The Future of the Central and Eastern European Property Markets

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On 1st May 2004 eight Central and Eastern European countries (Poland, Hungary, Slovakia, Slovenia, Latvia, Lithuania, Estonia and the Czech Republic) along with the island  states of Cyprus and Malta joined the European Union thereby drawing a certain focus to  a region that for so many years had been marginalized.

With Romania and Bulgaria on the brink of joining in 2007/2008 and several other  South Eastern European countries hoping to follow in their footsteps over the course of the  next decade there is also a sense of a defined future to the expansion of this club – a sort  of roadmap for Central and Eastern Europe which will bridge the gap between Russia and  Western Europe.

With the EU providing a solid base as well as a tangible future for the region it is  perhaps not surprising that the Polish property market, at its centre, is becoming one of the world’s hotspots for international investment.

Capital as base

Most development in Poland at and around the time of EU accession was centred on  Warsaw which boasts the largest population and highest GDP per capita within the country,  the most significant demand for A-class office space and upscale retail centres as well as the  greatest need for new residential complexes. Warsaw also boasted the best transport links  (nationally and internationally) and crucially – with little competition for sites – investors and  developers had no need to look and travel any further.

Investment spreads across the country

Three years on, the fundamentals are still the same with Warsaw attracting the lion’s share of investment but increasingly the gap is closing and development is spreading to secondary cities and beyond. In fact in Poland, average residential prices in Krakow are now neck and neck with those of Warsaw (1,500 EUR per square metre).

The lesson is clear. Warsaw has been and remains a worthy option for those considering investing in residential and commercial development – the capital is growing by an estimated 100,000 people per year – but the perceived risk of stepping outside the capitals is diminished and offering even greater returns for the perspicacious investor.

Early growth

Residential prices, broadly-speaking, have doubled from an average of 750 EUR per square metre to 1,500 EUR per square metre in Warsaw and Krakow in the three years since joining in 2004 with the likes of Wroclaw, Poznan and the Tri-City incorporating Gdansk, Gdynia and Sopot following close behind. Growing personal wealth locally, increase in interest from foreign investors and more importantly the wider availability of cheap financing (particularly in Swiss Francs), coupled with restricted supply thanks to the still time-consuming planning procedures look set to fuel residential growth still further.

Average monthly prices of apartments in Poland's major cities

Office & retail markets

A combination of relatively high levels of unemployment, a stock of highly-educated  and linguistically competent young workforces, a conveniently central geographical location  and forgiving tax structures are converting many of Poland’s cities into a Mecca for Westernbased  companies looking to outsource the likes of back-office operations and call centres.

As long as wage inflation (rising moderately but kept in check from any unwanted spikes by the unemployment levels) keeps stable, Polish government tax incentives are maintained and the workforce remains satisfied, foreign direct investment should continue unchecked even allowing for generous hikes in rents and capital values of real estate.

The potential absorption of further increases in rents is admissible too with regard to  the retail market. As wage inflation steadily grows, so does the disposable income of Polish  consumers and so it is hardly surprising that foreign retailers are keen, at no insignificant cost, to establish their brands and market position in this burgeoning region at an early stage in the cycle.

Residential market

City centre residential property prices in Polish cities (particularly in those with growing  links to the international tourist market such as Krakow) should continue to rise steeply until  they meet the Western European average. The wealth of any landlords or tenants in these  locations is based primarily on international activity and largely independent of any local considerations. Rents in such areas should see a strong rise too as the market readjusts to the influx of the foreign (long-term) business and particularly (short-term) tourist tenants and
yields also gradually equalize with Western European norms.

It remains to be seen to what extent the region’s population embrace the notion of home-ownership and the foreign culture of mortgage but early signs are promising for developers and banks with exponential growth already – with a long way left to go before personal debt reaches Western European levels. If this trend continues (and if interest rates remain low), the mid to lower end of the apartment market also looks promising. Growth at this level should be bolstered by further urbanization within the Poland – there is scope for the capital and other major cities to double in population to reach the same urban/rural population ratio as in Western Europe.

On the fringes of the cities, if another cultural divide can be crossed – envisaging the move into a detached house as a step on the property ladder rather than reaching its final rung – the popularity of the detached house in the suburbs (currently excellent value at less than 1,000 EUR per square metre) as part of a housing chain and hence as an investment will also become an important part of the Polish housing market.

Sustained growth

In terms of factors initially influencing foreign direct investment into Poland, the low  cost of property (cheap rents, relatively high yields or highly affordable entry-level residential investments) was obviously significant. Whilst this is still an important factor, investors in the  region are seeing many other positives which should keep investment in the area high even when yields compress and rents and residential prices rise.

Inflation, overheads and taxes look like remaining low, the area is now as politically  stable as any other, financing is relatively easy to obtain and tourism is booming thanks to lowcost airlines. There are even an estimated 500,000 Poles in the UK and Ireland many of whom are flying back and forth regularly to Poland (which may in part explain the 97% increase in passenger numbers, for example, at Krakow’s Balice airport between 2004 and 2005). New routes are continually being opened with a direct service between Krakow and Moscow due to open in the New Year. The wealth being brought back from abroad is important in terms of driving the residential and retail markets, whilst the inevitable breaking-down of social boundaries and prejudices will also have more wide-reaching effects.


Even leaving the persuasive economic argument to one side, the current sociopolitical  climate of the region and the direction in which it is moving looks set to garner more investment for the Polish real estate market. As capitals begin to saturate with foreign  investment, this investment focus will increasingly dilate and spread outwards to suburbs and secondary cities.

Not to be underestimated, the work ethic and productivity of the average Polish  employee (whether employed abroad or in their native land) has made a huge impression on employers – and it would not be fanciful to suggest that even with all other associated costs of investing in Poland reaching parity – real estate very much included – this central tenet of conscientiousness will keep a positive spin on Poland and foreign investment in the country and in its real estate market very much alive.

Nowoczensne projekty domów