East European Property

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East European Property Secrets, Copyright JoJaffa Limited 2005, by Robin Bowman Page 1

East European Property Secrets

How to exploit the new East European propertyInvestment Opportunity

By Robin Bowman

Copyright JoJaffa Ltd 2005

Part of the Property Secrets Serieswww.PropertySecrets.net

http://www.propertysecrets.net/






Copyright JoJaffa Limited

Edition 1.0, First Published 2004, Updated 2005

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Disclaimer

As with all investment advice, you are advised to take proper financial and legaladvice at all stages. Investment values can decrease as well as increase!

As authors we have endeavoured to deliver information and advice of the highestquality, however you are advised not to rely on this book as your sole source of advice.

The basic principles in this book are founded on substantial experience and backedup by statistical evidence. However, please take care - not every property behavesas the 'average' - there are always lots of risky options around and we encourage youto take full and good advice on any investments or purchases that you intend tomake. Equally, the nature of markets is that they are unpredictable.

Don't forget the story of the statistician who drowned in a river that was (on average)

only 1 metre deep!

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To the fullest extent permitted at law, Property Secrets and JoJaffa Limited areproviding this book, its subsidiary elements and its contents on an "as is" basis andmakes no (and expressly disclaims all) representations or warranties of any kind withrespect to this book or its contents including, without limitation, advice andrecommendations, warranties of merchantability and fitness for a particular purpose.In addition, Property Secrets and JoJaffa Limited do not represent or warrant that theinformation accessible via this book is accurate, complete or current.

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Table of Contents 1. Welcome to East European Property Secrets 14 1.1 How to use this book .................................................... 17 1.1.1 Section 2 -The Opportunity.............................................................. 18 1.1.2 Sections 3 and 4: Strategies to maximise returns and how to locate the

best investment areas...................................................................... 20 1.1.3 Section 5 - Finance.......................................................................... 20 1.1.4 Section 6 – Twelve-Step Plan to Success ....................................... 21 1.1.5 Section 7 - Using the East European Returns Spreadsheet............ 21 1.1.6 Section 8 - Country by Country comparisons. ................................. 21 1.1.7 Section 9 - 16: East European investment verdicts ......................... 22 2. Why is East Europe such an exciting investment?

24 2.1 Do you know……............................................................ 25 2.2 Seven key reasons for investment now ....................... 26 2.3 What is so EXCITING about investing in this region? .. 26 2.3.1 Maximising the East European investment opportunity ................... 28 2.4 What EU membership tells us about these eight countries

30 2.5 Foreign and EU money is already pouring into Eastern

Europe ........................................................................... 31 2.6 Huge cash injections are being made to stimulate

economic growth .......................................................... 31 2.6.1 How to follow the money.................................................................. 32 2.7 Investment peaks later – take advantage now ............ 33 2.7.1 Excellent economic performance prior to joining the EU ................. 35 2.7.2 Size does matter – and small can be beautiful ................................ 35 2.7.3 Investment tends to follow the most successful traders................... 36 2.8 The drivers of the new East European property market36 2.8.1 Pent-up aspiration is a key driving force.......................................... 37 2.8.2 Big potential returns also carry a certain amount of risk and uncertainty

37 2.8.3 But change for the better is occurring.............................................. 38 2.9 Making your investment at the right time in the economic

cycle will create the quickest returns ......................... 39




2.10 The Irish experience – to be repeated across Eastern

Europe? ......................................................................... 39 2.10.1 Inward Investment ........................................................................... 41 2.11 Government spending – will it spoil the party?............ 42 2.11.1 The currency risk ............................................................................. 43 2.12 Years of growth potential remain................................. 44 2.12.1 Average monthly salaries ................................................................ 45 2.12.2 Massive property price growth potential from within these countries46 2.13 The Euro factor ............................................................. 48 2.13.1 Euro membership – don’t bank on it short term............................... 48 2.13.2 Why you should be wary of countries that race to adopt the Euro... 50 2.13.3 Why the Euro doesn’t count in the short term.................................. 50 2.14 Pluses and Minuses of investing in the East European Eight

