Checks and balances

The region compensates for its market size and higher risk with better returns, analysts said, with property yields ranging from about seven percent for a prime building in Warsaw's central business district to about 10 percent in Moscow.

This compared well against London where prime offices yielded five percent last year, but as the downturn drove yields in mature markets higher this year, some emerging Europe investors are seeking even higher returns through distressed buys. Still, many are aware of the various risks involved in purchasing in markets they may not be familiar with.

“If you can buy in London for six or seven percent, why buy in Central Europe? Central Europe needs to trade at a yield premium – my guess about 150-200 basis points,” Jones Lang LaSalle head of CEE Capital Markets & Investment Tomasz Trzoslo said.

Foreign opportunistic funds expect more to start taking over assets from insolvent developers, particularly in Russia, and launch a wave of discounted property sales later this year.

“My guess is distressed purchases (in Russia) will start accelerating at the end of this year, continuing to the next year,” Lee Timmins, senior vice-president of US property funds manager Hines, told reporters in an interview.
Hines is currently raising €300 million for an emerging Europe property fund, of which 70 percent will be invested in Russia as “we can make a better return on our money by investing a large portion into Russia,” said Moscow-based Timmins.

Russian properties could rebound quickly after hitting a bottom by the first quarter of 2010, boosted by a reforming market and resurgence in oil prices, said Charles Voss, Aberdeen Property Investors managing director for Russia.
“I can't really see the whole world going for ten years in which oil is at $10-20 per barrel… the potential is for the Russian market to come out more quickly than some of the western markets,” said Voss, who is based in St Petersburg.

Baltic risks
Investors say they are more cautious elsewhere in the region, to give a wide berth to markets such as Hungary, Ukraine, Latvia and the remaining Baltic states where they expect more instability.

“I wouldn't invest in any of the Baltic states where they still have foreign exchange problems. For core investors that is clearly a region where one should not invest,” DekaBank's Junius said, adding he would also avoid Hungary.
“Its more of a structural issue… (Hungary) simply has too much debt, so the economic policy has to be restrictive rather than expansionary,” he said.

There are also more concerns about Romania, until recently a favourite among property investors in Eastern Europe due to its huge and relatively young population, and rising consumer spending driven by debt, CBRE's Tromp said.
“It is unlikely economic growth over the next two to three years can again be driven by a massive amount of debt, so one of the major drivers of growth has been taken away,” he said.

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