Trends and issues in CEE Real Estate

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Trends and issues in CEE Real Estate

• Sound analysis, inspiring ideas

SME Banking conference, October 24 2006 Damo
Holt, Manager International Real Estate advisory
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Content

• Short introduction ECORYS
• Main angle Institutional investor portfolio
  analysis and management
• Economic trends regional markets and cities
• Major trends in real estate markets
• Additional extra Equity participation/loans
  /fund management for urban development/ PPP-
  projects (EIB JESSICA-initiative)

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Who we are

• One of the foremost European economic research
  and consultancy firms
• ECORYS Group has 18 offices in 11 countries
• Including CEE (Warsaw, Prague, Budapest), SEE
  (Sofia), Turkey, Russia
• ECORYS Group 550 employees

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Wat we do

• Market research, concept development
• Feasibility studies, risk analysis
• Commercial due diligence, portfolio analysis
• Cost-benefit analysis
• Project management, programme management
• Technical Assistance/Structural Funds management
• Monitoring and evaluation
• etc

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Who we work for

• Public sector
• World Bank, EBRD, AsDB, EIB etc
• European Union (eg. SF)
• National governments, government agencies
• Provinces, regions
• Major cities, local municipalities
• Sector organisations

• Private sector
• Developers
• Building companies
• (Institutional) investors
• Retailers
• Leisure chains
• Transport and logistics companies
• Engineering firms
• Consultancy firms

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Where we work
Countries where ECORYS clients were based 2005
(blue)
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• Angle 1 Institutional investors portfolio
  analysis and management

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Investment strategy from the investors point of
view

• Market stability
• Stable economic growth,
• Political risks,
• Legal framework,
• Low inflation and unemployment rate
• Tax environment
• Product quality
• Tenant mix
• Rental income stability, cash flow
• Yield compression

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Simple basic rules

• Real estate sector in CEE and SEE boosts, tight
  sellers market
• But be selective in market choices (both in
  countries as in products)

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Economic development CEEC
EU 25 100
Source European Regional Prospects, ECORYS
Cambridge Econometrics
11
Unemployment rate 2005 in percent
in comparison with other
East-European countries
Quelle Bank Austria Creditanstalt, Turkeys
Statistical Yearbook 2004, Financial Times
Deutschland/ECE
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Inflation rate 2005 in percent (annual average)
in comparison with other East-European countries
Source Eurostat/ECE
Quelle Bank Austria Creditanstalt, Turkeys
Statistical Yearbook 2004
13
Corruption index 2005
in
comparison with other (East)-European countries
and Germany
Source Transparency International/ ECE
Quelle Transparency International
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Tax rate corporate tax in comparison with other
East-European countries
Source European Commission/ ECE
15
Purchasing power 2005 in per resident and
year in comparison with other Eastern-European
countries and Germany
EU 25 14.255
Source Eurostat/ECE
Quelle GfK
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Ranking urban economic growth I
Source European Regional Prospects, ECORYS
Cambridge Econometrics
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Ranking urban economic growth II
Source European Property Development Group (EPD)
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League table macro-economic indicators
Top
Middle
Bottom

• Hungary
• Czech Republic
• Slovenia
• Lithuania

• Estonia
• Latvia
• Poland
• Slovakia
• Croatia
• Bulgaria (Sofia!)
• Romania (Bucharest!)
• Turkey (Istanbul!)

• Bosnia-Herceg
• Serbia
• Macedonia
• Albania
• Ukraine (exc. Kiev)
• Russia (excl. Moscow)

Note Often yield compression in many markets,
higher yields (including risk premium) in middle
and of course bottom of league
Kazachstan (?!), Kyrgyzstan etc X
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Market entry analyses/criteria

• Current product supply and development pipeline
• Demand and take up - history and projection for
  the future
• Rental rates - history, projection for the
  future,
• Currency risks
• Major tenants on the market and projection of
  future market entries
• Major competitors on the market
• Key competing projects in the segment - existing
  and those in the pipeline
• Development conditions for the segment (terms of
  land acquisition, permitting, etc.)
• Availability of real estate financing in the
  market
• Availability of advisors on the market i.e.
  law firms, quality surveyors, agents, etc.
• Legal framework

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Retail trends
Simple rule get the fastest and biggest

• Consumer spending is increasing at significant
  rate
• New developments need high quality to be
  competitive
• Large-scale supermarkets/hypermarkets, but future
  small-scale high profile outlets (deli-type)
• Big box developments
• Retail parks offer best development prospects
• Increasing attention towards thematic shopping
  malls (accessibility crucial)
• Factory Outlet Centres
• More focus on mall marketing, centre management

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Shopping Center leasable area per 1,000
residents and expected increase of area within a
year in sqm
240
180
55,0
6,1
120
30,0
24,5
10,0
18,0
20,0
0,0
150,0
133,1
60
91,9
88,0
82,7
80,9
80,0
75,0
35,0
5,0
7,0
10,0
19,2
1,0
10,0
8,9
7,1
0
0,0
EE
D
PL
HU
SK
CZ
LV
SI
LT
TR
RU
BG
RO
Source Cushman Wakefield, 2005/ECE
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Leisure/tourism trends
Simple rule get a high quality formula on a
prime location

• Important boost in tourism next decade
• Many new developments in urban peripheral areas
  (hotels, resorts, facilities etc)
• Multiplex cinemas
• Large-scale thematic parks attractions
  (seaworld, indoor ski park, etc etc)
• Luxury wellness centres
• Golf-residential resorts (!)
• Marinas combined with residential (2nd homes)