51 2.14.1 What is good about investing in the eight? ...................................... 51 2.14.2 What is risky about investing in the eight?....................................... 52 2.14.3 How the Eastern Eight might actually lose out by joining the EU..... 52 2.14.4 Predictions of annual foreign investment 2003-2007....................... 53 2.14.5 Why the pessimists will be wrong…. ............................................... 53 2.15 The Eastern Eight vs established property investment

countries ....................................................................... 54 3. The Secret of Success – Choosing the Right

Location 56 3.1 Choosing an investment location based on the risk factor

57 3.2 Country by country risk and stability rankings ............ 58 3.3 Choosing the right Country or Sector?......................... 59 3.3.1 Perhaps not so much which country as which sector? .................... 59 3.3.2 Sector-based investment................................................................. 60 3.4 Where to target your investment.................................. 60 3.4.1 Tourism............................................................................................ 61 3.4.2 Follow the budget airlines................................................................ 62 3.4.3 Hi-tech industry and technology parks............................................. 62 3.4.4 Superstores and shopping mall developments................................ 62 3.4.5 Big infrastructure projects................................................................ 63 3.4.6 Business investment........................................................................ 63 3.4.7

Universities ...................................................................................... 64

3.4.8 Main and secondary cities ............................................................... 64




3.5 Where NOT to put your money...................................... 64 3.5.1 Countries and areas with old thinking.............................................. 65 3.5.2 Areas dependent on a single industry ............................................. 66 3.5.3 Stay well clear of anything nuclear or chemical or polluted ............. 67 3.5.4

Unsettled issues .............................................................................. 67

4. Investment Strategy 69 4.1 Securing your investment............................................. 69 4.2 Your investment aims ................................................... 70 4.2.1 If you want capital growth from a holiday or primary home.............. 70 4.2.2 If you want rental income and a holiday home................................. 70 4.2.3 If you want to buy purely as an investment...................................... 71 4.2.4 Buy New .......................................................................................... 71 4.2.5 Buy, renovate and rent out .............................................................. 71 4.2.6 Buy to renovate and sell on ............................................................. 72 4.2.7 Do any of the above, but outside the capital city ............................. 72 4.3 Invest Direct? Or through a fund? ................................ 72 4.4 The ABC secret of successful investment in the Eastern

Eight .............................................................................. 73 4.5 How to ensure your property is cash positive.............. 74 5. Financing your Property Investment in East

Europe 76 5.1 How finance leverages your investment...................... 76 5.2 Can you Borrow Against an Eastern Eight Property?... 77 5.3 Re-mortgage your existing property............................. 78 5.4 Pay in cash now – refinance later?............................... 79 5.5 How much money do I need to invest? ........................ 80 6. A Twelve-Step Plan For Successful Property

Investing in the Eastern Eight 81 6.1 One - Legal advice ........................................................ 81 6.2 Two - Selecting an estate agent................................... 81 6.3 Three - Beware of what seems too good to be true..... 83 6.4 Four - Be clear about your investment goals ............... 83 6.5 Five - Restoration opportunities ................................... 84 6.6 Six - Rental potential .................................................... 84




6.7 Seven - Check before buying ........................................ 85 6.8 Eight - Understand the tax implications of selling....... 85 6.9 Nine - Avoid being the first in an area.......................... 85 6.10 Ten – Can you fund it?................................................... 85 6.11 Eleven - Use the power of cash to get a better price .. 86 6.12 But use finance to get a better return.......................... 87 6.13 Twelve – Cut currency risk by ensuring that your loan and

the income are in the same currency........................... 87 7. Using the Snap Shot Return Analysis

Spreadsheets 88 7.1.1 Evaluating potential currency devaluation ....................................... 89 7.1.2 Evaluating mortgage interest rate risk ............................................. 90 7.2 Opening and using the Snap Shot Returns Calculator . 91 7.2.1 Opening the Spreadsheets on an Apple Mac .................................. 91 7.2.2 Sourcing rental yields and property price growth figures................. 92 8. In Which Country Should You Invest? 93 8.1 Country by country comparison - Tax, Finance and Legal

