(AG Real Estate) Investment Funds in the Balkan Real Estate Market – Who is Ready to Face the Challenge?

Valeri Valtchev

Managing Director of Fortom International JSCo.

[email protected]

Investment real estate market in the Balkans has been practically non-existent in the years before the 1998. However, in the last years investment market has acknowledged a rapid development. The first largest institutional investments and cross-border transactions have taken place at last. Although the Central European countries, and mainly Poland, Hungary and Czech Republic, have attracted 80% of all investments in the region until now, the trend has started to gradually change. The major factor that has been positively influencing investors’ interest and confidence in the region is the recent economic and political progress of some of the Balkan states, leading to their prospective EU accession. Bulgaria and Romania expect their accession in 2007 or 2008, and in October, 2005 EU opened accession screening of Croatia and Turkey.

The countries in the region possess a lot of competitive advantages, including: high average GDP growth rate of 5% (with Romania managing to achieve the highest economic growth rate of 8.1% in 2005); increasing FDI flows; decreasing inflation and unemployment levels; some of the lowest operational costs in Europe (especially Bulgaria and Croatia); flexible and highly skilled workforce, and favorable fiscal environment. Approaching their EU accession, some of the Balkan states will offer enormous business opportunities, and international trade incentives. In 2005 Bulgaria was ranked second among European countries in A. T. Kearney’s 2005 Global Services Location Index. The region’s downside, however, is the underdeveloped infrastructure, which, despite the large amount of EU pre-accession financial aid, continues to hinder investments in the region.

The challenges of the emerging markets

Investment market development in the Balkans follows the Central European pattern. Most rapidly developing has been the office sector, followed by retail, and the next years are expected to be the turning point in investment market activity with constantly increasing importance of the industrial sector. The investors’ interest in the office and retail kind of properties is enormous, which compresses risk (and expected yields respectively), and makes investors diversify in other branches, such as hotels and industrial areas. As of December, 2005, yields have fallen to the 9-11% level, with the lowest levels in Greece – 7-7.5% mainly due to its EU membership. In the next few years, the countries, expected to experience the most rapid increase in investment volumes are: Bulgaria, Romania, Turkey, Croatia and Serbia. However, besides the growing stability and predictability of the market, one of the major reasons behind the falling yields is the limited amount of suitable investment grade products, with alternative investment schemes gaining momentum. In order to compensate lack of supply, demand has focused on small scale transactions and development. However, the development of local REITs, and the large number of international investment funds, both public and private, entering the Balkan market, is a major factor, expected to stir market activity and development, gradually improving market transparency and liquidity, and increasing competition.

Who is ready to face the challenge?

Until now, the largest part of investment funds in the region have come from the EU and USA, with the major ones from Germany, Austria, UK, Ireland, France and Netherlands. Investors from Israel and Russia have expressed some interest too. This trend is expected to continue in future, with most of the activity driven by the local REITs, real estate developers and large international investment institutions – funds, trusts, and private equity companies, who have already met the region’s challenges, or have some presence in Central Europe and are keen to expand to the South-East.

Some of the largest investors in the Balkans:

(Annual Rents EUR/sqm/yr = Godišnje iznajmljivanje EUR/m2/godina; Yields = dobit )

(Balkan Prime Retail Market = Balkansko tržište prvoklasnog maloprodojnog prostora)

• Aerium Fund;

• Apollo Rida;

• Black Sea Property Fund;

• BlueHouse;

• Bulgarian Property Developments;

• CA Immo;

• Charlemagne Capital;

• Dawnay Day Carpathian;

• Engel East Europe;

• EQUEST Investments;

• European Convergence Property;

• Europolis;

• GE Commercial Finance Real Estate;

• Global Finance:

• Global Emerging Property Fund;

• EuroMerchant Balkan Fund;

• Black Sea Fund, and

• Global Bulgaria and Romania Growth Fund

• Heitman;

• Immoeast;

• Landmark Property Investment & Management;

• Lindner;

• Lewis Charles Sofia Property Fund;

• Mainland Capital;

• Meinl European Land;

• MIL Equity Partners, L.P.;

• Orchid Developments;

• Portland Trust;

• Quinn Group;

• Sachsen Funds;

• Tishman;

• TriGranit;

(Balkan Prime Office Market =Balkansko tržište prvoklasnog kancelarijskog prostora)