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Joanna Iwanowska, CEO and Executive Vice President, Central European Real Estate Associations Network (CEREAN)

Paraphrasing the title of Marcel Proust’s most popular novel, in pursuit of an ultimately organised and predictable real estate market all participants are constantly looking for a perfectly efficient and reliable information mix. In order to secure best penetration of profit opportunities, companies and individuals continuously undertake a never-ending task of combining the hard data with historical and sociological background knowledge.

The Central Eastern European (CEE) and South Eastern European (SEE) regions have re-appeared on the free market economic map of the world relatively not long ago and for over a decade now all these economies face an imperative of catching up with the developed markets. At the same time money and workforce are moving dynamically cross the boarders - in opposite directions though. Whilst investment capital moves from West to East (not neglecting Nordic and Middle East sources), workforce is moving from East to West, especially within the EU.

With the development of all media - mainly the Internet - all possible information seems to be available to all, at a touch of a button and free of any charge. Let me repeat: seems to be.

The first entities to enter a given property market are companies of a pioneering attitude, usually with their first projects being sold within a short period of time after completion. Their experience is the very first benchmark for followers and such case studies are very much sought after. Overall, project case studies are always found most interesting to analyse regardless of the situation and market concerned; seminar sessions presenting such always gather a large and keen audience. Unfortunately, there are always a limited number of companies and individuals eager to share openly all the nuts and bolts of their project - for the obvious reasons.

Since 1989, the Central European property market has moved on and nowadays can already be looked at as a diverse one. It is still a region where demand surpasses supply in every market segment, but in some markets the profitability is already gradually decreasing. Considering the residential property market, the question is: "Does this mean these markets have overheated and are heading towards the dreaded "price bubble burst" situation or is this just a normal cycle of levelling the economic indicators following a rapid growth period?" Experts say that all depends on how balanced the price increase is compared to the supply/demand ratio, meaning not solely the international pull but also local investors being on the scene.

How to judge it - remains a topic for a separate article.

Not so long ago we were using one term for the Region: CE - Central Europe, now we often come across more specific descriptions, for example as CEE & SEE, the "Balkan region" and "the Baltics". Ukraine is now analysed separately, yet the situation in all neighbouring countries clearly has impact on the development of this property market. With the four Vysehrad Group countries (Poland, Hungary, Czech Republic and Slovakia) holding the undisputable lead in the overall property market development, the boutique economies of the Baltics are already being acknowledged as continuously very interesting for investors.

Russia and Ukraine were during the last years perceived as the hottest markets both for commercial and residential investment. Yet nowadays, several months before the - although announced as conditional - enlarging of the EU, investor priorities and interest have visibly shifted from Ukraine and Russia towards the new "acquisitions" to the European Union community: Bulgaria and Romania.

The speculation commercial market in more developed markets of Poland, Czech Republic or Hungary is narrowing visibly. The ROI has dropped, or as some may like to look at it, reaching desired profit is more spread in time. Whilst the market risk drops - so does the premium. Big opportunities still remain in real estate development both commercial and retail, and of course within the residential markets. The residential markets are still facing years of large demand in all these countries, with prices rising from 10 per cent annually in Poland to 20-30 per cent in Romania or Russia.

Ukraine itself is a very interesting destination for those who dare, with its 47- million population, booming new construction residential market and the shortage of quality office supply (with offices being the most developed segment of Ukrainian commercial real estate market). The yields, along with the Moscow ones, look extremely promising to investors interested in entering this segment. In 2006, the vacancy rate for professional office premises for different classes will stay within 2-4 per cent. A rent rate decline may nevertheless be anticipated in 2007-2008, but the rent will remain one of the highest among other Central and Eastern European countries.

Worth noting is a visible interest from foreign investors in purchasing large pieces of land in Ukraine which has got the most fertile soil for farming in entire Europe. For the time being a moratorium on land sales still prohibits such transactions though. Although changes are noticeable, especially in the Western part of the country, the climate for foreign investors is still not yet as friendly as in the three boutique Baltic markets of Lithuania, Latvia and Estonia.

These three relatively small economies enjoy tremendous influx of foreign capital (largely Scandinavian, British and Irish). Lithuania, for example, shows the highest expenditure rate per one square metre of shopping centres in entire Europe, higher than Ukraine coming second, Belgium, third, Slovakia fourth, with Latvia, Holland, Sweden and Estonia closing the chart. With such an individual purchase power index, allowing a certain promise of predictable long-term profit, the constant demand for shopping malls, organised retail outlets and location for shopping centres in these markets is very strong, proving an overall development trend.

