CEE property markets so far holding firm amid
mounting economic turmoil

By Jan Cienski in Warsaw

The credit crunch, and the resulting global financial crisis which has shaken the core of the financial world in the US and London over the last couple of weeks has had only a peripheral impact on central Europe so far, although some of the region's property developers have been bloodied?

The region's stock exchanges have plunged and soared in tandem with larger markets elsewhere, but the underlying economic fundamentals are much firmer than in other parts of the world. The banking system looks stronger than in countries which allowed a full-fledged real estate bubble to grow combined with a finance sector that fed on increasingly exotic, and now often toxic, investment instruments. Central Europe's economic growth continues to be sturdy and banks have in the main been unaffected by the turmoil.

Zdenek Tuma, the Czech central bank governor, says that although a slowdown is expected for the Czech Republic due to a cooling of growth in the US and western Europe: "It is remarkable how resilient emerging markets really are. Up to now we have managed to be unaffected."

He is seconded by Miroslav Kalousek, the Czech finance minister, who says: "Exceptionally good times are over and normal times begin but these are not extraordinary times that would require extraordinary measures."

In Poland, the biggest economy in the region, growth in the second quarter came in at an unexpectedly robust 5.8 per cent, higher than predicted by analysts. Ryszard Petru, chief economist of BPH Bank, says that a big reason for Poland's resilience is its large domestic market and its relative insulation from the outside world. Poland's trade to gdp ratio - a common measure of how exposed an economy is to the outside world - it only about 40 per cent, similar to other economies with large home markets.

Poland's growth is being driven in large measure by continuing foreign investment flows and by strong consumption, fuelled by continued consumer and mortgage lending by local banks.

Polish banks last year issued 60bn zlotys (eur17bn) in mortgage loans, 46 per cent more than in 2006, according to the Polish Banking Association. The association expects that new mortgages will rise to about 68bn zlotys this year. In the first half of this year, 165,000 new mortgages were issued, a 4 per cent increase over the same period last year.

Although the housing market is stagnant in many of Poland's largest cities, banks are continuing to lend and real estate developers - perhaps optimistically - expect the unsatiated demand for housing to prevent a collapse in the market.

"The dynamic development of financing in the real estate sector is caused mainly by the enormous demand for housing," says a statement by the banking association. "Currently, it is estimated that there is a need for 1.5-2m new apartments."

However, Poland's Financial Supervision Authority is hoping to dampen enthusiasm for risky lending by looking into the way banks assess the credit-worthiness of their clients.

"We want to lower the long-term level of risk in the Polish banking system," says Lukasz Dajnowicz, a spokesman for the authority.

The result is likely to be a slight dip in real estate prices and a move by buyers to smaller and cheaper apartments, says Robert Chojnacki, head of the Rednet Property Group. Banks are also reducing the size of their loans. A few months ago loans for 100 per cent or more of the value of a property were common, now it is becoming increasingly difficult to find loans for more than 90 per cent of value.

While retail buyers have come through relatively unscathed, the same is not true for developers. Jean-François Ott, CEO of the Orco Porperty Group, says that banks are now being much more demanding before showering cash on a developer.

"Banks are still lending, although maybe not for purely speculative projects," he says. "If you show about 50 per cent pre-leased then you can get the money."

He adds that developers can now get lending covering 60 or 70 per cent of the cost of a project, not the 80 per cent that was common a year ago, and that the cost of borrowing has gone up by about 40 basis points. For now developers have to go to banks because they have no real access to either bond or stock markets.

Orco and other real estate developers have taken a battering on local stock markets. Trading in Orco even had to be temporarily halted on the Prague stock exchange.

Some developers have also pulled out of weaker projects, although Orco's signature building, in Warsaw, a residential tower designed by Daniel Libeskind, is still going ahead.

While developers have taken a bit of a beating, the region's financial system itself remains healthy.

