Obama Heads Towards Underpriced Property Market
President Barack Obama will travel to Poland later on Friday to meet with heads of state in Central and Eastern Europe.
Investors should not focus just on the politics in the region but rather turn their eyes towards its underpriced commercial property markets, Holger Schmidtmayr, Board Director at Austrian real estate investment company Sparkassen Immobilien, told CNBC.com.
Despite suffering from anti-investment rhetoric from host governments and perceptions of widespread corruption, cities like Hungary's capital Budapest or neighboring Romania's Bucharest offer good growth opportunities for the next few years, Schmidtmayr said in an interview.
"Property prices have risen drastically in London and the yields are down significantly and now the interest is there for highly-yielding property in macroeconomically solid markets," he said.
"I believe that places like Hungary have much better fundamental macroeconomic data than their reputation," Schmidtmayr added.
Central and Eastern Europe, with the exception of Poland, underwent a deep recession in the economic slowdown that followed the collapse of Lehman Brothers in September 2008. Unemployment surged, gross domestic product shrank and property values collapsed.
Sparkassen Immobilien's fortune is tied to the region's; its share price collapsed from a high of 14.7 euros ($20.8) in 2007 to a low of 1.7 euros in December 2008 and is now hovering around 5 euros – compared with a net asset value per share of 8 euros.
"We had a lot of US shareholders, we lost a lot of them. The UK has also gone down," Schmidtmayr said.
His company has been listed on the Vienna stock exchange for 23 years and has a portfolio worth 2 billion euros in Central and Eastern Europe, in countries like the Czech Republic, Slovakia, Croatia, Hungary, Romania and Bulgaria.
Scared that CEE markets would be wiped out by the financial crisis, Western investors sold their stocks and retreated. But now they are coming back, as the region is starting to be perceived - in the credit markets at least - as less risky than some parts of the euro zone.
This year will still not be an easy one for CEE, but it will be a "year of recovery," according to Schmidtmayr.
"The trigger for all these developments is risk perception. Here I see a trend to require a decent yield. And you don't have decent yields anymore in Central London," he said.
At the height of the crisis, when property values in London were plummeting, yields were around 7 percent, but now the yield in the center of the UK capital is around 4.5 percent, Schmidtmayr said.
He sees a 10-15 percent upside in property values in Budapest this year while "Bucharest will go up even more steeply than Budapest but it will take a little longer."
"Budapest is I think the market that's most underpriced," Schmidtmayr said. "Amazingly enough, a 100 million euro deal happened in Bucharest, not Budapest. In Budapest, that has not happened so far."
"The rhetoric of the Hungarian government makes investors shy away."
Euro Turmoil Helps
Last December, the Hungarian parliament voted a law allowing the government to seize up to $14 billion in assets from private pensions in order to use them to cut the budget deficit, and many have criticized the measure as tantamount to nationalization.
"Hungary was in an extraordinary situation," and its debt to gross domestic product ratio was reduced dramatically following the measure, Schmidtmayr said.
The Czech and Slovak republics are "more Western-style markets," with slower growth, he said.
Sparkassen Immobilien's results are beginning to show improvements as the situation in the region turns, he said.
Cash flow was "significantly positive" in first quarter of 2011 as rental rates were rising in Germany and in Bucharest the situation has been improving.
"We have one million people walking into the shopping center (in Bucharest) every month, and now they are beginning to spend. The collection rates are improving so the cash side is improving," Schmidtmayr said.
"I believe that the euro turmoil would rather help these countries. The euro skeptics are going to like this," he added, echoing analysts' opinions that for those who want exposure to Germany but without the euro risk, Eastern European countries are a good play.
Sparkassen Immobilien has just finished a 500 million euro development plan in Vienna, Bratislava, Bucharest and Sofia and this creates a "significant uplift" for the company's cash flow for the coming years, he said, forecasting that operating cash flow will rise to 100 million euros by 2013 from 59 million euros currently.
The company will consider a share capital increase when the share price will approach the NAV, which is currently 8 euros, Schmidtmayr added.