Central and Eastern Europe are becoming more and more attractive to the real estate industry. However, not only the locations but also the market segments need to be investigated in a diversified manner.

A shopping center in Gdansk, a logistics park near Moscow, an office building in Bucharest—the number of project developments and investments in Central and Eastern Europe is growing continuously. According to a survey by CB Richard Ellis, real estate investments amounting to 5.6 billion Euros for the markets in Poland, the Czech Republic, Hungary, Romania, Bulgaria, Russia and Slovakia in the year 2005 exceeded the five billion mark considerably for the first time. By comparison: according to CB Richard Ellis, in 2004, investments made amounted to 3.9 billion Euros. And even this record result was an increase by more than 60 percent in comparison to the year 2003.

Photo: In Slovakian capital Bratislava, the “Aupark Tower”, developed by HB Reavis—right in photo—is considered one of the most modern office buildings.

Different Investment Markets
However, the collective term “Central and Eastern Europe” can be confusing. For one thing, the individual countries differ in their size, their culture, their mentality and their history, and for another, in the maturity level of their real estate markets. “Cautious“ investors rely on “established” markets such as Poland, the Czech Republic and Hungary when it comes to investing the money of their financiers; while more “courageous” investors feel attracted to Romania and Bulgaria and even to Russia and the Ukraine. Nonetheless, the collective term Central and Eastern Europe is justified for two reasons: all countries—in different stages and intensities—have decisively opened up towards the European and the Western world as a whole, and in the end, it is the general overview that shows the dimensions of real estate investments in Central and Eastern Europe.

As in previous years, most investments are currently taking place in office and retail real estate. Even if the share of properties of mixed usage such as hotel and logistics real estate is relatively low in comparison to office and retail real estate, it is continuously on the increase. This is all the more true for the logistics sector, which more and more international investors rely on. Poland, the Czech Republic and Hungary are still preferred target countries: in 2005, almost 90 percent of the total investments were done in these countries. Germany and Austria are top of the list of investing countries, followed by Great Britain, the Netherlands and Ireland. Major acquisitions were transacted, among others, by Immofinanz Gruppe, Orco Property Group, ING, Klepierre and Ivanhoe Cambridge. On the part of German open real estate funds, the DIFA Deutsche Immobilien Fonds AG participated in the Central Europe portfolio of Europolis with about 180 million Euros in office, retail and logistics properties in locations in Hungary and the Czech Republic; and in the spring of this year, DEGI purchased the office complex “The Metropolitan” in Warsaw for about the same amount. The most noteworthy investment among German closed-end real estate funds was done by HGA Capital Grundbesitz und Anlage GmbH. Previously, the company had already acquired the Galeria Vankovka shopping center in Brno, Czech Republic, from ECE and also invested in property developed by ECE in Krakow, Poland, and in Pecs, Hungary. In the spring of this year, the company also bought three office complexes in the InfoPark Budapest and two listed buildings on Andrassy ut 11 and 12 from the developer and the previous owner IVG Immobilien AG for almost 100 million Euros.

In the other countries, project developers who (want to) come into the market with new buildings as “first mover”, are improving the shining hour. In at least some of these countries—most certainly in Russia and the Ukraine—there are indications of a second wave of investments as of the year 2007. “Clear the ring for the second round” is the motto of the competition of investors in the countries of Eastern and Southeastern Europe. In a way, there is a repetition of what happened in Poland, the Czech Republic and Hungary years ago: project developers analyzed the demand and started their developments after the lots and permits were assembled. When the idea was not to keep these properties on their own stock but the exit strategy provided for a disposal, then this has often succeeded very well. Meanwhile, Poland, the Czech Republic and Hungary can very well be considered as investment markets of a more mature level. DIFA’s resale of the “Hadovka Office Parks“ in Prague to the Heitman European Property Partners III fund and the 2005 acquisition of the Polish Metro portfolio by Apollo Rida or the disposal of the Polish OBI portfolio to W.P. Carey in the spring of this year are just a few examples.

Additional Growth Segments
Thus, in the field of real estate investments, two market participants have been mentioned who do not belong to institutional funds, REITs or private equity investors. Metro and OBI —specialized in retail, just as Carrefourt, IKEA, Meinl and many others—are very much focusing on the countries in Central and Eastern Europe. And since retail takes place in real estate and its range of products requires distribution centers, this makes them big and important market participants in the field of real estate investments, particularly for the growth segments retail and logistics. Another growth segment is certainly in the area of hotel real estate. However, not only the location but also the choice of the right hotel category needs to be given attention. Yet another luxury hotel in a capital city might be problematic, however, hotels in the lower and medium price range can pay off, especially in cities with an airport serviced by low-cost carriers.

Photo: The “Nile House” is a primary office real estate, which was developed by Europolis for the “River City” project in Prague.

By Andreas Schiller