It is a region marked by concerns over the actions of illiberal, populist governments, worried by clashes over policies with Brussels and the rest of the EU and with some states under threat of sovereign debt downgrades.
Central and eastern Europe is supposedly becoming a trickier place for investors to do business.
You would not guess this, however, from gazing at the steel and glass skylines, colossal shopping centres and office atriums of Warsaw, Budapest, Prague and Bratislava.
Including the Balkans and other south-east European countries, €9.1bn flowed into the region’s markets last year, the third highest annual amount on record. Projects in the pipeline and estimates of dealmaking suggest 2016 will be just as active.
“Investor interest in the CEE real estate market has been growing over the past few years — and that trend is continuing,” says Richard Wilkinson, chief executive of Erste Group Immorent, the real estate financing arm of Vienna-based Erste Group. “Investors from Germany, the UK and North America are focusing in particular on prime real estate and the office and logistics segments, with healthy inflows spread across most of the region’s markets.”
Some countries appeal to short-term investors. However there is a growing interest in longer-term projects as the region’s property markets mature and the quality of developments increase.
“There is much more focus now on the intrinsic value of real estate,” says James Chapman, head of capital markets for central Europe at Cushman & Wakefield. “In CEE, we have reached the point in the development cycle where… you can see defined locations where the best asset classes are performing and stand out.”
He adds: “That is where the core money is coming in, which values long-term growth.”
The change in government in Poland and subsequent fall in investor confidence over political stability, top the list of immediate concerns for many property specialists. This raises eyebrows across the industry because of the Polish market’s importance.
Poland takes the lion’s share of property investment into central and eastern Europe. Anyone active in the region is likely to have interests there. Moves by the ultraconservative Law and Justice party’s new government, including changes to the workings of the top court which critics say threatens its independence from the executive, have caused a constitutional crisis, international condemnation and a lowering of Poland’s investment credit rating.
The property industry typically considers more than just short-term political strife when it comes to drawing up future plans, however, and Poland’s growing potential marks it as still one of the most attractive destinations for investment in Europe.
Increased risk in the region was among the hot topics at Mipim, the property industry international trade fair, which took place in Cannes last month. The message from developers and sales representatives to nervous property investors was “keep calm and carry on”.
“We do receive questions from investors who are interested in the latest changes in Poland and the influence these events have on the country’s investment real estate market,” says Tomasz Trzoslo, managing director of Jones Lang LaSalle in Poland.
Yet “real estate investors base their investment strategies on a long-term perspective,” he adds. “Investment decisions take into account a number of economic factors and as a result, knee-jerk reactions to unexpected events or sudden market fluctuations are taken out of the equation.”
“Political risk can’t be ignored and . . . the immediate impact is almost always one of investor — and often occupier — hiatus,” says Damian Harrington, head of European research at property advisers Colliers International. Investment may slow down “but significant transactions keep on happening, especially when a wider market is buoyant.”
Further afield, the lack of resolution to the military stand-off in eastern Ukraine and political turmoil in Kiev have kept most investors away from that country. Before Russia annexed Crimea in 2014, many had hoped Ukraine would become a profitable market, on a par with Poland a decade ago.
Other countries are showing strong growth.
A surge in deals at the end of 2015 saw the Czech Republic, the region’s second-largest market, record transactions of €2.65bn last year. The figure is 65 per cent higher than that of 2014 and just shy of the pre-crisis record.
In Hungary, where investors are regaining confidence despite a series of business unfriendly policies since Viktor Orban returned as prime minister in 2010, the market is bubbling again. Commercial deals were up 62 per cent last year and total market size of €790m was the highest since before the financial crisis of 2008.
Investment flows remain strong in the Baltic states of Latvia, Lithuania and Estonia. Lithuania adopted the euro last year, which boosted its appeal, particularly to commercial developers keen to enhance the region’s role as a destination for IT and outsourcing services.
In Serbia, reforms to property laws have raised investor optimism in a country whose government is eager to benefit from its lower-cost advantages over neighbouring countries inside the EU. Serbia’s accession to the 28 member bloc, though, remains some way off.
The flow of property deals in the region has been helped by a surge of funding from new sources, such as Asian and South African investors. They are muscling in on a market previously sewn up by German, UK and US-based investors.
The new investors are attracted by the theme of central Europe property being a low-cost, high-return bet that offers a foothold and training ground for the wider EU market.
“In Romania the first institutional investors are returning,” says Ernst Vejdovsky, chief executive of S-Immo, an Austrian property group with operations across the region. “These are not the classical ones from the UK or the US but, for example, investors from South Africa,” Mr Vejdovsky adds.
The trend of offshoring, in which western companies such as banks and technology firms use offices in lower-cost countries to perform back-office or other tasks, is continuing to support commercial developments, particularly in Poland, though also in countries such as Romania.
Companies that pioneered offshoring to the region a decade ago are adding increasingly more complex tasks to their central European offices.
To facilitate this, they are tapping large numbers of well-skilled graduates in such cities as Warsaw and Krakow in Poland and in the Romanian capital Bucharest. They are also taking on more office space.
Demand for premium retail space is rising fast, too. Investors look to profit from the growth of the region’s middle classes, who are showing off newly acquired spending power by shopping for western brands in modern malls.
Investors poured €2.3bn into retail projects in Poland last year, the most since 2006. Another €1.1bn went into Czech retail schemes.
The sector saw some 42 per cent of total real estate transaction volumes in the region. Retail accounted for the largest chunk of industry dealmaking in the south-east Europe group of Croatia, Serbia, Bulgaria and Slovenia, according to JLL research.