Coming into their own

From the edge of Letna Plain, a hillside park overlooking the old city of Prague, architect Ian Bryan stands on the plinth that once supported a towering statue of Joseph Stalin and gazes down at the City of a Thousand Spires.

"When I first saw Prague in 1990, it was incredibly beautiful, but it was crumbling away," muses the 40-year-old Englishman, casting his eyes over a panorama of pastel-painted houses and gleaming church steeples. "Even the newer buildings on the outskirts of town, the warehouses and apartment blocks that had been built under Communism , even they were falling down."

Lovely as ever, a transformed Prague stands today at the center of a renaissance in Central European real estate. Property values throughout the region have risen to levels unimaginable when Bryan, the head of Ian Bryan Architects, first crossed the Charles Bridge more than a decade ago. Despite a spate of overdevelopment in the late 1990s and the cancellation of several real estate projects immediately after September 11, the commercial property market looks poised for a solid run of growth.

Spurring the rise are some of the healthiest local economies in all of Europe. Last year the Czech Republic's GDP grew by 3.5 percent, Hungary's by 4.2 percent, Poland's by 5.1 percent and Slovakia's by 3.3 percent. Greatly improved physical and technological infrastructure and regulatory changes that have allowed capital to flow in more easily have also helped. With all four countries slated to become full-fledged European Union members in 2004, once-reluctant institutional investors are taking a second look.

"These are exciting times for investors in Central Europe," says Angus Wade, associate director of Jones Lang LaSalle, a London- and Chicago-based real estate consulting firm. Real estate prices and yields (the ratio of rental income to the purchase price of building) will probably track the wobbly Western European economy over the next six to eight months. At that point, Wade says, an upturn is likely and should last several years.

"The property cycle lags the economic cycle," says Wolfgang Lunardon, managing director at Europolis Invest, an Austrian-based real estate investment firm. "The first signs of economic recovery are beginning to appear in Europe, so we expect that property prices will not pick up before the end of this year."

Adds Ewen Hill, Central and Eastern European director of investment at the Budapest branch of CB Richard Ellis, a global real estates services firm headquartered in Los Angeles: "Central Europe is a gateway to Eastern Europe. These economies are in decent shape, the communications systems are modern, and the financial criteria that these countries have to meet to join the EU are in many cases actually stronger than those the existing members have to follow."

Certainly, real estate developers are betting on a bright future, closing several major deals in just the past few months. In Warsaw Austrian property developer CA Immobilien Anlagen, which has invested 32 percent of its total capital in the region, acquired the 30-story Renaissance Tower for a reported E55 million ($53 million) from the building's developer, Apollo-Rida. (The seller is a partnership of New York,based Apollo Real Estate Advisors and Houston-based Rida Development Corp.) With more than 18,500 square meters of class-A office space, the office block houses blue-chip tenants Centertel (13,700 square meters leased for eight years), Nike Poland, Com-Net Ericsson and PepsiCo.

Acting on behalf of private clients, in the first quarter of this year, Jones Lang LaSalle bought the 7,500-square-meter headquarters of PricewaterhouseCoopers, the U.S. consulting firm, in Prague. The purchase price , an estimated E20.5 million-plus , reflected a yield of about 9 percent.

In Budapest Vienna-based CEE Property Invest Immobilien last September purchased two landmark buildings, the ECE City Center and the River Estates Building, and took an option on a third, a 12,500-square-meter structure that was constructed for Unilever. (The option has since been exercised.) The seller was another Austrian company, ECE Investment. Purchase prices were not available, but they reflected yields of 9 to 9.5 percent.

These days, the quality of the very best class-A office space in Central European cities is comparable to the equivalent space in London or Paris. Of course, prime Western European office space is still far more expensive. One square meter of class-A office space rents for E45 per month in Frankfurt and for E63.5 per month in Paris. Budapest and Warsaw offer similar space at E18.40 and E26 per square meter, respectively, though top-quality offices remains relatively scarce throughout the former East Bloc.

By some financial measures, Central European property markets look to be in better shape than their Western European counterparts. Yields have fallen in much of Central Europe, down from 11 percent in 1998 to the roughly 9 percent rate prevailing in Budapest and Prague, but they are still well above those in Western European capitals , 6 percent in London, 5 percent in Geneva and 4.75 percent in Berlin and Frankfurt.

Still, those yield comparisons tend to fluctuate. That's because the office markets are relatively small in Central Europe, and the supply-demand balance can shift fairly quickly, reports an analyst in the region.

Most Central European rents are linked to the euro or the dollar, which protect property owners from local currency fluctuations. "That's an important consideration for international investors," says Hill.