In Poland there are no real subprime borrowers. People able to get a mortgage tend to be urban professionals, and despite the recent defrothing of the real estate market, prices have held fairly steady, unlike in the US where some borrowers are now caught with loans that are worth more than their homes

Poland's banks have been able to continue lending because very few of them dabbled in risky US mortgage-backed securities. The country's second-largest bank, PKO BP, is majority owned by the state and stuck to the traditional business of taking deposits and granting loans, confined almost entirely to the Polish market. Although Italy's UniCredit has run into trouble, its Polish subsidiary, Pekao SA, the country's largest, is liquid and has steered clear of riskier loans denominated in foreign currencies. Even the troubles of Belgium's Fortis, which has a small presence in Poland, has not upended the mortgage market.

The story is similar in the Czech Republic and in Slovakia, where an even higher proportion of the banking system is in foreign hands than in Poland. There the most important banks tend to be Austrian and Italian, and they too have spent the last few years expanding their operations in eastern Europe.

"We have not really felt the effects of the credit crunch at all. We are very far from any kind of sub-prime lending here" says Gernot Mittendorfer, CEO of the country's largest bank Ceska Sporitelna, owned by Austria's Erste Bank, adding that lending growth will likely slow this year before rebounding.

As in Poland, mortgage loans are still a relatively new product in the Czech republic. Because of the late start, the country's households have debts of about 20 per cent of GDP, about a third of the level common in more advanced EU countries.

"The mortgage market here is only about a decade old," says Kamil Janacek, chief economist with Komercni banka, owned by Société Générale.

The smaller number of loans issued means that banks are able to cherry-pick the best clients: relatively high-earning professionals. Because of the quality of the borrowers, non-performing loans in the retail segment are below 3 per cent, similar to the ratios found in Poland the Slovakia. Local mortgage markets have also been insulated by strongly rising local wages, which have made it easier for clients to keep up with their payments.

There is similar bullishness in Slovakia, where the real estate market has not even taken the breather visible in Poland, and economic growth continues to be the highest in the EU.

"In terms of the general economy, we have not seen any impact," says Ignacio Jaquotot, deputy CEO of VUB Banka, a unit of Italy's Intesa Sanpaulo. "The financial weather map shows sunny for this part of Europe."

Because most central European banks are owned by larger foreign banks, they have been able to adopt the technology and risk assessments common in more advanced economies. As well, if any local banks do get into trouble - something that has not yet happened - they would be able to call on help from their parent companies.

The flip side of that; parent banks tapping the assets of their affiliates to get themselves out of trouble, has also not occurred, even in the case of Société Générale following the losses it suffered because of rogue trader Jérôme Kerviel.

Most analysts feel that the danger of direct contagion from the US credit crunch has bypassed the region. Currently, the Polish, Czech and Slovak economies are continuing to post strong growth numbers, even though the Czechs and the Slovaks are much more dependent on trade than the Poles, and could be more affected if western Europe, and particularly Germany, enters a recession.

While Poland, the Czech Republic and Slovakia are weathering the crisis well, other parts of central Europe are running into more difficulties, although again they are not directly affected by the credit crunch. The three Baltic countries have seen their overheated real estate markets implode and economic growth turn negative, but mainly because of domestic factors, not foreign ones. The same applies to the recent difficulties encountered by Hungary.

Don't miss TROPICAL STORM: Global economic turbulence and the CEE property markets.
For a full list of presenters and panelist sand the event itinerary visit Forum Itinerary & Speakers, to reserve tickets go to Book Tickets.

Tropical Storm, Corinthia Grand Hotel Royal

9.00-14.30, 22nd October 2008 (including luncheon mixer)

Hot on the heels of the credit crunch a wave of wider economic and political turbulence is testing the nerve of property investors and financiers everywhere and making life harder for developers as costs and cap rates rise, liquidity falls, currencies bounce, stocks stumble, and retail sales and GDP forecasts tumble. Is the worst over or is there more to come, and what are the likely long term repercussions? Some argue that residual economic catch up coupled with lower leverage levels and strengthening local currencies may buffer the CEE markets from the worst ravages of the storm compared with elsewhere - in fact there could even be upside in some areas. What do the experts think, and how are the leading companies responding?