Nicholas Watson in Vienna -
To witness the return of the property market in Austria, you need only take a glass lift up the OBB Tower. There, spread out before you, is 1m square metres (sqm) of construction site that will be the new main railway station and its surrounding commercial district, Vienna's answer to Berlin's ultra-modern Hauptbanhof.
This giant project is a sign of the good times returning to the Austrian real estate business, which has had an unfortunate recent history. The global crisis of 2008 struck Central and Eastern Europe, the stomping ground of Austria's developers, particularly hard, revealing a number of unsavoury scandals that raised questions about the transparency and management structure of Vienna's publicly traded real estate funds. "Confidence in the sector will take some time to recover after the scandals and the exposure to CEE," admits Holger Schmidtmayr, member of the board of Sparkassen Immobilien, which wasn't, it must be stressed, one of the firms tainted by scandal.
Still, Vienna's residential market is going some way to achieving that, being currently the best performing part of CEE's real estate business, with the office market in the Bulgarian capital of Sofia the worst, and everything else in between.
According to Gunther Artner of Erste Bank, the price of existing flats in Vienna rose 4.4% in the first quarter of this year from the previous quarter, but grew a huge 13.6% in the first quarter compared with the year-earlier period. "The shift in investor focus regarding residential real estate is not concentrated on the yields, but rather on price stability and potential gains deriving from any future asset sale," says Artner. "Investors were mainly private buyers and foundations, but also institutional investors."
With the sovereign debt crisis really beginning to bite in the Eurozone and economists predicting the spectre of stagflation haunting the region for years to come, the relatively solid fundamentals of the economies of Emerging Europe - lower debt levels in particular - should help them sustain growth during this tricky period. "CEE is certainly one of the better prospects," says Artner.
This is reflected in the flow of investment into real estate in the region, most of which, about 70%, has gone into Poland, Russia and the Czech Republic. This year's investment volumes, mostly from Austria and the UK, had reached €6.9bn by the middle of August, which is about 20% higher than that for all of 2010.
The office market in CEE is holding up particularly well, with growing office take-up reducing the overall vacancy rate in the region to 13.8% in the second quarter of this year compared with the 15.7% rate seen in the last quarter of 2010. The vacancy rate varies widely across the region, though, with just 6% in Warsaw compared with 24% in Belgrade. Likewise, there's increasing divergence seen in office rents across the region; rents are stable in most CEE countries, but range from €500 per square metre (sqm) in Moscow to just €168/sqm in Sofia.
The retail segment is not much different to office and reflects the macroeconomic situation in CEE, which is better and more stable than further west. Rents across the region remain very diverse, ranging from €480/sqm in Sofia to €3,708/sqm in Moscow. Rent levels have risen most in Warsaw, St Petersburg and Moscow, while the biggest yield compression - a fall in the implicit yields paid for real estate on the investment market, which translates into higher prices - was seen in Moscow, St Petersburg and, surprisingly, Bucharest.
Romania was particularly hard hit by the 2008 crisis and its institutional weaknesses has meant it's struggling to recover. But S-Immo's Schmidtmayr likens today's Bucharest to Prague in 1999. "It's the right place to invest 20% of our portfolio. Where's the growth? We need markets with inherent growth and that's Romania," he says.
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