Eastern Europe Property

With almost daily news about negative impacts of the credit crisis on world’s economies and the possibility of a US recession, what is the likely effect on property investment in the high growing emerging markets in the “new” Europe?

For Central Eastern Europe (CEE) 2007 has been a good year. That is even more true about Slovakia. Following very fast growth over the last several years, Slovak economy again broke all records in 2007.

Unemployment has been constantly slashed since the beginning of the decade, annual GDP growth has been approaching 10%, the wealth of the population is increasing at fast pace and the country keeps attracting significant foreign investments.

All this coupled with the Slovaks’ desire of home ownership and massive demand for better quality housing, plus a low supply of such homes, as well as more accessible finance. Here we have the explosive combination that has been fueling the local property boom in the last few years.

And indeed much of Slovakia has seen a strong growth in property prices – between 10 and 20% p.a. depending on region and type of property.

Yet Slovak property is still some of the cheapest in Europe, and conditions for further growth are very good indeed. Also, significantly for any investor, the Slovak property boom is based almost wholly on the local demand from keen home buyers (as compared to many other markets that have been inflated by foreign investors and became dependent on the continuity of such investment). With still affordable prices and growing incomes the Slovak housing market is unlikely to slow down any time soon.

And then there have been further good news for Slovakia and the CEE markets…

Late last year Slovakia (as well as Poland, Czech republic, Hungary, Estonia, Lithuania, Latvia, Slovenia, Malta) joined the passport-free Schengen zone. This move is expected to significantly boost business and tourism.

Now of course the most eagerly awaited event is the euro adoption. Slovakia is to join the single currency in January 2009, several years ahead of its Central European neighbours.

The country has been well on track to meeting the Maastricht criteria and few economists have doubts about the euro being indeed successfully introduced in Slovakia next year.

Does it mean the current global financial turmoil will have no negative impacts on Slovakia?

Well, of course, no country in today’s globalized world can be considered completely immune. However, as we know, the credit crunch and recession fears are really a problem of the developed world (primarily US, UK, etc) and not the emerging markets.

While the impact of the financial crisis may result in some cutting down on investments in CEE and other emerging markets, it’s important to remember that the fortunes of the “old” and “new” Europe depend on each other and the economic ties go both ways.

So in the worsening financial situation the developed euro zone economies and the new European markets will look to further deepen their already strong trade relations.

The CEE countries have relied on foreign investments (mainly from the eurozone) to accelerate their economic growth. And, in turn, they have been one of the main pillars of growth for the developed Europe.

In particular strong exporters will, amidst a possible US recession, increasingly rely on their emerging neighbours. The “new” Europe has in fact been as important as the US for eurozone’s exporters (such as Germany, France, etc) in this decade.

So… yes, the credit crunch could see some investors and banks pull back from these emerging markets. However, the eurozone also knows of the growing significance of its CEE neighbours for its own exports and growth.

Slovakia and other CEE economies are considered to hold up well and further strong growth is expected in the region for the coming few years – including continuing high growth in wages, falling unemployment and strong and steady investment activity.

A report by the global property consultancy King Sturge comments: “Despite some uncertainties in the financial markets, continental Europe is underpinned by positive long- term fundamentals: a strong macro-economic outlook, healthy businesses and improving occupier markets.”

King Sturge expects France and Germany to supersede the UK as Europe’s busiest investment hub in 2008 and also sees a momentum for growth building in emerging markets like Slovakia, Poland, Turkey and Bulgaria.

And although the Slovak financial markets are not immune to the developed world’s problems, local economists consider the positive impact of the planned 2009 euro adoption to be far more important than any negative consequences of the credit crunch.

The credit issues themselves are the developed world’s problem, and while several European banks have been hit, the US shock has not been repeated on the old continent.

As a result European consumers (with the exception of the UK perhaps) have not been largely affected by any US- style tightening of credit.

In fact the European Central Bank (ECB) has informed an increase of business loans granted in the eurozone last December by 14.4% (compared to November) – the highest monthly increase since 2000. The volume of personal loans and mortgages grew by 11.1% y/y last December.

So, how will all this affect the Slovak property market?

