East Europe Real Estate Stays Hot at Pre-Crisis Growth Pace

(Bloomberg) -- Commercial and industrial real-estate in eastern Europe remains attractive to developers, as the economic outlook overcomes the region’s volatile politics, according to industry executives at a conference in Vienna.

“Full speed ahead,” was how Remon Vos of Czech industrial park developer CTP Invest spol s.r.o. described the market’s potential in 2018, after two years when investments reached pre-crisis levels.

Prices across the region have surged as money pours into real estate at a rate unseen since 2007, before the global financial crisis led to recessions across the continent. Real-estate investment last year was probably close to the 2016 level of 12.2 billion euros ($14.9 billion), according to property consultancy Colliers International. With gross domestic product expected to rise as much as 5.5 percent this year according to forecasts by the International Monetary Fund, a downturn in the market is unlikely even with political strife in many countries, executives said.

While the region’s economies are among the European Union’s growth leaders, the political scene has been increasingly volatile. Romania’s government fell on Tuesday for the second time in less than a year after a feud between the prime minister and the head of the ruling party. Czech Premier Andrej Babis lost a confidence motion to form a new administration on the same day. Poland -- where a new prime minister revamped the cabinet by replacing almost half of his ministers this month -- and Hungary -- headed for elections in April -- are under fire for policies that the EU says violate its standards.

Abundant Liquidity

“Those markets are growing and not so much dependent on the political situation in a certain country,” Vos said during a panel discussion at the conference on central and eastern Europe, organized by Euromoney. “That doesn’t have an immediate impact on our business.”

In Prague alone, the total amount of investment transactions in 2017 probably topped 3 billion euros, according to London-based real estate firm Knight Frank, with the IT sector accounting for the largest slice. The amount of new office space opened in the Romanian capital Bucharest jumped to a record in 2016, before a drop last year that showed "the maturing rhythm of the market,” Knight Frank said.

Liquidity is still abundant this year, and “market players” remain optimistic, Pal Danos, a director and real-estate adviser at financial consultant KPMG in Hungary, said in an interview in Budapest before the Vienna conference.

Property investments will remain more attractive than financial assets as long as interest rates stay at their current low levels, according to Danos. While the base rate in Hungary has been at a record-low 0.9 percent since May 2016, the yield on a category A office building in Budapest is at about 6 percent.

In Romania, the market is among the strongest in the region, “despite the political situation,” while investors continue to find it “interesting,” he said. Investors “like it here,” said Vos.

Long View

Executives agreed that while political upheaval is typically short term, decisions in real estate are taken with a much longer view, helping blunt the effect of political risk.

“The cycle at the moment looks very bright” for central and eastern Europe, said Jos Tromp, the head of research for Europe, the Middle East and Africa at U.S.-based broker CBRE Group Inc., while in terms of price, western Europe seems to be cresting.

In addition, private equity from the U.S. was expected to “exit” Europe on expectations of stronger growth, but investments remain in Europe, helping emerging regions further, said Tromp. With 2017 “the best year ever from a volume point of view,” the market overall in the continent will remain robust for now, he said.

“Political risk is still out there,” he said. “The stability in the financial markets is great. Things will change, and the question is how long it’s going to last.”

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