Central and eastern Europe’s residential markets are growing – but at different rates
The residential markets of central and eastern Europe are in varying stages of maturity. Romania, Bulgaria and Ukraine are in the early phases of a boom. Bulgaria, the smaller market, is more developed than that of Romania (see panel).
Although the highest returns have moved on from Poland, its market is still rapidly expanding. The country had the highest capital growth in Europe last year, and it has a far more sophisticated business environment than Romania or Bulgaria. The Hungarian and Czech markets are also mature, having had their building booms and initial jump in house prices a few years ago.
Property consultancy Savills says that Romania has the biggest potential capital growth, followed by some areas in Poland. Savills also believes that Poland’s provincial cities have more potential than other countries’ provinces. Czech and Hungarian prices are well below western European levels and are good long-term bets.
In Russia, residential construction is booming. During the first five months of 2007, more than 15m m2 of residential space were delivered, according to real estate advisor Cushman & Wakefield. This exceeds the amount of space delivered in the same period of 2006 by 50%.
C&W describe 2006 as a year of “unbelievable” price growth for the Moscow housing market. The price of
apartments in mid-income housing more than doubled, while levels for high-end apartments increased by 60%-70%.
Stable price growth in the out-of-town market in 2007 was the result of record price growth in the city centre market. Average prices in the out-of-town segment reached $4,300 per m2 (€2,926 per m2), an annual year-on-year price growth of 68%.
Institutional interest in CEE housing is growing. Savills associate James Beeton cites a €30m, nine-asset, off-plan portfolio acquisition the firm has made for a private offshore trust. The properties are in Poland (45%), Bulgaria (20%), Romania (20%) and Hungary (15%).
“Typically, investors may put down 20-30% of the price and then pay nothing until completion. The capital rate of increase is more than 20% in Romania and Bulgaria’s capital cities. Poland’s capital’s rate is around 15% while Hungary’s remains in single figures. But the Czech market has been surprisingly hot again, at between 10% and 14%,” says Beeton. Profits can be considerable. Associate director Henry Wilkes says: “The investment rate of return is typically north of 30% to 40% and on some projects can be significantly more.”
Nicholas Barnes, a partner in real estate consultancy DTZ, says that the number of specialist residential funds in the region is growing. “Funds have money to invest, they need sector diversity and need to take advantage of differing cycles, so there is a clear investment case,” says Wilkes.
One of DTZ’s clients is Tri Investments, a specialist investment boutique based in London offering investment products to individuals, corporate bodies and trusts. The fund sells diversified exposure to European residential property, in off-plan residential developments in the newer EU countries such as Bulgaria, Croatia, Czech Republic, Poland and Romania. For its investment criteria, it follows a top-down approach strong macro economy, featuring falling interest rates and improving currency stability. It seeks a 10% internal rate of return a year.
According to managing director Christopher Finch, the credit squeeze has had little effect on CEE. “A lot of banks in eastern markets have very low exposure to markets plagued by the credit crunch. Those markets have low debt-to-equity ratios and lending margins in eastern countries are higher anyway,” he says.
International developers also want a piece of the action. GE Real Estate Central & Eastern Europe bought a stake in ICKM Real Estate, a Czech developer. GE Real Estate managing director Karim Habra says he is very keen on the Czech market, citing its housing undersupply, mortgage market boom and fast consumer spending growth. GE Real Estate also plans to expand into Slovakia.
In Poland it has a 21% stake in Ronson Development Group, which has 20 projects under way in the capital, Warsaw, and some provincial cities. Last November, Ronson raised extra funds for expansion on the Warsaw stock exchange. Habra is also looking for a strong partner in Romania and Bulgaria.