94 8.2 Country by country comparison - Property buying costs and

potential ........................................................................ 95 8.3 Country by country comparison - Country risk and

economics..................................................................... 96 8.4 Why you are as good a judge as anyone ...................... 97 8.5 Meet the Eastern Eight countries................................. 97 8.5.1 The top-tier countries....................................................................... 97 8.5.2 The second-tier countries ................................................................ 98 8.5.3 The third-tier countries..................................................................... 98 9. The Czech Republic – an Established Investment

Target 99 9.1 Czech - Business & Economic Overview.................... 100 9.1.1 Country profile - Key data.............................................................. 100 9.1.2 Key economic data........................................................................ 101 9.1.3

Labour costs and spending power................................................. 102

9.1.4 Currency policy.............................................................................. 102




9.1.5 Economic overview........................................................................ 103 9.1.6 Problem areas for the economy – what to look out for .................. 104 9.1.7 How open is the economy? ........................................................... 105 9.1.8 Does corruption affect the country?............................................... 105 9.1.9 What are the prospects for the economy?..................................... 106 9.2 Czech - Property Market Potential.............................. 106 9.2.1 Drawbacks to buying property in the Czech Republic ................... 107 9.2.2 Domestic driving force ................................................................... 108 9.2.3 Converted office spaces ................................................................ 109 9.2.4 Czech investment verdict and tips ................................................. 110 9.2.5 Over-supply presents a buyer’s opportunity .................................. 110 9.2.6 Prestige properties in prestige areas away from the centre........... 111 9.2.7 Falling yields for offices – more residential property...................... 112 9.2.8 Target property that Czechs will buy or rent .................................. 112 9.2.9 Dismiss the EU factor at your peril ................................................ 114 9.2.10 Here’s a potted investment guide for Prague:................................ 115 9.2.11 The spill-over effect – look outside Prague.................................... 116 9.2.12 …and beyond ................................................................................ 117 9.2.13 The peace dividend ....................................................................... 118 9.3 Czech - How the Property Market Works.................... 120 9.3.1 How to buy property in the Czech Republic................................... 120 9.3.2 What about taxes?......................................................................... 121 9.3.3 Restitution status ........................................................................... 124 9.4 Czech - Property Finance............................................ 125 9.5 Czech - Investment Verdict ........................................ 125 9.6 Czech - Links:.............................................................. 125 9.6.1 Government links........................................................................... 125 9.6.2 Trade and Information ................................................................... 126 9.6.3 Professional Associations.............................................................. 126 9.6.4 Misc links....................................................................................... 126 9.6.5 Estate Agents ................................................................................ 127 9.6.6 Solicitors........................................................................................ 127 10. Hungary – First Among Equals 128 10.1 Hungary - Business & Economic Overview ................ 129 10.1.1 Hungarian politics in a nutshell ...................................................... 129 10.1.2 Country profile – key data.............................................................. 129 10.1.3 Key economic data........................................................................ 130 10.1.4 Currency policy.............................................................................. 131 10.1.5 Economic overview........................................................................ 132 10.1.6 Problem areas for the economy – what to look out for .................. 133 10.1.7 Reduction of the public sector deficit ............................................. 133 10.1.8 Currency attacks............................................................................ 134 10.1.9 East-west divide ............................................................................ 134




