BRICKS & MORTAR: Institutions see no end to CEE property boom

By bne IntelliNews February 22, 2007

Nicholas Watson in Prague -

A private banker in London once advised that a good time to get out of an investment is when it starts being marketed to retail investors. A Czech bank's announcement this week that it plans to launch a real-estate fund for small investors might suggest, therefore, the property boom in the Czech Republic is over. It isn't; and with institutions continuing to plough money into Central and Eastern European property markets, the boom probably still has some way to go in the rest of the region too.

Ceska sporitelna said that its subsidiary Reico will launch the first Czech real estate investment trust, or REIT, for small investors in March and is looking to raise over €100m in the first year. The bank is promising a yield of 4-7% per year, which if last year's sterling performances in CEE property markets are any guide, should be easily achievable.

Two surveys released in the past month show that 2006 was a record year for real estate in CEE.

The Royal Institution of Chartered Surveyors' (RICS) review of European housing, released February 5, found that Poland stood head and shoulders above the rest of Europe with price rises of more than 30%, followed by the three Baltic States.

"Not surprisingly, as big increases in individual earnings and the advent of mortgage products have led to considerable pent-up demand for brand new and higher quality homes," says Henry Wilkes, head of CEE investment at the international property services company Savills. "People are desperate to move from their small, dilapidated apartments in the multiple, drab, Communist concrete block buildings."

This strong performance in the Baltics was backed up a survey from the Global Property Guide, which claims it maintains "the world's single biggest collection of house price indices."

Like the RICS survey, it found that Northern European countries saw the biggest rises in house prices in 2006 among the 40 countries monitored, with Estonia leading the charge with an impressive 54% increase. Early indicators, Global Property Guid said, suggest that Latvia’s strong house price growth continued in 2006, following 27% price rises in 2005.

"Southern Europe, the favourite destination of second-home buyers and holidaymakers, is also experiencing strong house price increases," it said.

While the RICS survey found that the price rises in CEE housing markets appear to be slowing, there is little evidence of any let-up in the amount of institutional money flowing into CEE property.

Follow the big money

Writing in today's Financial Times, Damian Harrington, head of CEE research at property adviser CB Richard Ellis, said 2006 was another record-breaking year in 2006, with the total value of transactions exceeding €10bn.

"This represents by far the largest annual total to date, 77% higher than in 2005," Harrington wrote. "Overall, 2006 investment equates to 43% of total investment in the region since 1999."

Harrington says the bulk of this money continues to be invested in the larger, more established markets of the Czech Republic, Poland and Hungary, which account for 78% of the market, with Poland the most significant recipient, accounting for 42% of total investment over time.

"Investment is clearly moving further east. Russia increased its market share in 2006 to 9.4% of total investment in the region from only 4% in 2005. This figure will undoubtedly continue to grow as the availability of institutional grade product improves and the market continues to mature," he says.

Institutions are clearly gearing up for another huge year. On February 8, the Czech real estate developer Orco Property Group said it planned to raise around €100m in new capital to fund the expansion of its portfolio in CEE.

The company said it plans to place new shares with institutional investors in the second quarter and at the same time list its shares in Warsaw and Budapest in addition to Prague and Paris, where the shares trade now.

Send comments to Nicholas Watson

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