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Trends office market
Simple rule get big inside cities or get prime
locations around them

• Increase of mixed-use projects in inner-city
  regeneration
• Focus on capital cities, some 2nd tier
• Office demand mono-functional business parks
  outskirts of cities (also rise airport cities)
• Continuing need for redevelopment inner-city
  buildings (eg government used)
• Business services development leading to need for
  conference space (hotels)
• Attention to call-centre market

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Trends industrial sites
Simple rule get strategically located brownfield
sites

• Urgent need for brownfield development (SF!)
• Some subcentre areas, much space at outskirts of
  major cities
• Thematic (business) park developments
• Demand for modern facilities
• Importance of connectivity by road, rail,
  airport, IT-infrastructure
• Mixed-use office/retail developments
• Increasing role for showrooms car industry

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CEE Office Yield compression

• Source CB Richard Ellis/Warimpex

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Effect of yield compression on the value of a
property

• Case study Property, Income is 1 M EUR/a

Delta 3,4 M 23
Source Warimpex
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Trends logistic parks
Simple rule look at Prologis

• Increasing demand logistics parks at central axes
  east-west
• Focus on multi-modality (road, rail, water, near
  airports), but often facilities yet
  underdeveloped (logistics centers, terminals)
• Demand for modern, high quality facilities
• Road freight transport increases very fast, rail
  sector lags behind increasing number of joint
  ventures between logistics providers and private
  rail companies
• Too much focus on expansion into new
  infrastructure links but not enough on future
  maintenance needs

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Trends in residential market
Simple rule get into the rent flats expat market

• Inner-city regeneration capital cities/some 2nd
  tier cities
• Widespread suburbanization high-end residential
  developments at outskirts of cities
• Growing demand from the West for expat housing
  and high-quality residential parks (2nd home
  ownership)
• Increasing market for private rented flats
  (investor owned)
• Shortage affordable housing and poor quality
  post-war housing stock
• Urgent need for restructuring panel housing
• Need for money and instruments local government

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Simple rules general product criteria

• Sustainable (high) quality
• Innovative concept/product (competition!)
• Look at phase in product-market life cycle
• Prime locations
• Focus on catchment area/market size and
  absorption capacity consumers

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Land, prices

• First mover advantages
• Land economy is not fully developed
• Often unclear building laws (permits!),
  corruption
• Partly excessive asking prices (eg. periphery
  Sofia and Bucharest 1,500 /m²!)

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Gradual changes in portfolio management and
market strategies

• Strong FDI influx, investments steadily growing
• Yield compression in maturing markets
• Search for new market possibilities is driving
  investors further east south (Russia, Ukraine,
  Romania, Bulgaria, Turkey, further east....)
• Increasing attention towards 2nd ring around
  cities and 2nd tier cities

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Challenges
Simple rule go where the Structural Funds money
will go (or get it there)

• New market attention drawing towards
• Health care instutions (hospitals, private
  clinics etc)
• Schools, including private schools. Also prisons
  ()
• Infrastructure building consortia (!)
• Private Finance Initiatives introduced (supported
  by EIB, SF, others), increasing role DBFOM-models
• Focus on Structural Funds (pipeline) projects ?!
• Financial management of the Structural Funds
  money (accounts) itself (eg. tender Czech
  Republic?)

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• For more information
• Real estate, regional and urban development
  services
• Damo Holt, damo.holt_at_ecorys.com
• Pal Baross, barossp_at_ecorys.hu (ECORYS Hungary)
• Economics, innovation, SME finance
• Julia Djarova, julia.djarova_at_ecorys.com
• www.ecorys.com

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• Additional extra Equity participation, loans,
  fund management for urban development/PPP-projects
  

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Need for capacity building and financial
instruments government

• Joint decentralisation and liberalisation have
  eroded local government base
• Severe shortages of financial assets
• Few instruments for adressing large-scale
  problems (eg. ownership-issues in casu housing)
• Growing role of urban dimension in Structural
  Funds (within National Strategies/NSRFs)
• Growing awareness of EU Structural Funds and
  banking institutions (EIB presents JESSICA, EBRD
  pilots bankable housing projects)

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Three new initiatives for EU cohesion policy
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How the JESSICA initiative works I

• Is based on grant contributions from the SF
  operational programmes (ERDF) to urban
  development funds (UDFs) or holding funds, to be
  managed by fund managers
• Levers-in additional loan resources for PPP and
  other major projects for urban development
• Includes opportunities for equity participation
  in project consortia
• Private banks and investors can contribute
  additional loan or equity capital (multiplier
  focus)
• Not being grants, these funds are recoverable and
  recyclable

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How the JESSICA initiative works II

• Projects eligible
• Financially sustainable and technically and
  environmentally adequate
• Included in integrated plans for sustainable
  urban development and renewal
• Projects that could be supported by UDFs/EIB
  finance (selection of draft ideas)
• Redevelopment of land and buildings
• Commercial and retail development
• Upgrading of social and affordable housing (in
  NMS)
• Urban infrastructure, transport, utility networks

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• For more information
• Real estate, regional and urban development
  services
• Damo Holt, damo.holt_at_ecorys.com
• Pal Baross, barossp_at_ecorys.hu (ECORYS Hungary)
• Economics, innovation, SME finance
• Julia Djarova, julia.djarova_at_ecorys.com
• www.ecorys.com