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Institute of Management
of Slovak University of Technology
BRATISLAVA
Vulnerabilities of Visegrad real estate markets –
lessons from the past.
Koloman Ivanička, Andrej Adamuščin, Július Golej
Page  1
Introduction
 The Visegrad group of countries (V4) :
– Slovakia,
– Czech Republic,
– Poland
– Hungary
Page  2
Economic overview – CZECH REPUBLIC
 The population of the Czech Republic (2009): 10.3 million inhabitants
 National currency : Czech crown
 Capital city: Prague (1,249,026 inhabitants in 2009)
 strongest economic sectors : industry and services
 main export partners : Germany 28%, Taiwan 8.5%, Slovakia 8.4%,
Poland 5.9%, France 4.9%, UK 4.4%, Austria 4.3%, Italy 4.3%
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* May 2010
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source:
www.cia.gov
Economic overview – POLAND
 The population of the Poland (2009): more than 38 million inhabitants
 National currency : Polish Zloty
 Capital city: Warsaw (1,711,466 inhabitants in 2009)
 main industries: machine building, iron and steel, coal mining,
shipbuilding, chemicals
 main export partners: Germany 24.4%, France 6%, Italy 5.9%, UK 5.6%,
Czech Republic 5.5%, Russia 5.2%
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* May 2010
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source:
www.cia.gov
Economic overview – SLOVAKIA
 The population of the Slovakia (2009): 5,463,046 million inhabitants
 National currency : Euro
 Capital city: Bratislava (428,791 inhabitants in 2009)
 main industries: automotive industry, electrotechnology, engineering and
wood processing.
 main export partners: Germany 20.1%, Czech Republic 12.9%, France
7.8%, Poland 7.2%, Hungary 6.3%, Italy 6.1%, Austria 5.8%, UK 4.8%
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* May 2010
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source:
www.cia.gov
Economic overview – HUNGARY
 The population of the Hungary (2009): 10.01 million inhabitants
 National currency : Forint
 Capital city: Budapest (more than 1,800,000 inhabitants in 2009)
 main industries: mining, metallurgy, construction materials, motor vehicles
 main export partners: Germany 25.4%, Italy 5.2%, Romania 5.1%, Austria
4.7%, Taiwan 4.5%, Slovakia 4.5%, France 4.5%, UK 4.4%
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source:
www.cia.gov
Vulnerability
Social vulnerability refers to the inability of
people, organizations, and societies to
withstand the adverse impacts from multiple
stressors to which they are exposed. These
impacts are due in part to characteristics
inherent in social interactions, institutions,
and systems of cultural values
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Vulnerability
 Vulnerability is a set of prevailing or consequential
conditions, which adversely affect the community's
ability to prevent, mitigate, prepare for or respond to
hazard events
 These long-term factors, weaknesses or constraints affect a
household's, community's or society’s ability (or inability) to
absorb losses after disasters and to recover from the damage
 Vulnerability precedes the disaster event and contributes to
their severity, impedes disaster response, and may continue
long after a disaster has struck
 Vulnerability has two interacting forces: the external force,
which is exposure to shock, stress and risk; and internal
force, which is defenselessness, in other words a lack of
means to cope with problems
Page  12
Crisis triggers
 The crisis trigger can be for instance, terms of trade, political turmoil,
contagion from other countries
 Or as in the last crisis the collapse of the subprime market
 The triggers are quite random in their nature and we usually do not
know to predict them
 Most of the analysts at the beginning of 2008 were thinking that the
V4 countries can withstand the financial crises without major impact
 Their banking systems were at that time judged as not being directly
linked to the subprime mortgage and securitisation processes which
had initiate the financial crisis in the United States and in other financial
centers
 They were wrong.
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Vulnerabilities and early warning systems
 The underlying sources of vulnerabilities should be
described, possible shocks that may unwind these
vulnerabilities
 It is necessary to understand, how these shocks could
propagate through the sectors
 Then the early warning systems could be prepared
 The warning had to be accompanied by the set of the
policy options that may enable to address the various types
of risks and also the recommendation of the international
policy cooperation
Page  14
Neglect for early warning signals
 When the business goes fine, most of the members of
the politic and business community are blind and neglect
the early warning signals –it was really true in V4
 otherwise they would probably analyze the vulnerabilities and
would try to prepare and to realize the measures that would
protect the economy against major shocks in advance.
 This could be difficult, when the broader community may not
understand the need for the protective measures in the times
of prosperity.
 Thus in future the effort should be oriented on the ways
how to address the policy makers in the way that they
would be willing to react on the underlying vulnerabilities
instead of trying to predict the crises triggers.
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Investment property market
 Property in Central and Eastern Europe (CEE) boomed
before the crisis, with investors driving prices close to west
European levels, believing the region was rapidly
converging with the wealthy west
 With banks offering cheap finance, investors flooded into the
less developed markets of the Baltics, south east Europe and
Ukraine.
