As the Russian Duma passes groundbreaking land reform laws, accession to the EU is raising the subject in Central Europe
Ten years ago central and eastern Europe experienced a wave of land reform that saw land and property once held by the state – on the grounds that private ownership belonged to the overthrown capitalist system – transferred to private hands. By and large, a workable system of property ownership and transfers emerged, accompanied by a financial framework that allowed loan finance to be raised against property assets.
But the process has proved more robust in some countries than others, and some believe that “transition” economies are still not enjoying the full benefits of a transparent property system. Privatisation, restitution and mortgage law may all be on the statute books, but the system still creaks so badly that ordinary central European citizens – and the enterprises that employ them – are drawing no economic advantage from the ownership certificates gathering dust in a drawer.
That, at least, is the argument from two UN-backed working groups. The UN’s Economic Commission for Europe established a Real Estate Advisory Group to promote the idea to governments in the region that an efficient property market is a motor for future economic development. In 1998, the off-shoot Terre Initiative was established specifically to persuade Western Europe’s financial services sector that further reforms will help expand their market opportunities in the region.
As REAG chairman Bob Hall sums up: “Governments can introduce the relevant laws, but you need the private sector to take advantage of them.” He argues that an efficient property market can increase a country’s gross domestic product (GDP) by 25% to 30%, a calculation based on greater capacity for businesses to raise loans for investment; the access to a property investment market for local pension and insurance providers, and the boost to consumer credit that will assist manufacturing industries.
Hall describes a programme of lobbying the European Union, World Bank and the European Bank for Reconstruction and Development (EBRD) to adopt policies that promote land reform and highlight the issues among non-government organisations and governments. REAG recently outlined its manifesto as part of the ECE’s Land for Development Programme, which is due to be ratified at a summit in Rome in March.
Last October it compiled a report on the Romanian property market, and hopes this could prove a model for the governments of other countries. So far, REAG has had talks with representatives of the Czech Republic, Bulgaria and Slovakia. The clearest question mark over REAG/Terre efforts is that the region would not have seen sustained development activity, and the recent emergence of an investment market, if it did not have functioning property markets. But Hall counters that this Western-financed activity represents only a fraction of the capacity locked in the system.
“A lot of developers had a lot of success in central Europe early on, but that was mainly directed at Western occupiers. That’s now plateaued, and to go forward, they have to encourage indigenous demand, for commercial property or for housing.” His argument is upheld by the experience of Germany’s HypoVereinsbank, which has subsidiaries in Poland, Hungary and the Czech Republic that lend to individuals and commercial clients. Director Peter Neubauer is actively lobbying the three governments for improvements in the legal environment before it expands its operations. “The land registers still need improving, and mostly do not exist in electronic form. One critical issue is foreclosure; the procedures still take a long time. It means that when we do loan analysis, we can only take on good risks.”
The UN-backed efforts are taking place against a backdrop of major political and commercial trends. The prospect of accession to the EU for Poland, Hungary and the Czech Republic is concentrating minds on measures that would promote economic harmonisation. Secondly, this year’s World Economic Forum meetings in Davos stressed the importance of relating the advantages of globalisation trends into identifiable benefits for ordinary citizens.
“If more is not done soon to help individuals, there may be a tendency to slide back to former-style economies,” Hall warns. Practitioners on the ground agree that Romania, the subject of REAG’s first in-depth analysis, is a prime candidate for reform. “Poland and the Czech Republic have cut-off dates for restitution claims, but here it’s still not a clear picture,” explains David Howard, country manager for Jones Lang LaSalle.
“Often someone will come up with a claim for part of a site, which throws uncertainty into the process, or can be used to extort money. Things can get quite murky.” To make matters worse, Romania only adopted a single national land registry system in January 2001. Howard agrees that title problems have left Romania with “a very limited bank finance scheme. Lack of finance is a key issue, and it means you basically have to finance projects out of equity. There are one or two schemes with foreign financing, but even the EBRD terms are very tough, requiring pre-leases and parent company guarantees.” However, the good news is that the Romanian parliament is currently considering new legislation to address restitution and title problems.
REAG is also encouraged by developments in Russia, where the Duma has just passed the new Land Code. This will allow leaseholders to convert to a more secure 49-year tenure, following a one-off payment calculated as a multiple of annual land taxes.
