Real Estate in Central & Eastern Europe Mike Edwards Head of Valuation Advisory Services, Central Europe
Real Estate in Central & Eastern Europe � Evolution of the market � Attributes of the market � Performance � Investment Considerations
Evolution of Property & investment in CEE � Phase 1 � market entrants require fast access to modern buildings but there is little suitable stock available � First Generation buildings arrive Opportunistic Developers Built where land is readily available (“grape shot” development) Emphasis on speed rather than quality Low supply = high rents
Evolution of Property & investment in CEE � Phase 2 � Developers respond to high demand, rents and low costs Increase in stock leads to oversupply Oversupply leads to pressure on rents Tenants become more discerning Choice and competition leads to design improvements Developers look for niches
Evolution of Property & investment in CEE � Phase 3 � Demand for new, quality stock competition and differentiation in stock expansion of companies lease expiry � Marginalisation of first generation stock � Consolidation of business districts � Stabilisation of prime rents � Emergence of regional market
Key Characteristics An increasingly liquid and international market. � Title – Freehold & Leasehold, Restitution. Though some anomalies � such as RPU (Poland) � Ownership – SPV v Asset acquisition � Legal systems – transparency, effectiveness. � Lease structures � 5 year plus leases. � Annual indexation. � Euro denominated leases, though some dollar and local currency exist � Recoverable costs through service charge – German lease structure � An evolving planning regime. � An active development market across countries & sectors. � Available financing subject to the profile of investment.
Central Europe Number of Cities with a Country Population population over 100,000 38.7 mn Poland 40 10.3 mn Czech Rep. 10.1 mn Hungary 59.1 mn Total 82.0 mn Germany 8 59.7 mn Great Britain 58.8 mn France 57,2 mn Italy 9 39.4 mn Spain
Concerns with investing in CE � Land ownership structure. � Land zoning procedures are can be lengthy and bureaucratic. � Lack of transparency. � Shortage of investment-grade property. � Declining risk premium vs the West. � Ongoing supply pressures from new development. � Economic Problems � Yield differentials between prime and secondary product
Growth by Market 14 12 GDP Growth (% pa) 10 8 6 4 2 0 a a a y a e a t " a a a p a d d y s s i i e i n i i i i e i n n r i v k s r n t n e n n a n k a i a R a a t a s W o a g a e a a a r o g l l u v u m r v t u o e n t L h r s l k S o R o u T P r C h c u o E I U l l " t B H S e R S i L z e C h T 2004/5 2005/6 Source: Consensus Economic Forecasts/Cushman & Wakefield
Investment in Central & Eastern Europe Central & Eastern Europe saw � investment of nearly €8bn – 122% up on 2004. 200 Rest of Europe 180 Investment in the CEE region � Eastern Central 160 Annual Investment Volumes (€bn) represented just 4.9% of the pan- European total– but this is up from 140 just 1.5% in 2000. 120 100 80 The first quarter of 2006 saw total � 60 investment of €45.1bn as against a 40 quarterly average of €40.1bn in 20 2005. 0 0 1 2 3 4 5 1 0 0 0 0 0 0 q 0 0 0 0 0 0 6 2 2 2 2 2 2 0 0 � The CEE region meanwhile saw 2 investment of just over €3bn in quarter1 – well up on the quarterly Source:Cushman & Wakefield average of less than €2bn in 2005.
Investment Volumes by Country 1,018 849 2005 Quarterly Average 679 2006 Quarter One Euro mn 509 339 170 0 Czech Rep Croatia Russia Poland Slovakia Hungary Romania Turkey Bulgaria Source:Cushman & Wakefield
Prime Yield Convergence � Central European yields now stand, Headline Yields - All Sector Average on average, less than 50bp above West Average Central (3) East Western European levels. Grow th � Yields in Eastern Europe meanwhile 18% are still, on average, 365bp higher 16% than in the West. 14% 12% 10% Excluding Turkey and Russia, � Eastern yields are 280 bp higher. 8% 6% 4% � Central European yields have fallen 2% by 250bp since 2003 while Eastern 0% yields have fallen by 518bp. 2000 2001 2002 2003 2004 2005 2006 Source: Cushman & Wakefield � Eastern yields are now at the level of Central yields in 2003. They have moved from over 15% to less than 10% in 5 years – a feat which took Central Europe 15 years to achieve.
What is the Rental Outlook? � Steady improvement in rents forecast through 2006 and 2007 West Central � Overall prime rents to rise 1 2% 3.5% this year and 4.7% 1 0% next for Western Europe 8% and 2% and 3% 6% respectively in Central Europe. 4% 2% 0% � Short term growth to be -2% led by offices in the West -4% and retail in Central -6% -8% Source: C&W European Research Group
Property Performance in Central Europe � Despite weak rental growth, the Central European property market is producing strong performance. Prime Performance - All Sector Average Yields Rental Growth Capital Growth � On average to March, rents fell 1.4% Grow th Yield versus a 2.6% gain in the West – principally due to falls in Poland 30% 16% 25% 15% 20% 14% On a quarterly basis however, rents 15% � 13% 10% were stable or up in all markets. 12% 5% 11% 0% 10% -5% � Yield compression in the past 12 9% -10% months has been equivalent to 20% -15% 8% growth in capital values. Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Source: Cushman & Wakefield � By comparison, Western European yield compression has added 7.5%. � Implied total returns to March would be 30% in Central Europe and 18% in the West.
Why invest in CEE? � Expanding consumer market. � Improving infrastructure. � Development opportunities in under-supplied regional cities. � Consolidation of the property market. � Lease reform. � Expanding and increasingly sophisticated property market. � Still relatively high yielding market. � Emergence of new formats such as retail parks and factory outlet centres.
CHALLENGES WHEN INVESTING IN CEE � Too much capital chasing too little product – is pricing led by economic considerations of herd instinct? � Yields in Budapest, Prague and Warsaw are similar to those in Madrid, Paris and Milan – But do they offer better potential? Germany is considered by many as cheaper than Central Europe – � does the economic growth reflect this � Equity is driving the market not debt – debt set to rise in cost � The emerging markets have quicker yield compression than CE – can investors expect the same returns in the short term � Russians are rich but they want to work with international capital – local knowledge, global experience
CEE market overview The region will continue to grow in importance – a core market � Eastern Europe remains under priced – not for long � � Central Europe is approaching being over priced � Don`t just look at the yield but at what you are buying – buy real estate, not just an income Eastern Europe can not meet demand for modern space – driving � prices up for western stock Secondary towns to continue to be of interest - especially for � retail Opportunities and asset managing first generation stock – value � generation by working assets.
Real Estate in Central & Eastern Europe Mike Edwards Head of Valuation Advisory Services, Central Europe
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