Still rising in the East?

As little as a decade ago, if someone had suggested that they planned to invest their money in the former Warsaw Pact countries of central Europe, people would have looked at them like they were mad. But the last few years have changed all that and today it is not just pioneering opportunity funds that are buying up prime real estate in Poland, Hungary and the Czech Republic; core funds are also looking east.

These three countries currently present fairly limited opportunities geographically, as there is comparatively little investment grade real estate outside the capitals. Those cities, however, have seen significant growth in demand over the last five years. Peter Murphy, a research director with DTZ in Budapest, says that comparatively little of that growth is the result of last year's accession to the EU. “Most of the multinationals are already here,” he says. “The activity has been mostly due to natural economic growth. Demand from local companies has grown, and the public sector is also beginning to take up more space.”

Rents peaked around 2000, before a development boom caused vacancies to rise – at one point it hit 20 percent in Budapest – and it took several years for the market to absorb the new supply. Since then, in Prague and Budapest, rents have stabilized somewhat. They remain slightly higher in the former, in part because of the lack of empty land in Prague's central business district, limiting new building. (The exceptionally high take-up the city saw in 2003, and tail off the following year, was a distortion resulting from a large number of lease renewals).

Warsaw, at approximately €20 per square meter, remains the most expensive of the three markets. This is in part a hangover from the fact that, until recently, it denominated its rents in dollars. However, several factors are conspiring to bring that figure down. The switch to the euro has made rents more comparable with other central European cities; while over-supply in the city center is still exerting further downward pressure.

“It doesn't have the pristine museum feel of Budapest or Prague, so there's a lot more available land for development,” explains Murphy. “In the medium term, we'll see more alignment with the other two markets. At moment, the landlords are giving incentives such as rent free periods and paying moving costs. I expect they'll soon realize they have to bring rent down too.”

— JONN ELLEDGE