The Code is due to take effect early next year, and will apply equally to Russians and foreigners. “Forty-nine years is a generally acceptable period, if not ideal for everyone, particularly open-ended funds,” comments Michael Lange, managing director of Jones Lang LaSalle in Moscow. “But this is a very positive step towards an investment market more in line with other markets.”
The Code was seen by Russian President Vladimir Putin as an important step towards encouraging commercial investment and are part of plans designed to liberalise the Russian economy. The legislation is only for land which is classified as urban or industrial. This makes up an estimated 2% of Russia’s total surface area.
Poland is clearly more advanced than Romania or Russia, but there are still worsening restrictions on foreign ownership of land. Foreign-owned companies require a Ministry of the Interior permit before they can acquire land or property. Until recently, foreign investors could structure deals through a vehicle with 51% Polish ownership. However, since July 2001, any company with any degree of foreign ownership has to apply for an MOI permit. The increased volume of applications has resulted in delays.
Tomas Trzoslo, senior analyst at Jones Lang LaSalle, describes the permits as “an administrative procedure, not an obstacle” but developers are slightly less charitable. “It now takes a minimum of six months, or as long as nine or 10. It has significantly and negatively impacted on our ability to do business, and makes participating in tenders particularly difficult,” comments Brian Patterson, managing partner for AIG Lincoln in Poland, which is building business parks in Warsaw and Lodz.
“There’s general concern that EU accession will be followed by people from Germany looking to buy up large tracts of land. It’s a problem, because of course it goes against the whole ethos of EU integration, and it partly explains why Poland has slipped behind the Czech Republic [in the EU timetable],” says Chelverton director Graham Kilbane, who is developing two shopping centres. However, he anticipates that the expected change of government will once more prioritise a speedy EU accession. Although REAG’s Hall cites problems in the Czech Republic with three valuations for all property transactions – on behalf of the buyer, the seller and the tax authorities – local agents feel that the Czech system is robust and even has an on-line electronic land registry system the UK could learn from. According to Paul Betts, managing director of King Sturge’s Prague office: “If you’re an investor looking to buy, you’re able to get pretty good records. In the past, people took out title insurance, but they don’t even do that any longer.”
Chris Naylor, joint managing director of DTZ Hungary, also feels the country has a stable system. “In some cases there can be a delay between buying a property and having full title entered in the land registry. But there is a system of side notes that are fully accepted by financial institutions.” On the other hand, he describes Bosnia as “the biggest nightmare”, thanks to two or three historic land registration systems and restitution problems following the war.
REAG appears to have a valuable role in drawing attention to the problems of opaque property markets in countries such as Romania, Bulgaria, and former Yugoslav and Soviet states. However, as its purview includes all “transition” economies south and east of Poland, there seems to be a danger of confusing regulatory systems that do not match their British, Italian or German counterparts with inefficient regulatory systems.
Even the most watertight legal and financial infrastructure cannot deliver the benefits REAG talks about without liquidity in the economy. “It’s the situation of the market itself. Do people earn enough to pay back loans? Are companies financially strong enough to take out a loan? You have to see it altogether,” says HypoVereinsbank’s Neubauer.
Lange of JLL in Moscow also brackets land reform and economic issues. “The main drivers for institutional investment are of course GDP growth, the government budget, foreign investment and inflation. But this new Land Code should be very positive.”
|
Country |
Population – m |
GDP |
Unemployment |
Inflation |
|
Russia |
147 |
7.7 |
6.6 |
20.8 |
|
Ukraine |
50 |
– |
5.2 |
15.1 |
|
Poland |
38.6 |
4 |
15.9 |
10.10 |
|
Romania |
22.5 |
– |
11.4 |
34.1 |
|
Czech Republic |
10.3 |
3.9 |
8.5 |
3.94 |
|
Hungary |
10.2 |
5.4 |
3.0 |
9.8 |
|
Lithuania |
3.7 |
4.3 |
12.4 |
1.1 |
|
Latvia |
2.5 |
8.1 |
8.3 |
-0.07 |
|
Estonia |
1.5 |
5.8 |
5.2 |
6.4 |
|
Source: OECD, Thomson Financial/Datastream |
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