10.1.10 How open is the economy?......................................................... 135 10.1.11 Does corruption affect the country? ............................................ 135 10.1.12 What are the prospects for the economy? .................................. 136 10.2 Hungary - Property Market Potential .......................... 137 10.2.1 Will you be buying just before the bubble bursts? ......................... 138 10.2.2 What kind of returns can I expect? ................................................ 138 10.2.3 What are the best kinds of properties for rental? ........................... 139 10.2.4 What can I expect to pay for a property?....................................... 139 10.2.5 Budapest is still best ...................................................................... 139 10.2.6 Be prepared to buy and hold, and avoid the top end of the market140 10.2.7 Buy let-able properties................................................................... 140 10.2.8 Where to invest in Budapest.......................................................... 140 10.2.9 Healthy returns – spa centres........................................................ 141 10.2.10 Hot tip tourist destination – Lake Balaton.................................... 141 10.3 Hungary - How the Property Market Works................ 143 10.3.1 How to buy property in Hungary .................................................... 144 10.3.2 Why buying through a company can be best................................. 145 10.3.3 How to set up a company in Hungary............................................ 145 10.3.4 Extra costs..................................................................................... 145 10.3.5 When buying as an individual is best............................................. 146 10.3.6 The purchase process ................................................................... 146 10.3.7 What about taxes?......................................................................... 147 10.3.8 Restitution status ........................................................................... 150 10.4 Hungarian - Property Finance ..................................... 150 10.5 Hungary - Investment Verdict..................................... 151 10.6 Hungary - Links ........................................................... 152 10.6.1 EU-related ..................................................................................... 152 10.6.2 Country specific ............................................................................. 152 10.6.3 Regions of Hungary....................................................................... 153 10.6.4 Real estate .................................................................................... 153 11. Poland – The Sleeping Giant 154 11.1 Poland - Business & Economic Overview................... 155 11.1.1 Polish politics in a nutshell............................................................. 155 11.1.2 Country profile – key data.............................................................. 155 11.1.3 Key economic data........................................................................ 156 11.1.4 Labour costs and spending power................................................. 157 11.1.5 Currency policy.............................................................................. 157 11.1.6 Economic overview........................................................................ 158 11.1.7 Problem areas for the economy – what to look out for .................. 158 11.1.8 How open is the economy? ........................................................... 160 11.1.9 Does corruption affect the country?............................................... 160 11.1.10 What are the prospects for the economy? .................................. 161 11.2 Poland - Property Market Potential ............................ 161




11.2.1 Traps for the unwary in the Polish property market ....................... 162 11.2.2 Why Warsaw? ............................................................................... 163 11.2.3 Where and what to buy in Warsaw................................................ 163 11.2.4 Avoid the top end…unless you can find a real bargain.................. 164 11.2.5 How to know if you are paying the right price ................................ 164 11.3 Poland - How the Property Market works................... 165 11.3.1 Restitution status ........................................................................... 168 11.4 Poland - Property Finance........................................... 168 11.5 Poland - Investment Verdict ....................................... 168 11.6 Poland - Property Links............................................... 169 11.6.1 Real Estate Agents........................................................................ 169 11.6.2 Others............................................................................................ 170 12. Estonia – The Hong Kong of East Europe? 171 12.1 Estonia - Business & Economic Overview.................. 172 12.1.1 Estonian politics in a nutshell......................................................... 172 12.1.2 Country profile – key data.............................................................. 172 12.1.3 Key economic data........................................................................ 173 12.1.4 Labour costs and spending power................................................. 174 12.1.5 Currency policy.............................................................................. 174 12.1.6 Economic overview........................................................................ 175 12.1.7 Problem areas for the economy..................................................... 176 12.1.8 How open is the economy? ........................................................... 176 12.1.9 Does corruption affect the country?............................................... 177 12.2 Estonia - Property Market Potential ........................... 177 12.3 Estonia - How the Property Market Works ................. 178 12.3.1 What about taxes and other costs? ............................................... 178 12.3.2 Other costs .................................................................................... 179 12.3.3 The best way to buy - how to set up a company in Estonia........... 179 12.3.4 How to establish a new company .................................................. 179 12.3.5 Restitution status ........................................................................... 180 12.4 Estonia - Property Finance.......................................... 180 12.5 Estonia - Investment Verdict ...................................... 181 12.6 Estonia – Links ............................................................ 182 12.6.1 Legal.............................................................................................. 182 12.6.2 Tax ................................................................................................ 182 12.6.3 Others............................................................................................ 182 12.6.4 Property agents ............................................................................. 183 12.6.5 Loan providers............................................................................... 183 13. Lithuania – The Hidden Gem 184




