CEE Real Estate Markets Crunched By Crisis

Doug Hardman will be one of the speakers at the 4th Portfolio Property Investment Forum, Hungary's biggest real estate market conference, on 11 November in Budapest.

Portfolio.hu: As a consequence of the latest wave of the credit crisis, most of the market players are having second thoughts and putting off their investments, hence the investment market in CEE has come to a standstill. Do you see any positive trends in this respect?

Doug Hardman: No, markets are not efficient and while many market commentators have been warning of overheating in CEE markets it is now very likely that the market will overcorrect. The only good result will be a market that returns to property fundamentals.

P.: In your view, what will be the main impacts of the current crisis on the real estate market in Central and Eastern Europe?

Doug Hardman: The current financial market crisis seems to indicate that we are entering a prolonged period of reduced liquidity. Banks' risk appetite and the availability of cheap debt has fuelled the property boom in CEE, the world now feels like a riskier place for investors and risk has been re-priced.

This re-pricing of risk is going to negatively effect emerging markets as capital retreats; this trend has been most pronounced in markets like Russia and Ukraine. Dramatic market movements always produce losses for some and opportunity for others, we are facing this prospect now.

P.: When you look at the impacts of the crisis in the region, do you think we should emphasise the differences between the individual countries or all of them will suffer largely the same consequences?

Doug Hardman: As the US, UK and major European mainland economies face the real prospect of recession, it is unlikely that any of our regional markets will escape the effects of the crisis. However as our markets have matured they have differentiated themselves in the eyes of investors, this is going to be increasingly important for investors in the current unsettled market environment. Hungary is considered to be increasingly vulnerable amongst the four central European economies for instance.

P.: Since, there is very only limited amount or literally no funds at all available on the market, the development activity is very likely to slow down significantly. Do you expect the rents to increase as a result of that?

Doug Hardman: This is a major question DTZ consider worthy of further research. Focus on only one element of the formula is misleading as the markets are dynamic and all elements underpinning rent levels will be reacting to the same external drivers according to their nature.

Rents as a function of an open market are established from supply on the one hand and demand on the other. Occupier demand has held up well so far during 2008, however now that the effects the financial crisis are slowing supply we have not fully understood what this means for occupier demand.

We have to assume that occupier confidence will be affected but how this plays off against a restricted development pipeline remains to be seen and will be closely watched by the industry.

P.: I often hear from different market players that German open-ended funds are indeed the only investors on the market at the moment who are actually willing to buy products. Can you confirm this trend? If yes, what are the major impacts of that on pricing, and generally on the office market?

Doug Hardman: German Open-ended funds were practically creating the market during 2008, however, following the recent banking crisis in Germany my understanding is that all GOFs are out of the market for now. This is a major development and has already had a dramatic effect on the market.

When the GOFs were in the market they were focused on prime assets, which has maintained the market in this segment. This has meant that there was less investor activity for secondary assets. As a result secondary assets, which have been most overpriced, have been more difficult to trade and finance.

P.: Right before the second wave of the credit crunch hit, the favourite market of investors and developers was still Russia. As Russia is suffering quite badly because of the crisis, do you anticipate the interest for the Russian market to decrease?

Doug Hardman: While not immune to the global credit crunch, having experienced an abrupt tightening in liquidity in September-October 2008 that triggered a sharp fall in its stock market, Russia is much better placed than other emerging markets to withstand the global economic downturn because of its huge fiscal and foreign reserves.

Indeed Russia's foreign reserves are more than double the total loanable funds of the IMF, which was the main source of funding for Russia's state budget during the chaotic 1990s. Even a sharp and sustained decline in oil prices to USD 60/bbl in Q4 2008 and USD 50/bbl in 2009 would not lead to a collapse in GDP growth. Inflationary pressures - the key macroeconomic risk in 2008 - are likely to abate as a result of the fall in oil prices, helping sustain growth in real incomes.

Foreign direct investment and the availability of debt have been key drivers of the market, so the current downturn will have a dramatic effect on the Russian real estate market. I have no doubt that the contraction of the market will ultimately lead to a mispricing Russian assets, the big question is when to call market and predict the return of liquidity."

Source: Portfolio Online Financial Journal