Consultant Wade explains that lending on property in Central Europe is tied to the euro swap rate (the five-year swap rate was recently at 4.95 percent), with the banks then charging the borrower an additional 1.25 to 1.5 percent, although that number can climb substantially if the project seems especially risky. At the normal rates a yield of 9 percent produces a margin of 2.75 percent.

Tempted by those values, foreign investors are charging in, with Austrian, German and U.S. investors providing most of the capital. During the past three years, foreign buyers have invested about E400 million annually in Central European real estate. Among the leading institutional investors: the U.S.'s GE Capital Real Estate and Heitman Real Estate Investment Management, Germany's HVB Group and Austria's Immorent and Europolis Invest.

Although the economic uncertainty that followed September 11 caused some real estate developers to scrap their plans, most projects went forward. In Warsaw, for example, a dozen buildings with combined projected space of 311,000 square meters are under construction. Some 25 percent of the space is already prelet.

As the market matures in Warsaw and other Central European capitals, more and more developers are moving out of the center city. Consider Budapest, where the Váci út corridor, a central highway leading out of the city, is the site of a new E15.7 million construction project to build nearly 64,000 square meters of office space in a complex of buildings known as Center Point. The first phase of the project, which is scheduled to be completed by next spring, will deliver nearly 14,000 square meters. The developer: GTC Hungary Real Estate Development, part of Netherlands-based GTC International, which is controlled by Israel's Kardan Real Estate.

The resurgence of Central European real estate began within days (if not minutes) of the fall of the Berlin Wall. Suddenly, property owners could charge whatever rent the market would bear. As a result, says consultant Wade, "You had guys doing rush conversions and charging $65 per square meter for rough-and-ready downtown space." (Pre-1989 rents varied widely and were often paid in barter deals.) After the Wall fell developers responded to a growing demand for commercial space by refurbishing old office, industrial and residential buildings. Little new construction began.

During the second stage of the market's development, between 1992 and 1994, a growing influx of Western European office staff triggered the construction of a series of class-A office blocks throughout much of the region, generating solid rental income and capital returns that were in many cases higher than their Western European counterparts. By the middle of the decade, most Central European capitals boasted something like a Western-style business district. Even so, international institutional investors steered clear. Well into the late 1990s, the local markets still lacked the depth, transparency and liquidity that would enable foreign buyers to make large-scale investments.

When the Czech Republic, Hungary and Poland moved onto the fast track to EU membership in 1998 (Slovakia was added the following year), the region became decidedly more attractive to investors. A significant turning point came in early 1999, when the German government eased restrictions on pension fund purchases of property outside the EU, sparking an influx of capital. Initially, Hungary, which had the most mature economy, attracted the most foreign investment. (Analyst Hill points out that those restrictions are expected to further ease, probably by year-end, hastening the flow of funds.)

The influx of institutional capital coincided with the fourth phase in the region's development: a general move out to the suburbs as corporate tenants began to look for bigger, more business-friendly quarters.

"These streets weren,t designed for cars, and 18th-century noblemen's palaces weren,t designed for 21st-century businesses," says Frank Nourse, finance director and operations manager of Irish developer Red Group, for which IBA's Bryan designed an office conversion of a onetime World War II munitions factory in the city's off-downtown Prague 3 district. Nourse is now constructing a 7,000-square-meter office center and an adjacent 4,500-square-meter building in the fledgling Nagano Office Centre on the outskirts of the city. "For those who don,t need a ,front office,, it's the obvious option," says Nourse. "The rent's 25 percent cheaper, and you have better access to the main highways and airport."

在短暂的繁荣,持续了大约两年, through the end of 2000, a host of telecommunications, gas and electricity privatizations and wireless auctions stoked office demand, which had already heated up to keep pace with the region's prospering economies. A surge in speculative construction was followed in short order by a glut. Although some of the surplus has been absorbed, many companies still find themselves with more space than they need. In Warsaw, for example, developers delivered 282,000 square meters of new office space in 1999, of which less than 108,000 was rented that year. Last year the market received 216,000 square meters of new space, of which only 181,000 square meters was rented.

A more serious problem , local corruption , remains an ongoing issue for real estate developers. In Poland last summer, for example, the former president and vice president of the Lodz City Council were arrested and charged with accepting $100,000 in bribes to overturn a previously approved housing development plan to allow the German investor Metro to build a hypermarket.

不过,在中欧真正的机会estate look promising to people like architect Bryan. IBA, his five-year-old, 15-person firm, designed Budapest offices for British hypermarket chain Tesco in Bratislava. In Prague the firm designed commercial projects for Cisco Systems, Crédit Lyonnais and GE Capital. These days IBA is working on a 12,000-square-meter aquarium for Oceanis Australia. It will be erected on the very same spot on Prague,s Letna Plain where Stalin's concrete visage once looked down on the city.

Rents are dramatically higher than when Bryan first set eyes on Prague, but the architect would still say no city is more beautiful.