Trends and issues in CEE Real Estate : Trends and issues in CEE Real Estate Sound analysis, inspiring ideas
SME Banking conference, October 24 2006
Damo Holt, Manager International Real Estate advisory
Content : 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)
Who we are : 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
Wat we do : 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
Who we work for : 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
Where we work : Where we work Countries where ECORYS clients were based 2005 (blue)
Slide7 : Angle 1: Institutional investors: portfolio analysis and management
Investment strategy from the investors’ point of view : 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
Simple basic rules : 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)
Economic development CEEC : Economic development CEEC Source: European Regional Prospects, ECORYS & Cambridge Econometrics * EU 25 = 100
Slide11 : Unemployment rate 2005 in percent in comparison with other East-European countries Quelle: Bank Austria Creditanstalt, Turkey‘s Statistical
Yearbook 2004, Financial Times Deutschland/ECE
Slide12 : Inflation rate 2005 in percent (annual average) in comparison with other East-European countries Quelle: Bank Austria Creditanstalt, Turkey‘s Statistical Yearbook 2004 Source: Eurostat/ECE
Slide13 : Corruption index 2005 in comparison with other (East)-European countries and Germany Quelle: Transparency International Source: Transparency International/ ECE
Slide14 : Tax rate corporate tax
in comparison with other East-European countries Source: European Commission/ ECE
Slide15 : EU 25 = 14.255 € Purchasing power 2005 in € per resident and year
in comparison with other Eastern-European countries and Germany
Quelle: GfK Source: Eurostat/ECE
Ranking urban economic growth I : Ranking urban economic growth I Source: European Regional Prospects, ECORYS & Cambridge Econometrics
Slide17 : Ranking urban economic growth II Source: European Property Development Group (EPD)
League table macro-economic indicators : League table macro-economic indicators 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) Top Middle Bottom Kazachstan (?!), Kyrgyzstan etc X Note: Often yield compression in many markets, higher yields (including risk premium) in middle and of course bottom of league
Market entry analyses/criteria : 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
Retail trends : Retail trends 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 Simple rule: get the fastest and biggest
Slide21 : Shopping Center leasable area per 1,000 residents and expected increase of area within a year in sqm Source: Cushman & Wakefield, 2005/ECE 150,0 55,0 133,1 6,1 91,9 30,0 88,0 10,0 82,7 18,0 80,9 24,5 80,0 20,0 75,0 0,0 10,0 35,0 19,2 5,0 8,9 7,0 7,1 10,0 0,0 1,0 0 60 120 180 240 EE D PL HU SK CZ LV SI LT TR RO RU BG
Leisure/tourism trends : Leisure/tourism trends Important boost in tourism next decade
Many new developments in urban+ peripheral areas (hotels, resorts, facilities etc)
Multiplex cinema’s
Large-scale thematic parks & attractions (seaworld, indoor ski park, etc etc)
Luxury wellness centres
Golf-residential resorts (!)
Marina’s combined with residential (2nd homes)
Simple rule: get a high quality formula on a prime location
Trends office market : Trends office market 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
Simple rule: get big inside cities or get prime locations around them
Trends industrial sites : Trends industrial 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 Simple rule: get strategically located brownfield sites
CEE Office Yield compression : CEE Office Yield compression Source: CB Richard Ellis/Warimpex
Effect of yield compression on the value of a property : Delta = 3,4 M = 23 % Effect of yield compression on the value of a property Case study: Property, Income is 1 M EUR/a
Source: Warimpex
Trends logistic parks : Trends logistic parks 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 Simple rule: look at Prologis
Trends in residential market : Trends in residential 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 Simple rule: get into the rent flats expat market
Simple rules: general product criteria : 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
Land, prices : 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!)
Gradual changes in portfolio management and market strategies : 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
Challenges : Challenges 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…?)
Simple rule: go where the Structural Funds money will go (or get it there)
Slide33 : For more information:
Real estate, regional and urban development services
Damo Holt, damo.holt@ecorys.com
Pal Baross, barossp@ecorys.hu (ECORYS Hungary)
Economics, innovation, SME finance
Julia Djarova, julia.djarova@ecorys.com
www.ecorys.com
Slide34 : Additional extra: Equity participation, loans, fund management for urban development/PPP-projects
Need for capacity building and financial instruments government : 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/NSRF’s)
Growing awareness of EU Structural Funds and banking institutions (EIB presents JESSICA, EBRD pilots bankable housing projects)
Three new initiatives for EU cohesion policy : Three new initiatives for EU cohesion policy
How the JESSICA initiative works I : How the JESSICA initiative works I Is based on grant contributions from the SF operational programmes (ERDF) to urban development funds (UDF’s) 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
How the JESSICA initiative works II : 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
Slide39 : For more information:
Real estate, regional and urban development services
Damo Holt, damo.holt@ecorys.com
Pal Baross, barossp@ecorys.hu (ECORYS Hungary)
Economics, innovation, SME finance
Julia Djarova, julia.djarova@ecorys.com
www.ecorys.com