Within the CEE, Czech Republic, Slovakia, Bulgaria, and Romania are members of the European Union, and Slovakia also joined the European Economic Union on January 1, 2009, adopting the euro as its currency. Although investors tend to view these countries along with Poland and Hungary as a single entity, each is in a different stage of its economic cycle and, also, in different stages of the development of its real estate markets. While Czech Republic, for example, was enjoying a real estate boom—echoed in Slovakia—in Romania and Bulgaria, real estate prices were inflated, and the market was unable to deal with the bubble.

Stable Banking Systems
Unlike the current situation in the U.S. and Western Europe, CEE countries have a relatively stable banking system, resulting from two independent factors: 1) the source of the funds lent by the banks (i.e., banks lend largely from their own savings deposits rather than from funds obtained from loans from other banks) and 2) the lessons learned from the crisis in the banking system in the 1990s, when the banking system was restored to health by state subsidies, and the banks were sold to investors—mostly international banks.That experience has made them more conservative in granting new loans to com­panies, including developers, as well as in providing mortgages for ordinary people.

When this crisis hit in the 1990s, the practice of so-called “American mortgages” (i.e., home equity loans and no-money-down mortgages) was just developing. Subprime mortgages were almost nonexistent in these markets. The percentage of mortgage indebtedness was the lowest in all EU countries, even though this figure tends to steadily increase over time. At the moment, some of the parent banks are now facing their own credit and liquidity problems and this may, of course, influ­ence the local markets. Although local banks generally do not suffer from a lack of liquidity, there has been a loss of confi­dence in the market.

Czech Republic
Czech Republic is the CEE country with the strongest ties to Western Europe. Although its economy continued to slow down rapidly in the last quarter of 2008, with an even deeper slowdown predicted for 2009, the most negative estimates predict that the Czech GDP will grow by approximately zero percent, which is far better than the current state most of the Western economies.²

Like other countries in the region, the weak external environment has had a significant impact on its growth. Despite its rel­atively sound financial sector and few of the problems seen elsewhere in the region, the Czech economy still suffers a decline in demand for certain of its exports sectors.The relatively quick deterioration in the economic outlook has caused its cen­tral bank to react with a number of interest rate cuts in quick succession, made possible by steady falls in inflation, reaching 3.3 percent at the end of 2008. The interest rate cuts, however, have had little or no effect on the willingness of commer­cial banks to reduce interest rates, but rather have consumed the reduction of the base rate by increasing their margins.

The Czech commercial banking sector is notable for the absence of any recent government subsidies, and no help is deemed necessary at present. Credit growth remains relatively stable, although developers are experiencing more restricted access to money. Banks are now demanding upfront equity of at least 30 percent. This contributes to the stagnation of the real estate market with different effects in each area. Commercial and industrial property markets can respond to changes quickly due to the relatively short development times, but the current upfront requirement has caused a decline in speculative construction. New projects will be done mostly on a built-to-suit basis for a particular tenant. Also the offer of new manufacturing and office properties is now higher than demand. The reduc­tion in planned construction during this year will, however, reduce the availability of new properties. Substantial reduction in rent prices, therefore, cannot be expected. Many companies have reconsidered their previous plans for expansion and relocation.Vacancy rates have risen from 6 percent to 10 percent.

A 2008 VAT increase from 5 percent to 9 percent caused a drop in demand in res­idential markets, and mortgage requirements became more restrictive. Demand has also been reduced by the expectation of resulting lower prices.The price drop, however, is likely to be seen in less desirable properties. Prices of new residential projects in desirable locations are stable. Currently, there is a trend for energy sav­ing houses with low operating costs.

Slovakia
The global economic crises is not reflected in the fourth quarter 2008 economic report released by the National Bank of Slovakia,³ which shows a solid 2.7 percent growth in GDP, and a surprising growth in real estate sales and new construction. Signs of a weakening economy are noticeable, however, in overall industrial pro­duction which fell 7.2 percent in November and 16.8 percent in December. The economic picture is likely to deteriorate further in the first two quarters of 2009.

