Vulnerabilities%20of%20Visegrad%20real%20estate%20markets%20

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Vulnerabilities of Visegrad real estate markets
lessons from the past.
Institute of Management of Slovak University of
Technology BRATISLAVA

• Koloman Ivanicka, Andrej Adamušcin, Július Golej

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Introduction

• The Visegrad group of countries (V4)
• Slovakia,
• Czech Republic,
• Poland
• Hungary

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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
source www.cia.gov
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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
source www.cia.gov
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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
source www.cia.gov
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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
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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
  societys 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

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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

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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
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Office supply in V4
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Office demand i V4
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Office market Supply and Demand in V4
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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 sectorin particular,
  real estate, construction, and banking.
• Capital flows boosted domestic demand rather than
  supplyleading 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.
Excessive investments
Source Eurostat, Erste Group Research,Budash
Capital flows and growth in CEE
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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.
Highest imbalances
Almost balanced
Net lenders
Source Eurostat, European Commission, Erste
Group Research, Budash
Capital flows and growth in CEE
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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