 But in mid-2008, when the global financial crisis erupted,
panic hit CEE and its property market. Prices collapsed,
yields soared, banks cut credit lines and investors ran into
trouble. In Austria, the IATX property stock index, including
companies with heavy CEE exposure, fell almost 90 per cent
from peak to trough in early 2009.
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Prime office rents in V4
Prime Office Rents
35
30
€/sqm/mth
25
Praque
20
Budapest (CBD)
Warsaw
15
Bratislava
10
5
0
Q4/2006 Q3/2007 Q1/2008 Q4/2008 Q1/2009 Q4/2009 Q1/2010
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Office supply in V4
Supply "V4"
350000
300000
250000
Sqm
Praque
200000
Budapest
Warsaw
150000
Bratislava
100000
50000
0
2005
2006
2007
2008
Year
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2009
2010
(forecast)
Office demand i V4
Office demand in V4
500000
450000
400000
350000
Praque
Sqm
300000
Budapest
250000
Warsaw
200000
Bratislava
150000
100000
50000
0
2005
2006
2007
2008
Year
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2009
2010
(forecast)
Office market: Supply and Demand in V4
300000
200000
180000
250000
160000
140000
200000
120000
100000
150000
80000
100000
60000
40000
50000
20000
0
0
2005
2006
2007
2008
2009
2005
2010
2006
2007
2008
2009
Prague (supply)
Bratislava (supply)
Prague (demand)
Bratislava (demand)
500000
2010
(forecast)
(forecast)
350 000
450000
300 000
400000
250 000
350000
300000
200 000
250000
150 000
200000
150000
100 000
100000
50 000
50000
0
0
2005
2006
2007
2008
2009
2010
2005
2006
2007
2008
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2009
2010
(forecast)
(forecast)
Warsaw (supply)
Budapest (supply)
Warsaw (demand)
Budapest (demand)
Boom period before the crisis in Central Eastern Europe
Rapid growth
Growth often unbalanced.
Capital inflows were large, but to a great extent went
to the “non-tradable” sector—in particular, real
estate, construction, and banking.
Capital flows boosted domestic demand rather than
supply—leading to a surge in imports, current
account deficits that widened to unprecedented
levels, and overheating economies.
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Economic crisis
 The international crisis was “imported” into the CEECs
economies through external demand and foreign lending.
 Many of the CEECs’ industries rely to a considerable extent
on foreign demand, both directly and indirectly, though their
participation in international production chains, and this is
especially true for the new EU members. (ex. Slovakia 80%
of GDP realized by export)
 Last quarter of 2008 (export volumes contracted between 5%
and 15%), that became even more severe in the first quarter
of 2009, with drops in exports reaching 25%
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Decrease of lending
The financial crisis raised risk perceptions in the
international financial markets and international
capital movements slowed down, so that many
countries in Central and Eastern Europe saw a
sharp drop in the amount of lending available, as
capital inflows into the region stopped or in some
cases reversed
The crisis raised the issue of the appropriateness
of a transition and growth process heavily
dependent on economic (both trade and
financial) integration
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The mostly hit countries
Among the countries most severely hit by the crisis
are those with a high external debt already in 2008,
such as Hungary and the Baltic states (close or
above 100% of GDP), that made these countries
very vulnerable to the problem of credit crunch and
confidence loss that characterized the international
financial crisis.
It concerns also the countries that are lagging in
transition (Bulgaria and Romania)
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Eastern European Real Estate
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Higher investment growth in CEE – enlargement of production
capacities, productivity/quality improvements, infrastructure project.
Latvia and Estonia – outliers in the region.
12
Real GDP growth (average 2005-2007, %)
Latvia
Excessive
investments
10
Lithuania
Slovakia
8
Estonia
Czech
Rep
Bulgaria
Romania
Ireland
Poland
6
Slovenia
Cyprus
Finland
4
Greece
Portugal
Malta
Denmark Hungary
Netherlands
France
Sweden
UK
2
Spain
Croatia
Germany
Low investments
0
15.0
Italy
Austria
High investments
20.0
25.0
30.0
35.0
Investments as % of GDP (2005-2007 average)
Source: Eurostat, Erste Group Research,Budash
Capital flows and growth in CEE
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26
Countries with the greatest gap between investments and national savings - Latvia,
Estonia, Bulgaria and Greece run the largest C/A deficits. Romania, Portugal and
Spain almost at the same level. The lowest deficits were in Poland and Czech
Republic.Germany, Netherlands, Austria, Sweden were net lenders
Investments (% of GDP, average 2005-2007)
40
Highest
imbalances
Bubble size = Current account
balance (as % of GDP)
Latvia
Current accounts
in deficits
35
Greece
25
-18 -11
Portugal
-12
-15
-19
Bulgaria
30
Spain
Romania
Estonia
Ireland
Slovakia
Lithuania
-10
Almost
balanced
Netherlands
Hungary
Malta
Net lenders
Slovenia
Czech Rep
Italy
20
Cyprus
.