Is anyone surprised with Almaaty, capital of Kazakhstan, appearing on the top of this chart? Why even look so far into Asia? A big question mark in Europe is the market of Belarus, a literally white spot on the economic map. With a nation of 10 million, according to the experience of neighbouring countries, sooner or later Belarus will be a subject of economic and sociologic transformations. In November this year CEREAN is co-organising the first ever international conference in the capital city of Minsk (of 1.6 million citizens) and I have to say that the event is enjoying tremendous interest already. Anyway, it is yet to be seen who will be the first explorers of Belarus. Again, since credible market data in not obtainable for this country, it would be the local business people who could give the best view of this market. And again, to avoid shortcomings, employing a good consultant who would lead through the local particularities would be essential.

The language barrier is still a big one. Throughout the region there are differences as well, with many Romanians speaking French and Italian; Poles (in Western parts of the country), Czechs and Hungarians communicating in German; Lithuanians, Latvians and Poles often speaking Russian. Although English is most certainly perceived as the unofficial business language, the knowledge of Russian seems a prerequisite in several of these countries, if you want to understand the local climate of doing business. Or - I am repeating myself - you can choose to work with a local consultant, who can often service up to several markets, cut a lot of corners, save time and money and help avoid potential pitfalls.

Let us stop and take a look at the international market players themselves. They usually look for free of charge market data, do research on their own, especially in the less mature economies where the local business culture does not yet appreciate the value of professional consultants.

The commercial market structure is of a particular character in the region, since the large international network companies hold the lead in this market. They organised it years ago according to reflect their own corporate cultures and vast international experience. It is quite clear that the ability of gathering and processing data according to proven methods (both in a macro-regional and micro-national scale) contributes to their undisputable success in the commercial property segment in the entire Region. The data is often published in reports, parts of which are usually available free of charge. Along with niche research and network consultation - such as the WRF (Warsaw Research Forum) - such reports assure potential clients of a good standard of services rendered. Moreover, a client can be referred from one market to another within the network, provided one can afford such services as they come with a price tag and are not really available to all potential, especially medium and small, investors.

To service the non-corporate investors, a growing, both in number and service quality, professional group is emerging in all countries from the grass root level. The local professionals: brokers, appraisers, property managers, lawyers, notaries, last not least financial institutions and research institutes are able to prepare credible market reports tailor cut to satisfy particular expectations.

One of the indicators of the growing standard and reliability of local investor support institutions are growing numbers of their brand name clients, cooperating with them for years now. Worth mentioning here is an increasing number of trainings, workshop meetings, courses, graduate and post-graduate studies, conferences, round tables and many other information sharing events, all of which significantly contribute to improving the standard of the market and the level of professional services offered.

Although a by-the-numbers foreign investment process is similar for all segments, there is a vast array of the local offer and diversity of opportunities. Again, hard data would not suffice in this case. Anyway, tools are yet to be developed for a better understanding of the residential real estate market in Central and Eastern Europe, similar to a Real Estate Price Index covering other European markets. In CEE countries, taking into consideration "average x-bedroom apartments" in compared cities is burdened with a huge error in the first place. Whilst perhaps such a comparison might be possible between Paris, Berlin and Copenhagen apartments, cities such as Kiev, Bucharest, Sofia, Warsaw and St. Petersburg have no such average unit, mostly because of the massive concrete panel construction districts - a legacy from the communist period. With cities like Warsaw which was razed to the ground during World War II, the overall urban property substance is not comparable to the majority of Western European capitals.

In general, Poland is a country of an exceptionally wide investment offer it terms of its diversity, which is proven by a large number of operating investment funds from Austria, Germany, Great Britain, Spain, Luxembourg, Israel and Scandinavian countries. In Poland, it is the modern office space and investment land that are earmarked for highest profitability in the coming years. For all major cities, preferences of tenants in choosing office space remain unchanged for many years now. The following factors are the decisive ones: the location of building with office function (without retail, etc), level of rates, operational fees, sufficient parking space for clients and tenants. A returning prosperity in the office market has contributed to increase of interest in land. Supply of free land covered by official city zone planning is limited, which finds reflection in sale prices. Since 2005 prices have risen two-, three- or even four-fold, especially in attractive locations. Since the fourth quarter of 2005, a steady demand for land for construction of warehouses or logistic centres, with good access for heavy trucks, nearby highways and expressways, has been seen.

