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re as

on.point
March 2012

Residential Markets in
Central European Capitals
Bratislava Bucharest Budapest Kiev Ljubljana Prague Riga
Sofia Tallinn Vilnius Warsaw Zagreb
The situation of residential markets in Central and Eastern Europe
moderately improved during 2011, though growth levels varied
considerably between countries and property prices were largely
left out of the growth trend.
In cooperation with

/WRV JonesLang
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Real value in a changing world

2 On Point Residential Markets in Central European Capitals March 2012

Despite of persistent difficulties for some developers, the


residential markets of Central and Eastern Europe overall
experienced decent growth in demand, while the scale of
supply was geographically diversified and prices continued
to decrease, though at a decelerated pace.
2011 Market Review
The past three years have undoubtedly been among the most economically difficult in the post-socialist history of Central and
Eastern Europe. This is especially true for the real estate sector,
including the commercial housing market, as well as for the
financial sector that is an indispensable ingredient for the property
industry. Against this background, market actors across regional
residential markets can on the whole be pleased with the results of
2011, as most CEE markets have eventually come out of the
downturn and noticed visible improvement in demand. However,
the level of demand re- covery differed greatly across the region,
while the scale of new supply was diversified across the region and
prices were largely left out of the growth process.
The most resilient residential markets, including major Polish cities
and Prague, noted considerably increased interest from homebuyers, while at the same time developers were eager to launch a significant amount of new projects to the marketplace. In the three
Baltic capitals there was an observable recovery in demand,
though developers were still rather cautious in introducing new
supply to the market. The trend was very similar in Bratislava. In
contrast, the level of improvement was less pronounced in the
residential markets of Budapest, Kiev, Bucharest, Sofia, Zagreb
and Ljubljana. In these cities, there were little changes in demand
and supply com- pared to the situation in 2010, which may be

interpreted as a stabili- zation of the market, yet on a low level. In


particular, there was in- significant new supply to these markets,
whereas transactions mod- erately increased compared to 2011.
Generally speaking, the price decline in the last 2-3 years as well
as a stabilized market situation was able to fuel demand for new
hous- ing in 2011, though to a varying extent in different cities. At
the same time, supply was still reasonably limited in most CEE
coun- tries, except of the major Polish markets and Prague, while
every- where new projects were rather small-scale and phased into
stages.

Following significant price drops in 2009 and 2010, prices in the 12


CEE capital cities decreased at a decelerated pace in 2011. Still, 8
out of 12 analyzed capitals noted a further price decline. The
change in asking prices on local primary markets varied between
-7% in Sofia, a price stagnation in Vilnius and a double digit price
growth in Tallinn. Compared with the price peak, it can be stated
that developers in Ljubljana and Warsaw were the most successful
in defending the average asking price level, as the Q4 2011 price
level stood at 90% and 86% of the price peak, respectively.
Zagreb, Bratislava and Bucharest also revealed notable results of
over 80%, while Prague was just below this threshold. The
remaining half of the analyzed capitals indicated substantial losses
in the property price level between the local peak and Q4 2011. In
this context, it should be borne in mind that prices were pushed to
unsustainable levels during the boom period by speculative
investment demand.
From an economic standpoint all countries in the CEE region saw
positive growth rates in 2011 and, thus, they continued the
economic recovery that started in 2010. According to preliminary
data from Eurostat from 15th February 2012, the highest growth in
GDP was recorded in the Baltic States of Estonia (8.0%) Latvia
(6.1%)and Lithuania (4.5%) as well as in Ukraine (4.7%) and
Poland (4.0%). The economies of Slovakia (2.9%), Bulgaria
(2.2%), the Czech Republic (1.8%) and Romania (1.7%) expanded
by reasonable growth rates, whereas Hungary (1.4%), Slovenia
(1.1%) and Croatia (0.6%) revealed only moderate growth.
However, the weak macroeconomic performance of the euro zone
Figure 1: Dwelling completions in CEE capital cities, 20022011

Source: REAS based on national statistical office data

overshadowed regional performance and impacted on CEE growth


prospects in the near future. In the beginning of 2012 all Big Three
rating agencies lowered the sovereign debt rating of Slovenia,
while two downgraded Slovakia, leaving two regional euro
members with a negative outlook. Although Estonia was spared a
downgrade, the Bank of Estonia has recently reduced the
economic growth forecast for the Baltic country. Though to a lesser

