Germany:
Markets in Berlin work in strange ways. A few years ago it was common knowledge that one could buy everything, from a Russian army uniform to a front-line T72 tank for DM50,000 – about the same as a 5-series BMW.
When the wall first came down, professional advice on property was thought by many people to be unnecessary. Doctors and dentists routinely bought an apartment each year for tax write-off purposes; the commercial market was not considered to be that much different.
An example of this amateur attitude is measurement practice. When you suggest you are going to measure a building in Germany, the other party looks at you in amazement. Buildings are usually measured from architects’ plans, with figures given down to the nearest centimetre. But these figures are usually out by at least 10% to 15%. The DVCS (the German branch of RICS) has made a large contribution to clearing up this matter and is now close to finalising a code with the other professional bodies in Germany.
Ground pollution carries new meaning in Berlin, given the enormous number of bombs that were dropped on the city during the second world war. One firm specialises in providing aerial photography of sites based on RAF post-mission reconnaissance, which can tell you the likelihood of unexploded bombs being located on your patch. With at least one bomb found in Berlin every week, this is a valued service.
The Berlin Senate has welcomed many foreign developers such as Gerald Hines Interests and Tishman Speyer, who together with large local developers such as Trigon, Roland Ernst, von Jagdvelt and Daimler Benz are transforming the city. The Daimler Benz complex alone provides some 350,000m2 of offices, hotel and entertainment.
American and British clients tend initially to distrust the German notary system, in which the notary advises both parties of their rights and obligations. However, the notary, usually chosen by the purchaser, generally offers high-quality legal advice. And the codified nature of German law leads to shorter lease and purchase contracts, which have the invaluable benefit of being understandable to the lay person. Anglo-Saxon clients invariably have a retained lawyer from an international firm to advise them on their first transaction, but generally they are pleasantly surprised by the notarial system and often drop the legal adviser for subsequent transactions.
Living in Berlin is often chaotic, frequently frustrating, but never boring. The choice of restaurants varies from a squatter commune with barbecue around a MIG fuselage, to the Cecilienhof Castle where you dine from the same menu that Churchill, Stalin and Truman enjoyed when they stayed there for the Potsdam Conference in 1945.
Office rents in Berlin have fallen 50% from their peak in 1992, when they touched DM100 per m2 per month, and the oversupply in the market will take a long time to reverse in secondary locations. But, with the planned arrival of the German government in 1998, Berlin will be transformed into a dynamic capital city with a new infrastructure and building stock. The question of precisely when to board this roller-coaster is what intrigues many an investor.
Christopher Jarvis, Jarvis & Partners, Berlin
Hungary:
In many areas, Hungary still maintains a Hapsburg approach in its bureaucracy, which I recognise having been through the same process in Vienna. In particular, a love of endless application forms, completed in quadruplicate, and the necessity for stamps of all shapes and sizes are the cornerstones of a system unchanged for 100 years and wholeheartedly reinforced by the communists as a useful weapon of control.
Many an expatriate has spent days processing customs, residence and company registration formalities often to be thwarted at the final stage for the lack of a company stamp.
Such labyrinthine bureaucracy was curiously lacking in the property world. While Hungary possessed one of the most progressive eastern bloc economies at the end of the Cold War, the minutiae of legislation concerning private ownership and leasing rights, and the financial structures for local and foreign investment, were largely non-existent.
Those foreign banks (namely Austrian) which were prepared to accept the risk used this void to introduce international property finance methods. They also forced property developers to adopt standard forms of lease contract based upon a western European model. In a sense, the lack of legislation surrounding these instruments allowed an almost instantaneous transformation of the property market.
Debt-to-equity ratios, lending supervision, development cost control and three- or five-year lease terms with annual indexation as recognised in the west were rapidly introduced. Protection for investors was achieved with “stable rent” clauses, requiring exchange rate adjustments at each rental payment, and indexation linked to a hard currency, normally the Deutschmark.
On the back of this, some 350,000m2 of office space has been built or refurbished since 1990. To the casual visitor from the west, the property market is easily recognisable and relatively transparent.
In some areas, such as the linking of local payments to a foreign currency (illegal between Hungarian companies until January 1996), the strict interpretation of the law was ignored until the clarification of this area under the new Foreign Exchange Act. In many other areas, the rapid economic development outpaced legislative change, leaving the field open to some dubious practices. For instance, the major German banks have been notable by their absence in the financing of property development, as their lending criteria have “not yet been satisfied in all respects”.
However, the Hungarian authorities have gradually been asserting their control over legal and financial aspects of the property market, introducing bureaucracy in their wake. The Foreign Exchange Act, for example, has transferred the issuing of licences to acquire property from the Ministry of Finance to individual municipalities.
The greatest obstacle to the expatriate or foreign investor is undoubtedly the language. While English and German enable communications with 95% of the business community, in the long term, Hungarian will be essential. It seems, however, that only foreigners with four years’ concentrated study and a local spouse can realistically expect to become fluent in a language most closely related to Finnish. Despite these difficulties, Budapest is certainly the most cosmopolitan and developed capital city in central Europe.
