Here's something you may not have heard for a while: Eastern Europe is hot property. Perhaps not yet the residential markets but, for institutional investors looking for fresh opportunity, one of the worst-hit regions of the financial crisis looks attractive again, according to research by Colliers International.
Before 2008, property markets in many Eastern bloc countries had been on a high, riding a wave of economic growth which rivalled any in the world. But an underlying risk factor was the proliferation of housing loans taken out in a foreign currency. The practice of forex lending had become widespread in the region because it allowed borrowers to pay a lower rate of interest than they would otherwise pay on their local currencies. However, this easy access to "cheap" money also led to vast credit expansion and higher household debt.
When the crisis hit and currencies plummeted, those left holding forex loans found them suddenly more expensive.
As noted in a 2013 United Nations (UN) research paper, the issue of forex loans and borrower indebtedness is not new. "They were noticeable in other crises, such as in Mexico, during the 1990s. They also created problems in developed economies, such as Australia, during the 1980s." However, the post-2008 plight of Eastern Europe highlighted the threat of forex loans to financial stability. In the first quarter last year, the total value of outstanding foreign currency-denominated mortgages in Hungary still amounted to 12 per cent of the country's GDP, and payments on about 20 per cent of them were overdue, according to the UN report.
Fears of a systematic banking crisis in Eastern Europe also rattled foreign investors, who subsequently fled the scene. As Royal Institution of Chartered Surveyors senior economist Oliver Gilmartin noted at the time: "With prime yields across some emerging European cities now on a par with those in developed markets, it is little surprise that investors have turned cautious on a relative valuation basis when risk is factored into the equation."
Last year, approaching the fifth anniversary of the crisis-triggering Lehman Brothers collapse, Knight Frank tracked how Europe's housing markets had fared. Calculating each market's average price change from the third quarter of 2008 to September last year, researcher Kate Everett-Allen noted that the impact of the crisis was still being felt on most central and eastern European markets, and Spain and Ireland. Hardest-hit countries included Latvia (down 49.2 per cent), Lithuania (-39.7 per cent), Bulgaria (-38.9 per cent), Slovakia (-20.2 per cent) and Hungary (-20 per cent). The latest available data (to March) shows a marked improvement: values have gained in Latvia (+5.5 per cent), Lithuania (+8.4 per cent), Poland (+2.7 per cent) and Romania (+0.2 per cent), while Bulgaria is back to even (0.0 per cent).
Liam Bailey, Knight Frank's head of residential research, says the data confirms a lift in investor confidence. "Investors are looking for yield everywhere at the moment," he says. "Whereas non-prime markets in Europe were off the agenda for most investors 18 months ago, appetite for risk has been increasing.
"The most obvious manifestation of this is increased demand in Ireland and Spain. But a number of Eastern European markets are also being targeted, due to their strong potential for economic growth on the back of competitive labour costs."
Colliers International data concurs that the institutional investor mindset has shifted "from risk-averse to risk-aware". "The period of safe-haven investment appears to be ending as institutions seek greater returns to match investor expectations and growing pension fund liabilities. Fixed-income and equities have arguably run their course in the current cycle, and institutional investors are switching allocations towards real estate," Colliers says.
The report notes a Financial Times finding that private equity investors are believed to hold US$1 trillion in "latent capital" ready for investment. "So a big surge of capital into property is definitely on the cards" - much of it potentially headed towards the Eastern bloc.
Hadley Dean, Colliers International managing partner, Eastern Europe, says: "It is our belief that we are at the beginning of the second wave of inward investment and the wall of global money searching for commercial real estate has Eastern Europe firmly in its sights. Particularly, Poland and Prague are seen as being in Western Europe, but priced as if they were in Central Europe, making them among the most sought-after and attractive markets in Europe.
"Most of the capital is looking at Poland and Prague. However, as investment supply slows and the weight of money looking for that supply increases, we will see that money will move to Hungary, Romania and Bulgaria."
That said, "all the residential markets are flat, bar Prague", Dean adds.
"Post EU-accession, there was a wall of residential development, and until the real economy gets moving, it is unlikely that will change."
Commenting on reports that individual foreign investors are becoming active in Eastern European countries, Dean says: "We saw a lot interest from Irish investors across the region. However, this trend has slowed as the investors have turned inward-looking. I do not anticipate that we will see foreign investment in residential across the region - Prague maybe the only exception."