Jonathan Perl, Vice President at Citi Property Investors:Many large investors remain bullish

Banks have more restricted access to capital than before but at the same time recognize that many markets in CEE will continue to experience economic growth, which will stimulate demand for real estate

Jonathan Perl is Vice President at Citi Property Investors where he covers Central and Eastern Europe. Citi Property, the real estate investment management arm of the US financial institution Citigroup, has more than USD 12 billion in assets under management.

Mr. Perl, what are the impacts the credit turbulence on emerging central- and eastern-European real estate markets? Are the countries in Southeast Europe in a different situation than their central-European peers?
- The situation is very granular across the different countries in CEE and Southern Europe and one should look at the various sub-markets separately. This is a reflection of the different economic and real estate fundamentals prevailing across the region. For example, the Baltic States and Hungary are going through a difficult period as a result of relatively high leverage levels, very high current account deficits and high inflation. In Latvia and Estonia, the mortgage market has grown from practically nothing to reach mortgage to GDP levels close to the EU average in just a few years. Bulgaria and Romania are also experiencing high inflation and high current account deficits but are behind other countries in terms of the availability of modern real estate products and, especially in the case of Romania, leverage levels. Some markets such as Poland have a very healthy economy and low leverage levels but have a more mature real estate market than some of its neighbors.
For all these reasons, the impact of the credit crunch has differed across these economies. Banks have more restricted access to capital than before but at the same time recognize that many markets in CEE will continue to experience economic growth, which will stimulate demand for real estate. Those countries with more healthy balance sheets such as Poland are likely to be least affected by the credit crunch while economies with high current account deficits and leverage levels are more at risk.
In the Baltic States, the terms offered by some of the banks one or two years ago were very aggressive, as banks in those markets were keen to get market share and increase their loan books. Today, given the state of the credit markets and an element of overheating of those economies, banks tend to take more conservative views, particularly for some of the more speculative projects. However, even in those countries, banks continue to be competitive for the financing of attractive investment projects with reasonable downside risk and strong return potential.
Within specific markets, we also see that banks have not been affected to the same extent by the credit crunch. For instance, banks, which used to securitize or syndicate most of their exposure, have typically accumulated large amounts of debt in the past months, which is still sitting on their balance sheet. These banks are trying to sell down their existing exposure and typically take on no or very limited amounts of new loans. On the other hand, banks that have traditionally relied on their own balance sheet to finance projects continue to be active, although more selectively and often on more conservative terms than previously.

Would a more awkward access to finance prevent from moving in strategic investors (not only in the real estate sector) who have looked at the region but for one reason or another have not entered those markets yet? On the other hand, could it rather deter speculative buyers and more opportunistic players who had been used to higher leverage ratios looking to profit from rapid yield compression in the region?
- Debt finance is a crucial part of most real estate deals but the situation depends on the particular project and the type of investor involved. For example, high net worth investors who have got into some of those markets by acquiring well leased properties with very aggressive financing levels will find it much harder to remain competitive in the current climate. On the other hand, large institutional funds such as German open ended funds, which have been increasingly active in markets like Poland and tend to use much more conservative leverage levels, will be far less affected.
One more thing to point out is that equity capital continues to remain plentiful. Many large institutional investors are still underweight on the real estate sector and remain bullish about the growth prospects offered by central and eastern-European markets. Having said that I don’t think many investors are betting on further yield compression for most CEE markets. Expectations tend to be higher for less mature markets such as Russia and Ukraine, where more substantial undersupply, lower leverage levels and higher yields still prevail.

Is it possible the disorder of financial markets combined with expectations for slowdown of the global economy to contaminate real estate markets in the way it did with stock markets, i.e. to lead to outflow of investors?
- Again, I think the situation differs across various sub markets. For example recent reports indicate that UK investors are taking capital out of the second-home market in Bulgaria, just like they have been doing in Spain for a few years. On the other hand, less speculative markets characterized by strong, healthy real estate fundamentals continue to attract the interest of foreign investors.

Are the emerging economies in the CEE region immune to such scenario if their fundamentals stay stable? Could they even become and island of growth in an otherwise deteriorated real estate environment?
- The global credit crunch is affecting nearly all real estate markets across the world, but to different degrees. Those, which are being most affected, for example the US and the UK, are mature markets, which are often highly leveraged. This contrasts with less mature markets in Central and Eastern Europe, which offer strong growth prospects, are typically less leveraged and are therefore likely to be significantly less affected by the credit crisis.
Citi Property Investors has been active in the region (Czech Republic, Lithuania, Ukraine, Poland) for over two years and we continue to actively look for opportunities in CEE. While countries in those markets are not immune from the credit issues, which affect real estate markets globally and also have specific issues of their own, on balance we still find most of these countries to offer very compelling supply/demand dynamics and highly attractive growth potential.

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