Alan Vincent, Richard Ellis, Budapest
Czech Republic:
Prague, the city of a thousand spires, conjures up a variety of images for different people. Once the seat of the Holy Roman Empire, this town was larger than London was when William the Conquerer came ashore at Hastings.
Following the Velvet Revolution of 1989 and the separation with Slovakia in 1993-94, the former opulence of the city is gradually being restored.
Years of pollution and decay are being cleaned off buildings, their facades repaired and repainted to reveal the magnificence of the architecture. Prague is now one of Europe’s most popular tourist cities and receives some 50m visitors a year. This creates one of the few downsides for the permanent resident: much of the historic centre is pedestrianised, so carving a passage through the summer throngs can be somewhat troublesome.
A developer client of mine once said that the necessary ingredient to be a successful property man in Prague is patience. It is useless to expect the city to function like London, Paris or Bonn, where the property markets have matured over decades.
The frustration often emanates from a difference of perspective. On one side is the chartered surveyor, all too acutely aware of the European property crisis and the need to be realistic, and on the other, the resident land/ building owner with his property, believing he is sitting on a fortune.
Explaining the intricacies of a residual valuation and hence the true price he can demand for his property is extremely testing. Land and building price is often related to others’ asking price, or the price achieved on the last ill-advised sale. Lack of expertise encourages the seller to ask an amount, sometimes twice the true value, and then to conduct a Dutch auction of descending bids. This kind of musical chairs often starts with eight or so potential buyers, and the seller continues to remove the chairs until he is left with two. The exhausted last man wins the deal.
Bankruptcy of developers or individuals and the sale of half-completed projects are commonplace. The money to purchase the land, or unrestored building, is made available locally, but often without any definitive financing in place behind it. Many banks are now sitting on a pile of unserviced loans where the book value far outstrips the true value of the underlying land or building asset.
The most successful developers in Prague are Austrian, German or French, and bring with them their own finance in Deutschmarks or Swiss Francs. Leases are geared to these currencies, as too are the indexation clauses. Most leases tend to be for five years or less for offices and 10 years or less for retail and industrial. Developers like to see a relatively short pay-back period, which translates into high yields.
Simple supply and demand drove rents artificially high after the Velvet Revolution. There has since been a “levelling out”, which has not been totally appreciated by many.
Life for a surveyor in Prague is not easy, often associated with long hours. But the Prague community has a good multinational spirit and enjoys frequent gatherings in the Irish pub.
Compared with recession-hit markets in western Europe, the city is full of opportunity. It is very rewarding to be directly involved with landmark projects, to be part of their inception, to influence the design and marketing and to see the project through to successful completion.
Nigel Young, Muller International, Prague
Poland:
Visitors to JLW Warsaw often marvel at our ability to squeeze 12 staff into an office that suited us well when we moved in 12 months ago with a full staff complement of three. Lack of supply, high rents and corporate inertia help to preserve the status quo, while years of “stacking” training at our HQ in London’s Hanover Square prove their worth in every sense.
Since we opened in Warsaw in March 1994, much has changed in terms of our perception of the opportunities that the somewhat neglected city of Warsaw offers to an international company of commercial real estate consultants. Naively assuming that letting office buildings would provide our stock in trade, we have been pleasantly surprised at the amount of other work which we have taken to. As our Warsaw office now provides a home to one of the three directors of the JLW Finance Ltd team, we are living proof that SFA regulation and red braces exist outside New York and the City of London!
The stream of visitors to the office is fairly constant. These days they include the funds and investing institutions we often dreamed of in central and eastern Europe in the early 1990s. The bright, cheerful, hopeful and inevitably penniless Harvard MBA prospectors of the early 1990s seem to have either succeeded or packed up and moved on.
One of the advantages of setting up a new office anywhere is the sense of camaraderie that comes from everyone in the office pulling together when the pressure is on. Small offices are put to the test by seemingly indigestible lumps of work that need to be done within impossibly short time-frames. We have faced this challenge on a number of occasions and, I am pleased to say, have survived unscathed so far.
Nights spent in the office are a constant reminder of the global nature of the firm that we work for. We are told that there is never a time when someone is not working in a JLW office somewhere in the world. These days, the likelihood seems to be that this “someone” is in the Warsaw office!
And what of the evenings not spent in the office? With clubs, restaurants, gyms, tennis courts and culture, Warsaw is remarkably able to compensate for the lack of warm beer and the thud of willow on leather. Aficionados please note that Warsaw boasts more than one cricket team worthy of the name. Sad but true!
So does the home of Paderewski, Chopin and countless Miss Worlds hold promise for future generations of property hopefuls? (A question I seem to be asked more and more often these days.) The answer, not surprisingly, is yes – but watch out for the appalling TV!
Michael Hodges, Jones Lang Wootton, Warsaw