There is uncertainty in future development markets, especially if the number of transactions in the Greater Bratislava Area—the largest Slovakian market—shows a decrease. Construction has slowed. The first phases of projects are being com­pleted without a move to begin second phases. Some projects have been modified in size and some residential projects have been partly repackaged as office space to diversify investor portfolios. Residential developers are lowering supply via sus­pension of new projects to keep prices of newly built projects steady despite falling demand. Luxury markets may have difficulty keeping the prices at today’s levels.

In what is probably a coincidence in timing, by the end of 2008 the supply of new warehouse space had reached a level of 334,200 sq m versus 180,000 in 2007, an increase of 85.7 percent, resulting in a quarter-on-quarter vacancy rate of 8.82 percent, which is likely to increase.⁴ Also, it is likely the number of newly built warehouses will fall and that investors will switch from speculatively built to built-to-needs warehouse projects. The leased office market average rental price declined by 6.7 percent, caused primarily by a drop in demand. Rents on older apartments fell 15-30 percent depending on location and condition. In addition to sellers being hit hard by the global recession, buyers must now comply with much stricter criteria with regard to mortgage financing.

Romania
At the end of 2008, the Romanian economy continued to expand rapidly. Annual GDP grew around 9 percent. Inflation fell to 6 percent, no longer the problem it was before. Romania's 2007 entry into the EU created an increase in foreign investment in construction sector and manufacturing. Growth in consumer spend­ing was extremely strong last year. In 2008, there was significant expansion in for­eign currency loans, leaving consumers vulnerable to fluctuating exchange rates, although the central bank has attempted to reduce this trend by easing conditions for domestic lenders.

Growth at this pace appears to be no longer sustainable because of the decline in external demand and forecasts for 2009. The global financial crisis has already gen­erated reduced lending, leading to a slowdown of economic growth. Real estate, the most dynamic sector of the Romanian economy and the most important con­tributor to the growing GDP, is probably the most effected. After reaching a high in July 2008, real estate activity shows signs of stagnation and in some areas, prices have already begun to fall. It’s probable this decline will last until the end of 2009, leading to declining prices for existing residential units, slight declines for new res­idential units, and growth in rents. By the end of 2008, prices fell around 5 to 10 percent for new homes, and around 30 percent for older homes.

For 2009, the developers will have to adjust and rethink their market strategies. Lack of funding will require higher levels of upfront equity, a problematic change, given the economic outlook. Real estate markets will probably resume a normal path only when the banks reset their credit requirements, which is not expected to happen until 2010.

Bulgaria
The fourth quarter of 2008 was a time of radical change in the Bulgarian real estate market, changing it from a seller’s market as it has been since the millenni­um to a buyer-dominated market, with each segment following its own path.

The residential market is seeing the first consequences of an over supply. Real estate agencies report that, in large metropolitan areas, up to 10 percent of apart­ments are for sale—a rate that, in Sofia, has risen to an incredible 16 percent. New projects are extremely rare. This has not, however, brought the shocking price slump expected by many. Rather, it has helped the market really distinguish between standards of quality.The future of second-home and vacation properties is uncertain due to both, the overall situation at the market and the short-sight of developing investors.While one could see from the ads a very slight downturn of prices, it is also a very telling fact that local banks almost ceased lending for this kind of property, unless secured at least twofold.

Office markets are following residential, although a step behind. With more than 100,000 sq m of space expected to be added in good locations in Sofia in 2009, tenants will enjoy something new—a choice. A controversial Sofia zoning plan, which has seen some changes recently, make predictions a bit uncertain, but the general trend seems clear. Certainly, this will cause at least one long-expected move—the relocation of offices from apartments in downtown residential build­ings to brand new, affordable, office buildings. gp

*A report compiled by Koneˇcná & ˇSafá¡r, a lawfirm operating in the Czech Republic, Slovakia, and Romania

1

www.loc.gov/rr/international/european/cee/cee.html

2

www.cushwake.com/cwglobal/jsp/localHome.jsp?Country=1100090&Language=EN&_requestid=6031

3

www.nbs.sk/en/home

4

www.cbre.sk/sk_en


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