13.1 Lithuania - Business & Economic Overview............... 185 13.1.1 Lithuanian politics in a nutshell ...................................................... 185 13.1.2 Country profile – key data.............................................................. 185 13.1.3 Key economic data........................................................................ 185 13.1.4

Labour costs and spending power................................................. 186

13.1.5 Currency policy.............................................................................. 187 13.1.6 Economic overview........................................................................ 188 13.1.7 Economic problems ahead? .......................................................... 188 13.1.8 How open is the economy? ........................................................... 188 13.1.9 Does corruption affect the country?............................................... 189 13.2 Lithuania - Property Market Potential ........................ 189 13.3 Lithuania - How the Property Market Works .............. 190 13.3.1 What about taxes?......................................................................... 190 13.3.2

Restitution status ........................................................................... 190

13.4 Lithuania - Finance Availability .................................. 191 13.5 Lithuania - Investment Verdict ................................... 191 13.6 Lithuania - Links.......................................................... 193 13.6.1 Agents ........................................................................................... 193 14. Latvia – The Jewel in The Baltic Crown 194 14.1 Latvia - Business & Economic Overview.................... 195 14.1.1 Latvian politics in a nutshell ........................................................... 195 14.1.2 Country profile – key data.............................................................. 195 14.1.3 Key economic data........................................................................ 196 14.1.4 Labour costs and spending power................................................. 197 14.1.5 Currency policy.............................................................................. 197 14.1.6 Economic overview and prospects ................................................ 198 14.1.7 How open is the economy? ........................................................... 199 14.1.8 Does corruption affect the country?............................................... 199 14.2 Latvia - Property Market Potential ............................. 199 14.3 Latvia - How the Property Market Works ................... 201 14.3.1 What about taxes?......................................................................... 201 14.3.2 Other costs .................................................................................... 202 14.3.3 Restitution status ........................................................................... 202 14.4 Latvia - Finance Availability ....................................... 202 14.5 Latvia - Investment Verdict ........................................ 203 14.6 Latvia – Links .............................................................. 204 14.6.1 Finance and economy ................................................................... 204 14.6.2 Estate Agents ................................................................................ 204 14.6.3 Other Links .................................................................................... 205




15. Slovakia – Out From the Shadows 206 15.1 Slovakia - Business & Economic Overview................ 207 15.1.1 Slovakian politics in a nutshell ....................................................... 207 15.1.2 Country profile – key data.............................................................. 207 15.1.3 Key economic data........................................................................ 208 15.1.4 Labour costs and spending power................................................. 209 15.1.5 Currency policy.............................................................................. 209 15.1.6 Economic overview and prospects ................................................ 209 15.1.7 How open is the economy? ........................................................... 210 15.1.8 Does corruption affect the country?............................................... 210 15.2 Slovakia - Property Market Potential.......................... 210 15.2.1 How to buy and finance ................................................................. 212 15.3 Slovakia - How the Property Market works................ 212 15.3.1 What about taxes?......................................................................... 212 15.3.2 Restitution status ........................................................................... 213 15.4 Slovakia - Finance Availability.................................... 213 15.5 Slovakia - Investment Verdict .................................... 214 15.6 Slovakia - Links........................................................... 214 15.6.1 Estate agencies............................................................................. 215

16.

