By leaps and rebounds - Steve Killick

Although 2009 was a grim period for the region’s commercial property sector, this last year has seen some encouraging signs of growth in key areas.

The birth of Eastern Europe’s free market began in Poland in December 1989, when democracy was restored — and it is Poland that is blazing a trail for the rest of the region when it comes to property activity.

“2010 was a surprisingly good year, especially coming on the back of what was a dismal 2009 almost everywhere,” says John Duckworth, head of Jones Lang LaSalle’s Central and Eastern European business.

Over €3bn of commercial property — three times more than in the previous year — was traded in 2010, with the Polish economy growing 3.8% over the same period. That figure, moreover, looks set to increase during 2011 and 2012. Private consumption is giving the Polish economy a big boost, with retail sales growing in December alone by a staggering 12%.

In view of Poland’s position in relation to other major European centres — it is on the same latitude as Berlin and Amsterdam — Duckworth says that a more sophisticated logistics infrastructure is a priority. “Poland is currently under-supplied due to its need for better quality roads,” he adds.

Despite having come a long way in a very short time, Poland’s road network is still in desperate need of improvement. Although some €80bn has been allocated to infrastructure upgrades, with major motorway schemes scheduled for a 2012 completion — in time for the UEFA Euro 2012 European football championship co-hosted by Poland and Ukraine — much work still needs to be done.

However on the plus side, Goodman Group has now launched its speculative Krakow Airport Logistics Centre, which has been on the books for years, and will eventually provide up to 160,000 sq m. The company is also due to start work on the 500,000 sq m Pomeranian Logistics Centre adjacent to the newly built Deepwater Container Terminal at Gdansk.

The Polish capital, Warsaw, represents the largest Central and Eastern European office market, offering over 3.4 million sq m of modern space. Last year saw the highest take up in the history of the market with 549,000 sq m. The biggest deal involved insurance giant Aviva, which agreed a pre-let on 13,000 sq m at Platinum Business Park IV.

With the supply level of new office buildings down 30% on 2009, Warsaw rents are forecast to move gradually up to €25 per sq m over the next year. “One benefit of the recession is that it took the heat out of the market,” Duckworth says. “The right people have now become involved in new developments. And with the advent of a new metro system, Warsaw is entering its next phase as an international centre.” Duckworth also cites satellite cites such as Krakow, Wroklaw, Poznan, Gdansk and Katowice as increasingly popular centres for outsourcing. “Poland’s wages are lower than in Western Europe, the country’s technical skills are strong and it is culturally a lot closer than the Asian markets,” he observes. But if Poland is pointing the way forward, a number of its neighbours are experiencing mixed fortunes. Question marks remain over Hungary, for example, despite Budapest being recognised as a trading centre long before the overthrow of communism. Duckworth says that doubts persist about the Hungarians’ commitment to embracing tight fiscal measures in a time of austerity. “Hungary is trying to win back investors,” he adds. “It wants to get back to the heady days when it was the region’s most attractive destination for foreign direct investment.” To this end, the Hungarian government is grasping the nettle and pushing through some unpopular cuts to state expenditure. It also intends to relieve some of the more punitive corporate taxes.

For all the belt-tightening, last year saw a raft of new overseas arrivals, with big investments by General Motors, Suzuki, Audi, IBM and KBC. However, investor demand remains largely focused on Hungary’s prime assets. Limited activity has pushed prime office yields to 7.5%, with retail between 7.00% and 7.25%. The Czech Republic — like Hungary, once a favourite with overseas investors — saw a welcome upturn in 2010 following the rigours of 2009. Remon Vos, managing director and co-founder of property developer CTP Invest, says: “It’s not so much the newcomers but the companies that have been in the Republic for the last five to 10 years that are extending their production facilities or adding new ones.”

Vos cites the automotive sector as a fast growing area, with the likes of VW, Hyundai, Kia, Audi and Fiat all major players. And it is not just the capital, Prague, that is securing new occupiers. According to Vos, the country’s second and third cities, Ostrava and Brno, have, respectively, attracted the Finnish IT company Tieto and the aerospace giant Honeywell. Meanwhile, the country’s investment in its road infrastructure has paid dividends, with Levi’s moving its European distribution warehouse in Brno, where Michelin Tyres is also based. “The Czech Republic will continue to attract investors,” Vos adds. “Location, a well-developed infrastructure and skilled labour all make the Czech Republic a more attractive destination than Hungary, Romania or Slovakia.”

Slovakia has always been perceived at the Czech Republic’s poor relation — and 2009 was indeed jaw-droppingly dreadful for the country, with no investment deals at all. From such a position, there is only one way to go. Investment trades in 2010 reached €66m, with Czech Property Investments Group spending €38m in just two deals. Being in the eurozone, unlike its neighbours, has also brought Slovakia benefits, according to Andrew Thompson, managing partner at Cushman & Wakefield in Bratislava. “It means there are not the same jitters over interest rates,” he says. “And we also have stability with exchange rates, which makes Slovakia attractive to investors.”

Thompson admits that work is still needed to bring the standard of training up to level found in the Czech Republic and Poland. Unemployment is also still high, although dropping slowly. Call centres, service centres and the automobile industry are providing the bulk of Slovakia’s big deals — and being within a 45-minute drive of Vienna has also proved popular with Austrian investors. Next year looks set to see steady if unspectacular progress.

Over in Kiev, Sergiy Markosyan, director of capital markets for CB Richard Ellis in Ukraine, reports that post-recession investors are turning from his country’s office market to retail — although the bulk of activity remains small scale, with local players dominating the scene. “What we are lacking is sufficient quality investments — prime income- generating properties,” Markosyan says. “Owners are reluctant to sell and there are significant differences between sellers’ and buyers’ expectations on yields.”

Markosyan believes that interest rates are still too high, and cites weak infrastructure, inflation, bureaucracy and corruption as major hurdles that need to be overcome. However, he is cautiously optimistic about the big investment programmes that are currently under way for the shared Euro 2012 football championships. He also notes that, in 2011, inflation is not expected to exceed 11%.

“By 2013, we expect prime yields to hit 10%-11% and cross-border transactions to account for at least 50% of investment turnover,” Markosyan adds. “The Ukrainian real-estate market offers excellent opportunities for international investors and developers.

This article was taken from MIPIM Daily News 1. Read more here.

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