The results of a survey by the Investment Property Databank represent bad news for eastern Europe. But these headline figures should not hide the continuing innovation that characterises this region's approach to commercial property.
For the first time in its five-year history, the IPD survey – which looks at a basket of 429 commercial properties in 27 portfolios chiefly in Poland, the Czech Republic and Hungary, along with some from the rest of the Central and Eastern European (CEE) region – has delivered a negative annual growth rate.
More ominous of all is the fact that each individual sector recorded losses. Best performing was the office division with a five per cent return, followed by retail units at -5.2 per cent, then industrials at -9.7 per cent. Since the start of the survey in 2005, Poland has been the best-performing market followed by the Czech Republic, while Hungary has consistently delivered the worst returns; that pattern remains the same in 2010.
In some ways the results of the survey are merely indicative of what is happening in the rest of the world. The commercial property sector, globally, performed relatively well until 2007 or 2008, since which it has been volatile with a broadly falling trend. In other ways, however, the eastern European picture is slightly worse than elsewhere, due to the weight of expectation it has carried since the Millennium.
Almost a decade ago CEE was considered to be perhaps the region of the world with the brightest commercial property growth potential, thanks to the promise of corporate expansion from western Europe and north America. Most firms appeared to alight on the CEE as their favourite location and massive infrastructure projects – including residential development – fuelled speculation that this region was ready for take-off. But while some expansion into CEE did, indeed, occur, the demand to justify that expansion has now contracted sharply.
"Poland's capital, Warsaw, reflects the trend…with the strongest underperformance in the industrial sector that has suffered from a contraction in demand for its manufacturing industries from [western] European countries," says the IPD's Regional Director Dr Nassos Manginas. That fall in demand typifies the unfulfilled promise. This apparently-depressing context should not, however, blind anyone to the fact that the CEE continues to offer surprising and encouraging commercial property initiatives.
Property funds are prospering, for example. These are an inevitable by-product of investors being wary of putting money into specific schemes. Typical of these activities has been the purchase by the European Property Investors Special Opportunities' fund of five Polish warehouses, fully tenanted, with 170,000 sq m space in Lodz, Poznan and Pruszkow.
Likewise, the region has a burgeoning reputation for green office development and the Swedish construction firm Skanska – widely respected for its green activities – has been outspoken in its advocacy of CEE as a pioneering location.
Skanska's Czech subsidiary is undertaking a new green office project, City Green Court, in the Pankrac business district of the Czech capital, Prague, for example. Work will begin after the summer and occupiers are expected from early 2012. On top of this, the country that is arguably the most traumatised in the CEE, Albania, is at last starting to enjoy the fruits of freedom with commercial development.
Remember that Albania had the most extreme form of east European communism until the late 1990s and then endured extensive civil riots and murderous feuding between gangs before becoming a stabilised democracy just a few years ago.
Now Germany's Lindner Development giant is creating Albania's first business park near the capital, Tirana. It will offer more than 200,000 sq m of office, warehousing and small-scale light industrial buildings, being built in two phases starting in October this year. It may be a minor scheme compared to many elsewhere but Colliers International believes it will be the catalyst for change within the country, improving construction standards and widening the scope for investors.
"We foresee there will be a wave of corporate occupiers coming to Albania, which has become a EU-candidate country. We're seeing a change in the development market which used to be dominated by local builders and is now becoming international. We're working with Italian, Austrian and Israeli developers" according to Colliers' spokeswoman Stela Dhami.
All this proves that there is hope behind the depressing figures of the IPD report. Like every other region in the world, the potential for commercial property recovery is extensive and, in time, will prove successful. We must hope that the time will not be too long.