Slovenia – The Odd Man Out 216

16.1 Slovenia - Business & Economic Overview................ 217 16.1.1 Slovenian politics in a nutshell....................................................... 217 16.1.2 Country profile – key data.............................................................. 217 16.1.3 Key economic data........................................................................ 218 16.1.4 Labour costs and spending power................................................. 218 16.1.5 Currency policy.............................................................................. 219 16.1.6 Economic overview........................................................................ 219 16.1.7 How open is the economy? ........................................................... 220 16.1.8 Does corruption affect the country?............................................... 220 16.2 Slovenia - Property Market Potential.......................... 220 16.2.1 State of the market ........................................................................ 221 16.3 Slovenia - How the Property Market Works................ 221 16.3.1 Taxes and other costs? ................................................................. 221 16.3.2 Restitution status ........................................................................... 222 16.4 Slovenia - Finance Availability.................................... 222 16.5 Slovenia - Investment Verdict .................................... 222 16.6 Slovenia - Links........................................................... 223




16.6.1 Banks............................................................................................. 223




1. WELCOME TO EAST EUROPEAN PROPERTY SECRETS

Right from the outset we need to be clear what this book and spreadsheet software

program is all about. In a nutshell, it is a guide to taking investment advantage of aunique time in history – the absorption of a group of eight former communistcountries into the European Union (EU).

And those countries are:

• Hungary• The Czech Republic• Poland• Estonia• Slovakia• Slovenia• Lithuania• Latvia

Many people – and you may be one of them – have come to take this momentouschange for granted. The collapse of the Berlin Wall in 1989 and the communist blocit came to symbolise can seem like a distant memory.

Even so, for the most part, the names of many of those states that last year joined agreatly enlarged EU still conjure up images of underdeveloped, poverty-stricken,

uninspiring places.Strictly speaking, of course, some of these countries are technically in CentralEurope and others are in Eastern Europe. But, for our purposes, they’re all inEastern Europe.

Just reel off those names again.

How many people, in all honesty, could point to these places on a map? Poland,Hungary, perhaps. Maybe even the Czech Republic. But Estonia? Latvia? Slovenia?

So, these obscure places hold little or no interest for anyone interested in making agreat real estate investment. Right?

Wrong!

In fact, these places are far more than merely interesting to investors, because whatsome of these eight countries could well represent is that holy grail of real estateinvestment – the basement-level opportunity.

Even before EU entry actually happened in May 2004, there were examples of annualised double-digit growth in real estate prices, as the ‘EU effect’ was factored in

future price predictions. In the time since accession took place, growth has continuedapace.




So, perhaps you’re thinking that you are already too late. If you haven’t alreadymade your investment move, have you been left behind? The answer is clear –absolutely not!

That’s the eastern promise of these potential goldmines – despite the fact that priceshave already begun to rocket in some places, there is still so much more potential for similar, if not better, growth.

There are good, sound reasons for this that are mainly to do with how far behindthese countries are economically – even the most advanced - from the EU average.

But, let there be no mistake, these new EU-member countries are not investmenttargets for the faint-hearted.

Maybe investing in fairly well-established markets such as those of Prague in the

Czech Republic, or Budapest in Hungary, may not be particularly daunting, but manypeople will balk at the thought of pouring their hard-earned cash into properties inEstonia, for example, or Lithuania, or Latvia.

But, in truth, locations that are lesser known to investors from overseas may wellrepresent the best buying opportunities. There are some great reasons, for example,to invest in Latvia - as we shall see.

This is all fine and good. Except there are a few hurdles to overcome before you canwisely put your property investment cash to work. How do you find out how theproperty market works in these places?

How do you discover what kind of returns you can expect? What about other major costs? How does the tax system work? What are the best locations? Will there belanguage problems? Where do I look for properties? How can I spot an up andcoming area? How can I make sure I’m not ripped off?

In short, how do you take a sensible and measured approach to locating and buyingthe best property? Just as important, how do you make sure you avoid making ahorrendous investment mistake?

It’s not important that you may not have even visited the country you decide to targetas an investment. What is important is that you are able to make an informeddecision about your investment.

That’s what this book is all about – helping you to form a rewarding propertyinvestment strategy for these eight EU newcomers.

If you've ever bought or read an e-book from JoJaffa before, you'll know we are crazyabout spreadsheet software. Why? Well, one of the basic mistakes most peoplemake when buying abroad is that they don't do the sums!

