Eastern European property markets will ride out current global turmoil, claims Property Secrets…

The big question for property investors in Central and Eastern Europe is how can these economies weather the global economic slowdown and what effect is that going to have on property markets?

Despite recent headlines based on forecasts from the World Bank and the European Bank for Reconstruction and Development, Property Secrets predicts that the effects are actually likely to be mostly benign.

Robin Bowman, Property Secrets’ Editorial Director, said: “There are fundamental reasons why the key economies of Slovakia, Romania, Poland and the Czech Republic can ride out this global economic slowdown. Their economies are incredibly strong going into the slowdown and, although we will see a slowing of growth, it will not be excessive.

“This is exactly what many of the CEE economies need – especially Romania and Bulgaria. Basically, a slowdown was coming anyway. This way it may well come before we see property markets, as well as whole economies, becoming dangerously over-heated.”

Growth momentum

Poland's economy grew at 6.5% in 2007, the fastest for a decade. Romania will be somewhere around 6%. Bulgaria is expected to be 6.2% and the Czech Republic around 6%. And the truly outstanding Slovak Republic is expected to have grown by 9% in 2007.

These impressive figures are a measure of just how much growth momentum there is in these economies. But with such pace usually come some negatives, most notably inflation and current account deficits, which of course have to be financed somehow.

And just as the mighty US deficit needs foreign cash to support it, so do those CEE economies with big deficits. That cash is likely to become increasingly harder to attract as investors look for safety. That means it'll cost more.

Already we have seen some of the effects of this as some CEE currencies have weakened - the leu in particular is down around 20% against the euro in six months. If you're a Romanian with a euro linked mortgage, that can't help but hurt.

This may sound bad but it needs to be put into perspective. The European Bank for Reconstruction and Development has cut its 2008 growth forecast for Eastern Europe to 5.0-5.5% from 6.1% entirely due to the global credit crisis.

Extra economic security

Robin added: “Even a GDP growth rate of 5% would be great so a forecast of 5.5% is hardly a disaster.
“Put it into context - let's be optimistic and assume the UK makes 1.5% this year. What about the US? 1.5%, 1%? Anyone's guess really - but few would bet on much more. Germany, France - are they really likely to do better than 1.5%? Italy will barely register any growth. And Spain's GDP growth rate is almost certain to plummet.”

And the EBRD points out something that Property Secrets has long argued: ”That these economies...are less vulnerable than other emerging economies because they benefit from the extra economic security offered by European Union membership. Investors assume greater risks than elsewhere because membership brings clear development perspectives and outside financial scrutiny.”

That's the key difference with these markets. And it's the one that Property Secrets predicted would make all the difference to property investors back in 2003 when it first published Eastern European Property Secrets.

In 2008, Romania will receive almost $1.5 billion in EU structural funds to improve its infrastructure. This is the kind of backing that last year drew net investments of €460 million into the country's stocks and bonds markets - more than twice the previous year's net sum.
Overall, foreigners bought €2.36 billion worth of Romanian stocks and bonds, up from €1.123 billion the year before. And the net the balance shows people and funds are buying and keeping their money in.

Turbo-charged growth

Turbo-charged growth is seen everywhere you look. Mortgage penetration rates relative to GDP in all these countries might still be low, but they are growing at staggering rates of 50% and more.

Bulgaria's mortgage market grew by 64% in 2007. The size of Poland's market increased by 50%. The Czech market grew in value by 41%, year-on-year, in 2007. When you see growth rates of this ilk - doubling, even 50% growth - it's almost certainly time for a period of more measured growth.

A slowdown of a few percentage points in overall GDP growth is exactly what most of these economies need.

A slowdown will allow the Polish government to continue saying 'no' to inflationary wage demands from public workers, as it is currently doing. A slowdown will enable the huge wage rises we've seen in some sectors of the Romanian economy slow and fall more in line with raised productivity, allowing the country to be competitive on salaries for longer.

Robin added: “Although the huge growth we've seen in property prices will probably slow – they will be more healthy and stable in the longer term. For property investors, eyeing the longer term is far better than a blistering pace right now.”