Region Insulated From the Crisis

BUDAPEST -- Central Europe's real estate market is relatively safe from the global credit crisis, but Baltic countries may face risks due to high capital inflows, the Royal Institution of Chartered Surveyors believes.

"[Central and Eastern Europe] is certainly better insulated from risks of a major shock than other parts of Europe," the group's chief economist, Simon Rubinsohn, told a real estate conference in Budapest in early December.

"The economies are better balanced, we don't have excesses even in terms of current account capital inflows or in terms of house prices. ... To the extent the credit crunch does begin to bite, I think it is relatively well protected as well," he said.

Rubinsohn said mortgage levels in the region were also significantly lower than in Western Europe.

But he warned that Baltic countries might face problems over the structure of capital inflows into the region.

"In the Baltics, you have capital inflows of other investment amounting to 15 percent of GDP. This is huge, and leaves the region incredibly vulnerable," Rubinsohn said.

"A lot of that is bad borrowing that is helping to finance mortgage lending in the region. Southeast Europe has a slightly better balance when we compare it to the [Central and East European] area, which, in this context looks like an oasis of stability," he said.

Baltic currencies, along with the Romanian leu, have suffered in the recent market turbulence, which stemmed from troubles in the U.S. subprime mortgage sector, although core Central European currencies have held firm.

Property investors at the conference said borrowing conditions in the region were still sound, and that despite a rise in borrowing costs for financial institutions, there were good prospects.

"I see quite a few buyers that are sitting on their hands right now," said Otis Spencer, of Heitman, which manages about $20 billion in real estate investments worldwide.

He said there was some pessimism over commercial assets but that he saw no sign of that on the residential side.

"Banks are very eager to lend ... a 100 percent mortgage, so there's quite a dichotomy there," Otis said.

He said economic growth in the region was relatively strong. Coupled with growing affluence, higher wages, and steady growth in mortgages, that provided for good prospects in real estate investments.

Otis said that in Poland and Hungary there was healthy demand in development of residential units, while the office market was a good asset class across the whole region.