France
Poland
Germany Sweden
15
Current accounts
in surplus
10
line of balanced investments
and national savings
5
5
10
15
20
25
30
National savings (% of GDP, average 2005-2007)
35
Source: Eurostat, European Commission, Erste Group Research,
Budash
Capital flows and growth in CEE
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27
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REVERSE FLOWS OF MONEY
 One unusual feature of the current crisis in CEE has been the apparent
“reverse flows” from emerging market subsidiaries to advanced
economy parent banks.
 The countries that experienced the sharpest reduction in cross-border
banking inflows, such as the Czech Republic, Poland and Slovakia, were
in fact the ones with the strongest fundamentals going into the crises.
 The reason for lower inflows was not the loss of confidence in these
countries’ policies or banking systems, but apparently, the need of
parent banks from advanced economies to maintain high levels of
liquidity at home during the most acute phase of the crisis
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Disastrous imbalances in foreign currencies
 Imbalances in foreign currencies are disastrous for economic agents
who do not have the means to cover the currency risk such as
foreign exchange earnings, hedging
 The share of foreign currency credit varied significantly from country to the
other and is:
• very high in Latvia and Estonia and largely exceeds the deposits
currency;
• high in Hungary, Lithuania, Bulgaria and Romania in relation to deposits;
• high but lower deposits in Croatia;
• increasingly strong in Poland;
• low and equal to deposits in the Czech Republic
 Slovakia and Slovenia are in EURo zone, so they are exposed to the
different types of risks (growing internal public deficits plus deficits in
some southern european eurozone countries)
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Vulnerability of small economies
 Small, open economies are in a number of ways particularly
vulnerable to the types of shocks which the international
financial crisis generated.
 They are vulnerable to shocks which lead to a reassessment
of emerging market risks. This was especially the problem for
South Eastern European countries and Baltic States with
fixed rate regimes they are more prone to a fast increase of
private sector debt levels (plus potential real estate bubbles)
prior to the crisis.
 The other problem - the rescue operations in the fiscally
stronger European economies that had the spillover effect on
the smaller CEEC countries
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Diversification of economies and impact on real estate
 The regions, cities and states may be more vulnerable in period of
economic crisis if their economies are not enough diversified. The
low performance in one sector has negative influence on the region, city,
state. This problem is often more acute in case of small opened
economies that are heavily dependent on exports.
 When the importing countries lower the demand for goods because
of the internal problems, the exporting country is also in trouble. (As with
automotive industry in Slovakia).
 Creation of one new job places in base industry creates often two
another places in the service sector. The destruction of one job in base
industry can just opposite effects. Growing unemployment then reduces
demand for real estate whether it is for business or for household
purposes
 Some countries, especially the Baltic countries, did not develop the
base industries strong enough, and as the result the impact of crises
was heavier then in V4 countries
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The positive aspects of crises
The necessity to reduce the rents and prices
of the real estate may help the businesses to
reduce the costs and thus become more
competitive
It may also enable the people to move to the
areas were there is higher needs for the labor
and the housing prices would act as reduced
barrier for the labor mobility
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I spite of crises: the opportunities for real estate development in V4
 The region of V4 is still not well enough supplied by modern,
high quality commercial and residential real estate
 The large real estate stock built thirty - forty years ago does
not meet modern criteria and its economic life is often close
to the end
 The new more modern buildings were built in last twenty
years only in the most dynamically developing areas
 There is the need for the replacement of many buildings in
close future
 Critical consideration, such as climate change and energy
efficiency were not often taken into account even in the newly
built buildings
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Conclusions: Main vulnerabilities
Economic structures without well developed
base economic sectors
The substantial amount of loans denominated
in foreign currency
Low transparency of the real estate markets
Strong dependance on exports
Dealys in development of the green buildings
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Conclusions: How to eliminate the vulnerabilities
 Better macroeconomic regulation
 By catching and analyzing the early warning signals coming
from changing economic conditions, and adapting the
economic, housing and real estate policies in advance
 More strategic thinking in banking and real estate companies
 Adapting the strategies of real estate sector, and looking for
future market niches – especially the developers
 By cleansing of market, which is actually taking place
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Conclusions: how to overcome the vulnerabilities
 The more professional real estate companies with the longer-term vision and
client orientation will survive and some of the speculators will be forced to leave
the market
 Many especially the smaller real estate intermediaries are already leaving the
market
 The real estate prices may help to standardize the behavior of the actors on the
market. The developers will become more responsible, and that the successful
could become only the projects located in the best localities. .
 The considerable market consolidation is expected by the developers and
construction companies. Financially weaker companies had to leave the market,
sell their distressed properties for a lower price
 We expect that the new behavioral norms and market processes will emerge from
the recession
 The recovery may depend on the government policies (there is not a large margin
for government that is restrained by the necessity of the fulfillment of Maastricht
criteria, and by the rising public deficits)
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Thank you for
your attention
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