The other way that we can help you is with our Property Secrets newsletters, websiteand expert forums at www.PropertySecrets.net .







We've created these to give you the latest and most up to date information on EastEuropean property market and other important issues.

The Eastern European EU newcomers are countries with huge potential, and, if you

are prepared to dare to be a little different in your investment strategy, some of thatpotential could well come your way.

Cheers and good luck

Robin Bowman

P.S. If you enjoyed this e-book, you might also enjoy:

• Czech Market and Forecast Report • Romania Market and Forecast Report

...all available from www.PropertySecrets.net

http://www.propertysecrets.net/market_reports/czech_republic


http://www.propertysecrets.net/market_reports/romania










1.1 How to use this book

Whatever your reasons for considering investing in real estate in Eastern Europe,

you will get the most out of this book by regarding it rather like a road map. Itcertainly doesn’t offer a foolproof plan for successful investment, but it will helpminimise risk.

And, without trying to sound too fancy about it, just as you might use a road map tochoose an indirect route to reach a destination, the same is true of this book. Thereare chapters you may want to simply disregard because they are of no interest toyou.

But, it is always wise to think about all the possibilities before making an investmentdecision. After all, circumstances can change. So can information about taxes andproperty laws – especially in fast-moving economies like those in Eastern Europe.

Please bear this in mind and treat the information as guidelines, rather than alwaysdefinitive.

As with all property investment, the key is not to be caught out by surprises – at least,not too many surprises; after all, if you’re buying in this part of the world you are likelyto find one or two novel procedures and the occasional odd turn of events.

Again, bear in mind that things change. A place you intended to buy and hold over

the long-term may become a millstone if at some time in the future you need toexchange that asset for cash.

If you can’t sell the property because of some simple factor you overlooked when youbought it, your original investment will become a regrettable one.

Don’t let that happen.

Consider all factors – from 360 degrees. Dip in and out of the sections of this bookas and when you need to, go back to chapters and use the data and advice to setagainst the property or the location you’re considering. Consider countries you never

thought about investing in before.

First, to make things nice and simple, let’s take a look at the themes that EastEuropean Property Secrets is going to guide you through:

• What is all the fuss about?

Why many investors in the know consider this zone to be the hottest around.

• What is the unique combination of factors that creates such a greatopportunity?




We’re going to look at these East European countries as a bloc and discover whatthey are all about and what the EU could mean for them – and for you, the propertyinvestor.

• How to work out whether this is the market for you.

This is the big picture stuff and it’s very important; but the other key area of information for you, as a potential investor, is how to form your own personal strategyto maximise profits – that’s what this book can help you to do.

1.1.1 Section 2 -The Opportunity

It’s important to grasp what EU membership is doing and is likely to do in future for these countries, before leaping in and considering a real estate investment.

What is clearly unwise, as with any investment, is to simply jump on the bandwagonbecause that is what everyone else is doing or, as more likely in this case, becauseyou’ve heard that an investment target is ‘hot’.

The EU Eight I’ve listed are certainly a hot topic of conversation among propertyinvestors looking for bigger returns overseas than they can get at home.

There’s a sense that an opportunity is present but many people outside of these eastEuropean Eight have not yet made that final commitment and bought a property.

So, what’s important to realise is that, while it is true that some spectacular gainshave already been made in certain parts of these countries, you are not yet in danger of being left behind.

Stock market watchers like to talk about anticipated events being ‘factored into’ theprice of a stock. And, to a certain extent, that’s true of the property market.

Even before these countries joined the EU, everyone knew it was going to happen,and they probably also knew something of the advantages that the EU was likely tobring to these states.

So, a year or more after it’s happened, and now that some of those potential benefitsof EU membership have become reality, the price of real estate has already made itsmost significant growth?

Not so.

And, in section 2, we’ll explore why, while actually joining the EU has been hugelysignificant for these countries, it is only the start of the story – both for them and for you, the investor.

We’ll also explain why it’s nowhere near too late to take advantage of the Eastern

Europe opportunity.




