Matt Day in Warsaw -

A few weeks ago, Klaus Gugglberger flew into Warsaw on a mission that could become something of a rarity in his line of work. A member of the board at the Austrian real estate investment bank Investkredit, he had come to the Polish capital to help open a 24-storey, gleaming tower of office space close to Warsaw's old town. But as the champagne corks popped, few were in any doubt that the sound of such celebrations are unlikely to be heard again for some time.

The property market in Central and Eastern Europe (CEE), says Gugglberger, is now reeling from the effects of the global slowdown. "The market is non-existent," states Gugglberger. "There is no liquidity in the market and so no transactions are taking place. In fact, we have a total crisis when it comes to liquidity."

This frank assessment of the market indicates that CEE's freewheeling real estate party has come to an end. After years of soaring growth during which countless billions of euros in investment transformed dowdy towns and cities, blighted by their shabby communist past, into sparking examples of capitalism and consumerism there is now a sobering reality.

In the worst affected market, Ukraine, Gugglberger reports that in some cases projects that are "90% finished" have been abandoned as the lack of funding bites. And even the more resilient markets of Poland and the Czech Republic could suffer as new development plans struggle to find the funding that was once so plentiful.

Even at the end of June, an Investkredit interim report found that "countless investors are no longer active on the real estate market [in CEE]" and that a "deceleration of development and investment activity can be observed." This could have dire consequences for some real estate companies. While Investkredit, which operates in six countries in the region, predicts it should see a 15% return on equity for 2008 owing to core assets that could provide income and security, Gugglberger expects "many developers to fail" if they lack the reserves to weather to storm.

But this is not to say that the big players will remain untouched. Even established banks like Investkredit have their backs to the wall. "The only strategy we have it to hold back on liquidity as much as we can," admits Gugglberger. "We are probably not getting any new liquidity from the market at the moment and until this situation starts to get back to normal, and the money flows quite freely, nobody will be in a position to start lending."

"We not yet in a position to think strategically or have a long-term view," he continues. "We are trying to handle the current situation as best as we can. We are in the middle of something and we are trying – almost on a daily basis – to deal with it. We do not have time to think about long-term strategies."

Crisis scenarios

Just how long the crisis will continue is debatable. Gugglberger argues that are two possibilities. The more optimistic outlook, and, he believes, the more probable, is that, "it should be over in the next six months and then we'll see a steady increase in deals because most of the liquidity crisis will be behind us." But at its worst, a profound recession could not only freeze the development market but put pressure on existing products. Retail centres, for example, could suffer as consumer spending falls and people stay away from shops, while offices could battle with low occupancy as firms either scale back or wind up their operations.

Despite the general talk of doom and gloom, the clouds come with a silver lining. Real estate professionals in CEE talk of pent-up demand in the region and how it still lags way behind Western Europe when it comes to supplies of office, residential and retail space. This could make CEE a far more attractive investment area than the congested markets of the West once money starts to return.

Gugglberger also argues that if CEE can resist the worst excess of the recession, existing product could benefit from the lack of liquidity freezing the product pipeline. "You won't see a lot of product coming to the market in the next two years so that should help existing projects and help them to keep fully occupied," he says. "As long as the recession doesn't affect the East as bad [as the West] then at least current projects should be fully leased and providing a stable rental income."

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