Once initiated on healthy market economy terms, the market development never stops. It just accelerates and slows down with individual dynamics. Poland was among the pioneers in the region in such dynamic spread of shopping centres, and logistic centres, despite a very bad (but slowly improving) condition of roads and communication network. In order to maintain required development momentum, new products have to be constantly elaborated and implemented to the national economic systems. In Poland, for example, relevant institutions, governmental bodies and business entities are developing various projects for implementation in the next 12-18 months. Examples include nationwide municipality housing projects and financial products such as reverse mortgage for an individual consumer. Their implementation takes time and is determined by a certain level of maturity of the country’s market, along with steady growth of professional qualifications and consumer awareness.

Being active in the field of international communication and with six years in the property market itself, it still comes as a surprise to me that experienced players often decide to do research homework on their own. Ever so often in closed conference rooms. Why study hundreds of pages to find out why the Berlin office buildings remain half empty, while at the same time Bucharest and Sofia do not have an A+ segment of this market at all? Would not it be easier to consult a real estate specialist?

Or, why do Norwegian investors - apart from those who purchase second homes in Spain - remain so reluctant to invest their money abroad? Very much unlike their Swedish and Danish neighbours who explore Germany, Poland, and Latvia. Would not it be easier to consult a real estate specialist to find out why?

Calling upon yet another Marcel Proust book: Remembrance of Things Past, brings me to the point of emphasising the importance of drawing conclusions from the developments of other economies in this field. Learning by example from others that travelled the same road before and learning in a clever way allows adopting some ready solutions, not necessarily reinventing the wheel.

While in Bucharest some weeks ago, I was asked if in my opinion the Romanian economy would need as much as 10 years to catch up with the current stage of the Polish property market. My opinion is that Romania might be able to shorten that time significantly. Seeing how eager the real estate and financial community is to learn from the experience of other, more advanced economies, I would not be surprised if the catch-up period is cut by several years, simply because there are already many benchmarks in the region to base and compare the development of business instruments in the country to.

Already far in the twenty first century, it is impossible not to comment on the role of modern civic professional organisations as entities organising particular business sectors and/or branches. They have very specific tasks to perform, being a bridge between different parts of the world, regions and professional groups, operating as neutral platforms for communication. In the case of CEREAN, during the long 12 years of our presence on the market, the expectations of our members have visibly evolved from simply marking the presence of professional communities in the Region, through establishing a voice locally and internationally, now with strong focus of supporting development of member businesses in the time of extremely dynamic and competitive market development. Improving promotional activities, enhancing the educational offer, cooperation and/or affiliate membership, holding networking meetings is just a part of the offer.

Apart from the hard facts and graphs, a link is always needed to draw a consistent and real structure. Such will be hard - impossible? - to be attained without involvement of the people active in the real estate environment, both local and foreign with some work experience and business intuition within a certain economy or even entire Region. Seeing is believing and believing leads to understanding.

For example, without the knowledge that traditionally the Romanians, Poles, and Hungarians are home owners by preference, as opposed to Germans, Parisian, and Swedes who tend to rent their apartments or houses for the entire lifetime - the picture would never be complete.

An information mix is a dynamic one. The above chart, however interesting for investment planning today, may have to be altered in several months. Expensively purchased reports can prove rather useless in six months, should a constant update be neglected.

The future belongs to those who have access to good information sources, those who are able to work efficiently with market information and contact providers. Exciting opportunities are today within hand’s reach.

I like to repeat on different occasions that keeping in mind the big picture, differences are a powerful driving force. Through enriching all parties concerned, they create an enormous potential for result-oriented dialogue and profitable project development.

Acknowledgement

The author used in her article research materials from DEOL Ukraine, WGN Real Estate, Jones Lang LaSalle, LaSalle Investment Management, REAS Konsulting, Experian-BSL and EIU ( February 2006).

Biography

Joanna L. Iwanowska is CEO and EVP of Central European Real Estate Associations Network (CEREAN). In this role she is responsible for CEREAN’s strategy development and international representation along with marketing, educational projects, seminars, research and training centres, Annual Conference, relations with members, new membership programme and international multinational partnership cooperation. She is also Vice President of the European Property Institute which initiates and cooperates in activities aimed at supporting European integration, developing contacts and cooperation between societies and professional groups, with emphasis on levelling economic and professional standards.

Ms Iwanowska lived in New Delhi, India for 4 years. Prior to joining CEREAN in December 2002, her entire professional career was focused on international business communication and management. She worked at such organisations as Hong Kong Trade Development Council, Eisner Strategic Communications, Siebert Head Branding, Deniz Investment.

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