extent, the economic


per- formance of the remaining CEE
On Point * Residential Markets in Central European Capitals * March 2012 3
countries is likewise strongly corre- lated to the performance of the
euro zone.
As a consequence and due to domestic austerity measures,
market sentiment dropped considerably in many CEE countries
recently. In the Czech Republic, the market mood deteriorated due
to the changed VAT rate and low economic growth prospects,
while Hungary remained in a difficult economic/political/financial
situation. The Baltic States embarked on austerity programs
relatively early, their housing markets started to rebound positively
in the recent months, yet the local markets are small and
households' investment mood remained restricted. In spite of
progress in the EU-accession pro- cess, Croatia showed a poor
business mood. In most of the remaining EU countries market
sentiment only slightly worsened, while in Ukraine domestic
demand remained limited.
In spite of external factors and market mood deterioration, the performance of residential markets in the CEE region in 2011 was
overall positive. Most markets recorded growth in demand and,
though not everywhere, also in supply. Price decreases were less
severe and, considering the fact that new supply was overall pricewise better adjusted to local demand and thus reduced the
average price level, one could speak of stabilization even in pricing
terms.

4 On Point Residential Markets in Central European Capitals March 2012

2012 Market Outlook


At this point last year, the CEE region had just experienced a
period of economic revival in 2010 and the market outlook for
2011, though uncertain, looked fairly promising. In contrast, the
current market outlook for 2012 is largely negatively, influenced by
the anticipated slowdown of the world economy and in the euro
zone in particular.
In fact, the macroeconomic environment within CEE begun to
deteriorate already in H1 2011 and market confidence still remains
fragile. A recent economic brief by the European Commission
remarked that the ongoing financial market turbulences within the
euro zone are likely to have a negative impact on the CEE region
as a whole. At the same time, the EC analysts state that the
impact should vary considerably across regional countries. From a
GDP growth perspective, Ukraine, the Baltic States and Poland
have the best macroeconomic outlook for 2012, followed by
Bulgaria and Romania. Slovenia and Slovakia are likely to note a
growth rate of around 1%, while the Czech Republic, Croatia and
Hungary are predicted to record slightly above zero growth rates.
From a residential property market mood perspective, the
whole region has lost momentum at present. Even in the major
Polish urban markets, despite of remarkable sales results in
2011, most market players look into the near future with
concern. Nonetheless, from a long-term perspective many CEE
markets reveal promising fundamental demand drivers, such as

a quantitative shortage of housing and a lack of qualitative


housing choice. There are dynamic
growth prospects in the formation of new households in the
region as well. Furthermore, there is still a gap in economic
standing and mortgage market growth between the CEE and
Western Europe. Thus, the regions' long-term potential remains
high and at present developers and investors can build up their
market position and create investment portfolios.
In 2012 developer activity will focus on proven products in liquid
markets. Banks are likely to support this development, while they
will obstruct investing in projects that do not conform to the
market. Moreover, banks will be selective in investing in local
markets with weak demand. Adequate due diligence will be
crucial for all market players.
In the near future the key factors for the development of the
residen- tial markets in CEE will be:

the accessibility of mortgage loans for homebuyers and


the lending policy of banks;

the scale of lending activity, i.e. ability and willingness of


house- holds to take a mortgage under the present financial
conditions and the macroeconomic situation;

the impact of austerity measures and other changes in the


legal or tax framework on housing demand;

the readiness of banks and other financial institutions to


issue construction loans and land financing dedicated for
residential investments.

Figure 2: Quarterly Growth in Residential Prices in CEE Capital Cities, 20082011 (Index: Q4 2008 = 100)
120 100

80 eo

40 20

0 i------------------------1--------------------1--------------------1------------------1----------------------1--------------------1--------------------1--------------------1-----------------------1-----------------1--------------------1------------------1----------------------1------------------1----------------------1--------------------1
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011
Warsaw

Prague

Bucharest

Budapest ---------------------------Bratislava --------------------------Sofia

Tallinn

Riga

-----------Ljubljana -------------------------------Zagreb

Source: REAS, growth rates calculated based on asking prices per square metre of apartments on the primary market