Not much is the likely answer. Slovak property is still attractive for growth and value oriented investors – in fact perhaps even more so today.

As explained at the beginning of this article, Slovakia is looking to continuing high economic growth and the increase in incomes and prosperity that goes hand in hand with it.

On the property side, low prices, strong and still growing local demand and insufficient supply of quality housing (with some of Europe’s lowest construction rates) will keep fueling capital growth. And, of course, the market doesn’t depend on investors or speculators but is driven by the strong desire of Slovaks to own a (better quality) home.

The main villains that have caused the US credit crisis are not present in the Slovak market, be it aggressive lending practices, unsustainable and inflated property prices or increased costs of borrowing.

Most of the western economies are highly leveraged (huge amount of consumer debt as well as business, bank and government debt) and hence vulnerable to any changes in lending criteria.

While Slovaks have become more acquainted with loans over the last few years, the mortgage market is still comparatively very new and many home buyers use savings instead of loans when buying a property. As opposed to Americans or Brits, most Slovaks are prudent savers and credit card debt is almost unheard of (although this might of course change in the years ahead). Consumer debt in Slovakia is one of the lowest in Europe.

And those who have used a mortgage to purchase their new home have little to worry about interest rates in the short-medium term. With the base rate at just 4.25% p.a. since mid 2007, and the expectation of further rate fall before the euro adoption, mortgages in Slovakia are both cheap and accessible. (Currently mortgage rates range from approx 5-7% p.a.)

So, in summary, the financial crisis may affect the Slovak finance market to some degree, however, the country is still in a very enviable position. And so is the local property market.

That of course is excellent news for you, the investor… whether you have already purchased a property in Slovakia or are still looking for the right opportunity. In which case we’d advise you to move fast.

Because while you may decide to wait to see what happens in the US and UK economy, the local property market – and prices – in Slovakia will most certainly not wait for you.

http://www.slovakiainvestmentproperty.com

The Slovak economy grew by 9.4% in QIII 2007, according to the Slovak Statistical Office. This means 0.4% higher growth than in the same quarter of 2006.

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The unemployment rate in Slovakia was 7.99% at the end of 2007, (according to the Central Office of Labour, Social Affairs and Family). That is a decrease by 1.4% compared to the end of 2006.

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The average nominal wage in Slovakia grew by 6.8% y/y to SKK 19,514 (588 euro) in QIII 2007. Real wages increased by 4.2% (Slovak Statistical Office).

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In 2007 foreign direct investment in Slovakia doubled (compared to 2006) to 1.28 billion euros, according to Sario (Slovak Investment and Trade Development Agency).

This came from 64 investments creating 14,738 new jobs. Sario is working on 146 new projects this year worth around 4 billion euros. Most of the investors come from Germany, US, UK, Belgium, South Korea, Austria and Italy.

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Slovakia’s 2007 budget deficit dropped below 2.5% of GDP (preliminary data from the Ministry of Finance of SR), which was considerably lower than the 2.9% predicted last year.

The Slovak economy ended 2007 with a deficit of SKK 23.53 billion (704.43 million euros), which was SKK 14.86 billion (444.85 million euros) less than budgeted. The economy improved by SKK 8 billion (239.52 million euros) y/y mainly thanks to higher tax revenues. (The 2006 deficit was SKK 31.68 billion.)

In 2008 the deficit is expected to be below 2.3% of GDP.

The country is therefore well on track to meet the conditions for adopting the euro in 2009, as planned.

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In 2008 Slovakia will be preparing for a new currency.

According to surveys 90% of Slovaks believe that the country will adopt the euro in January 2009 as planned. The predictions of economists and analysts support this. (According to INEKO foundation 75% of economists expect a successful 2009 euro adoption.)

The slovak crown (SKK) will remain in the European exchange rate mechanism ERM II until a final conversion rate is set (to be known in July). The exchange rate is expected to be SKK 32 to 33 for 1 euro. Some analysts predict an even better rate.

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A survey by GfK shows that Slovakia has the 4th highest internet penetration in CEE; 42% of Slovaks use the internet.

http://www.slovakiainvestmentproperty.com