Real Estate Investors Await Balkan Stability

BELGRADE -- Residential real estate is booming in the Balkans as the region recovers from the wars and stagnation of the 1990s, but big corporate investment will only come with real political stability, a top sector executive said.

"Over the last 15 years, there hasn't been sufficient investment in residential stock," Rob Schweizer, Merrill Lynch's director of Global Principal Investment, said in an interview on the sidelines of a real estate conference in the Serbian capital, Belgrade.

"We are optimistic the region is going to continue to enjoy significant growth and really outperform compared to the rest of Central Europe."

Construction ground to a halt in the Balkans for most of the 1990s as a result of conflict, embargoes and economic tightness.

As politics stabilized and investment inflows created jobs and jump-started national economies to gross domestic product growth rates of over 5 percent, high housing demand and low supply, especially in urban centers, meant that prices also started booming.

Residential property in Balkan capitals can currently cost up to 4,000 euros ($6,100) per square meter in Belgrade, 3,000 euros in Croatian capital Zagreb, 2,000 euros in Bosnian capital Sarajevo, and some 1,500 euros in Tirana, the capital of Albania.

But prices for land and commercial property are still lagging, reflecting the lack of big-name foreign developers, who Schweizer says are looking at the bigger political picture.

"The main obstacle that every foreign investor will cite when you talk about the Balkans is political instability," he said. "With the Kosovo situation ... the political stability will become issue No. 1 for every investor."

The breakaway southern province declared independence last month, triggering sometimes-violent protests in Serbia and other countries with ethnic Serb minorities, and reviving the image of the region as a volatile, lawless place.

Schweizer said Merrill Lynch was nevertheless sticking to its partnerships with local companies and had clinched deals to build shopping centers in Belgrade, Sarajevo, Zagreb and Skopje, the capital of Macedonia.

"Our strategy is to become the dominant city-center retail shopping developer," Schweizer said. "In the capital centers you see the wealth effect spill over."

Schweizer said Serbia, the biggest country in the region, had a lot of potential, but that investors would wait to see how the politics played out, especially regarding European Union membership.

"Romania and Bulgaria have so far been the region's winners in attracting the foreign investment," Schweizer said. "People perceive that being in the European Union gives them political stability."

Serbian analysts say the $880 million foreign direct investment the local commercial real estate market attracted in 2006 and 2007 is but a fraction of its real potential.

"Serbia clearly has traditionally been the economic hub of the region but obviously, because of the political situation, has seen more direct investment going to ... neighboring countries as opposed to directly into Serbia," Schweizer said.