Vilnius
----------Kiev

Capital City Case Studies


This year's edition offers an insight into three CEE capital cities
with very different residential markets. At the outset there is Warsaw, the region's by far largest residential market and one of the
most dynamic markets in Europe. Then again Prague has the
most mature and sophisticated primary housing market within
CEE. Eventually, Bucharest combines the highest pent-up
demand for housing, while at the same time it offers an adolescent
market within the structural context of the European Union.
According to REAS' market monitoring, the Polish and Czech
capitals presented a remarkable market performance in 2011,
whereas a subtle stabi- lization was observed in Romania's
largest metropolis.
Warsaw
Warsaw was the absolute best performer amongst the CEE
capital cities in 2011. About 11,600 apartments were sold on the
primary residential market, i.e. an increased number of
transactions by 9.2% year on year. New supply was high, as
developers launched 124 new projects for sale in 2011 that
covered almost 13,000 units. As a consequence, the market
offering reached a record high of over 18,000 units available for
sale in more than 400 projects, though a gradually decreasing
supply by developers in H2 2011 soothed the market. The
average price of the offering decreased by 2.8% comparing the
annual averages and 6.6% comparing Q4 2011 to Q4 2010,
mainly due to the launch of low-priced projects.
Prague
The Czech capital city revealed a robust market performance in
2011. On the sales side the residential market noted a remarkable
growth rate of 32% compared with 2010, translating into about
4,500 apartments sold in developers' projects in 2011.
Encouraged by improving sales and anticipating the impact of the
announced VAT change, developers felt encouraged to introduce
new supply to the market especially in H1 2011. New projects
were price-wise better adjusted to contemporary demand, while
price reductions in the unsold stock further fueled sales. Alike
Warsaw, the offering in Prague makes about 1.6 times the annual
sales, though the share of ready yet unsold units remains high at
30% of the offering.
Bucharest
In spite of strong market fundamentals, Bucharest's primary market continued struggling with the downturn during 2011. The major
problem was the demand side which remained restricted due to
several reasons, including the impact of macroeconomic weaknesses on the purchase power and investment sentiment of prospective homebuyers. Also there is an apparent lack of trust of
buyers for developers in particular due to various unfinished and
frozen projects. Yet, those developers that remained active on the
marketplace were largely able to defend prices. Though the
annual average asking price slightly decreased by 1.4%, a price

Figure 3: ComparisonWarsaw, Prague, Bucharest

2007

2008

2009

2010

2011

Source: REAS

Figure 4: Developer projects for sale in Warsaw in Q4 2011

Source: REAS; price listing in local currency for units delivered in shell and core

Figure 5: Developer projects for sale in Prague in Q4 2011

Source: REAS; price listing in local currency for turnkey apartments excl. kitchen

Figure 6: Developer projects for sale in Bucharest in Q3 2011

Source: REAS; price listing in EUR for shell and core units in Greater Bucharest

growth of 5% was observed, comparing the average of Q4 2011 to


Q4 2010.

JONES LANG
LASALLE'

The report has been prepared by REAS in cooperation with Jones Lang LaSalle

Real value in a changing


world

About REAS
REAS is an expert advisor in the planning and development of housing projects in Central Europe. REAS consultants are the leading
specialists in market research, urban and housing development, design, development management, project financing, marketing and sale
of residential projects. REAS partners, as advisors to the World Bank and the Government of Poland, have played an active role in the
Polish housing sector reforms. Independence and objectivity, combined with extensive knowledge and long-term experience, allow REAS
to support its clients at every stage of a housing project. Since 1997, REAS has been advising developers, investment funds, banks, local
governments and other institutions in their operations in the residential market in Poland. As result of a strategic partnership, Jones Lang
LaSalle and REAS offer integrated services in commercial and residential real estate in Central and Eastern Europe. For further
information, please visit our Web site, www.reas.pl.
Key Services
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Competition monitoring & analysis Highest
& Best Use studies Guidelines for architects
and review of designs Marketing & sales
consultancy Consultancy regarding
Developer Bill in Poland
Development consultancy, location analysis,

recommendations regarding the project-mix and


functionality of units Property valuations (RICS, TEGOVA,
USPAP, IVSC)
Business plans & financial feasibility
studies Capital raising & search for
equity partners Investment sites
disposal & acquisition

About Jones Lang LaSalle


Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services
delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global
revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200
corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately
195 million square metres worldwide. LaSalle Investment Management, the company's investment management business, is one of the
world's largest and most diverse in real estate with $47.7 billion of assets under management.

Contacts:
Pawet Sztejter
Partner, Head of Advisory R E
A S | Residential Advisors
Warsaw
+ 48 22 380 21 00
pawel.sztejter@reas.pl

Maximilian Mendel
Director, CEE Research & Advisory
R E A S | Residential Advisors
Warsaw
+ 48 22 380 21 18
maximilian.mendel@reas.pl

Kevin Turpin
Head of Research CEE &
SEE Jones Lang LaSalle
Prague
+ 420 227 043 131
kevin.turpin@eu.jll.com

Residential Markets in Central European Capitals March 2012


OnPoint reports include quarterly and annual highlights of real estate activity, performance and specialised surveys and forecasts that
uncover emerging trends.
www.reas.pl
www.joneslanglasalle.com
Information on supply, demand and pricing was derived from own research and regional expertise. If not otherwise declared, prices refer to the average asking price per sq. m. of new apartments.
Copyright 2012 by REAS Spotka z ograniczonq odpowiedzialnosciq Spotka Komandytowa. All rights reserved, except where noted otherwise. No part of this publication may be reproduced or transmitted in any form or by
any means without prior written consent of REAS. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors.
We would like to be told of any such errors in order to correct them.