Israel, Ireland, Spain, and Austria, beginning in 2007, investment was visible in all real estate sectors.

Overall, the extensive development activity in European real estate markets in recent years has benefited many investors, both local and foreign, who have gained greatly from soaring property prices.

Prague, which is the leading commercial property market in Czech Republic, has become the key logistics and distribution center for much of Europe. At the same time, the Prague residential market has two distinct residential real estate categories: 1) western-style finished apartments and homes for the expatriate community—people from other countries living and working in Prague, and 2) low priced, non-western style apartments attractive mainly to Czech nationals.

Political Uncertainty Exists, but is Diminishing
For some new and poorer European Union members, more EU means more grants and investments. For countries like Czech Republic, more EU means a less certain investment picture with more political conditions attached—a situation that also exists in other countries, such as Romania, Bulgaria or Ukraine.

In Hungary, economic stability has improved thanks to good government planning, the support of the EU, and foreign investment.This improvement is demonstrated by the economic growth of the commercial property sector, by the development of the Budapest office market, by the increased interest in city logistics, the improvement in the light industry sector—highway construction, warehouses construction acceleration—and the attractive property cost base and the low cost of labor. The favorable business climate created by these factors and new governmental tax policies are just part of the benefits initiated in Hungary in 2007.

For a couple of years the Polish real estate market was characterized by dramatic price escalations—more than several tens percent annually—a situation generated by the large number of foreign companies entering the market. In 2004, following an initial period of price stabilization after EU accession, prices began to explode about six months later, and continued to increase throughout 2007. Now, as a member of European Union, Poland is becoming a safe, interesting and hospitable country for foreign investors.

Bulgaria, a country situated between two important markets—Romania andTurkey—remains a property market dominated by retail and residential developments and retains its supply and warehouse investment opportunities. The continuing construction and modernization in Sofia is of great interest to both local and international investors. Bulgaria’s pre-construction sales prices did not do as well as developers had hoped in 2007—excellent news for buyers; not convenient for developers.

In Romania, residential business became the star sector in 2007, and continues to be a pleasant surprise for investors in 2008. The very attractive development market is holding up, thanks to European investments and a large number of local buyers. Office buildings are the next biggest sector—by the end of 2008, there will be more than one million square meters of new office space, with commercial development estimated to triple in size over the same period—to about 450,000 square meters. After EU accession last year, apartment prices increased, but the most important aspect to developers seems to be the quality of the newly built residential buildings, which compare favorably to other Eastern European markets.

Russia an Important Player
In the past few years, Russia has become an important player in the global economy, including in the real estate sector. As a result, markets in Eastern Europe and in the former Soviet Bloc countries are significantly changed. A positive trend in Russian commercial property acquisitions and sales suggests investment markets are developing quickly. Investor confidence, deriving from the country’s long term potential, is yielding investment in the distribution and warehouse sectors for 2008, especially when done in cooperation with local investors.

Market transparency and volatility affect investment, particularly in Russia’s urban areas. A positive effect of this investment activity has been improvement in the transparency and availability of information. Russia can only gain by opening its markets to Europe for joint local and foreign investors.

The decentralization of Ukraine's economic activity and the privatization of its society are the important points to be made when presenting the country as the next door to Europe. Following years of a strong Russian influence and political uncertainty, Ukraine sought and has achieved an independent economy and a reliable real estate market as well. there have been huge investments in its capitol city, Kiev, where growth of regional assets has risen to 60 percent. Similar to Russian demand for land—up to 100 kilometers from city limits—the Ukrainians started to look for property outside of town for both suburban and exurban expansion. Still relatively undiscovered, Ukraine is still very susceptible to external economic shocks. This is because of a fragile taxation system caused by frequent legislative amendments, resulting in volatility, a certain weakness in the protection of property, and bureaucratic inefficiency that affects commercial operations primarily. The changes necessary to turn the country around are happening slowly. Even if, at present, the tourism industry is slowly growing, the country is still not a common destination for international tourists. Three things indicate that there is a basis for continued development of the real estate market in Ukraine over the coming years: 1) the great potential of Ukrainian agriculture for producing raw food crops, 2) continued building of a road system, and 3) the development of a modern city transportation system.

Turkey on the Rise
Although not yet part of the EU, Turkey has gained prominence in the real estate sector for both local and foreign companies, reflecting both economic developments—such as a decrease in inflation to conceivable levels, the achievement of price stability, and the transition to the new Turkish lira—and political developments: its European Union candidacy.

The advancement along the road to full EU membership means that Turkey is also undergoing radical changes in legislation such as its Land Registry Law related to foreign acquisition of real estate, its mortgage law and its tax law.

1. The Turkish bank sector was the focus in 2007, but also other industries attracted the foreign capital, whether it is the real estate market, retail or tourism sector.

2. The favorable economic conditions determined the foreign capital companies¸ mostly from the European Union, to make eager investments and real estate projects, identifying Turkey as one of the ten most promising emerging economies


Rapidly Maturing Markets
The recent U.S. economic crisis has not yet affected Central and Eastern European real estate markets. Its strong domestic capital seems to signal market maturity with healthy competition between international and local capital. Also, a spotlight on the largest Eastern real estate markets—Russia, Ukraine, Kazakhstan—is showing signs of generating substantial growth over the next period. Eastern European countries are forecasting double-digit growth for 2008-2010.

Dan A. G. Negulescu, CIPS,TRC, Mister D Company, Bucharest, Romania, is President of CEREAN (Central Europe Real Estate Associations Network), and a member of ARAI (Romanian Associations of Real Estate Agents) where he has served as Vice-President since 200l, and is its liaison to CEREAN and NAR. Reach him at dan@mrd.ro


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