Key Tip

Bear in mind that EU accession is only part of the investmentequation. What comes afterwards is what will decide whether the real

estate market in the East European Eight is set on fire or not.

An increasing number of individual and corporate investors in Europe and the UnitedStates are looking outside the traditional zones for investment and seeking increasedreturns in new markets.

However experienced you are as an investor, you need to be able to apply the sametests and assessments as big business when you consider where your money shouldbe invested.

Scale of investment can make some difference, but, generally speaking, theevidence we need to consider and the methods we use are the same for any size of investor.

We need to be quite sure about why this region holds sound promise for growth andnot just blindly follow a bandwagon. That’s when you are in danger of paying over the top for a property - because you’ve been caught up in a bubble.

Remember the dot com craze and how truly crazy that now appears?

Well, exactly the same phenomenon can occur in the real estate industry when newmarkets suddenly become in vogue. You therefore need to apply the same tried andtrusted techniques to making an investment decision as you would to any other location.

Even so, it’s worth noting that many other investors have already decided that thisregion of Europe has what it takes to potentially offer great returns on investment.They are already voting with their dollars, pounds and euros.

According to US magazine Global Quarterly, a supplement to The Institutional Real

Estate Letter:

‘Europe, which is seeing economic integration under the Euro zone and continuedexpansion with the admission of former Eastern Bloc countries in the EuropeanCommunity, appears to be capturing more than half of the U.S. capital chasingoffshore real estate.’

And the same report goes on to quote John Coppedge, executive vice-president of international operations at global property services company Cushman & Wakefield,who outlines why money is shifting away from traditional targets:




‘With yields in prime European properties thin these days, some of the opportunityfunds are shifting to secondary and suburban sites, and even to emerging markets of Central and Eastern Europe, such as Prague, Budapest and Warsaw.’

That’s what the pros are doing and there is no reason why the individual investor

cannot learn from them and do the same.

1.1.2 Sections 3 and 4: Strategies to maximise returns and how to locate thebest investment areas

To really exploit investment opportunities it’s essential to be able to understand themost effective investment strategy and read the signs that indicate which area isgoing to be the next hot investment opportunity.

You also need to consider your attitude to risk and how much you are prepared to

take. Remember the greater the risk, the greater the potential return.

Potential is the key word there, though. Nothing is certain, and naturally, the greater the risk, the greater the degree of uncertainty.

1.1.3 Section 5 - Finance

Investment strategy is also all about finance. It’s important to understand how toleverage your capital for the best returns, and to get the best borrowing deal.

When capital isn’t available locally, what are your options?

In this section we’ll look at the various financing scenarios.

For many people, re-mortgaging their primary home may seem like the best option,although it is always best to borrow in the currency you will be receiving rent in – if you are using rental income to finance a loan.

The other option is to buy for cash – never a sensible way of obtaining the bestpercentage gain on an investment.

Except that if you pick your Eastern Eight country with care, buying in cash mayactually be a smart move in the longer term because the mortgage market is soundeveloped in most of the Eight.

Undeveloped, but as we’ll see, growing fast. In this section I’ll explain how you couldexploit this fact.




1.1.4 Section 6 – Twelve-Step Plan to Success

Investing outside your home country requires additional attention and care.

In this section we'll show you the 12 key steps to ensure that you investment is bothsecure and successful.

1.1.5 Section 7 - Using the East European Returns Spreadsheet

At the end of the day, every country and every region offers you both good and badinvestments.

So, how do you tell the potential investment stars from the investment dogs? Simple,you just run the numbers!

In other words, using a sophisticated analysis of your potential returns will help youdetermine the good investment options from the bad.

In particular, with East European countries you need to make an allowance of possible high inflation coupled with potential currency devaluation.

Use this spreadsheet software to run different investment scenarios.

1.1.6 Section 8 - Country by Country comparisons.

In this section I’ll lay out country by country comparisons, so you can see at a glance:

• Which countries have the best rental yield prospects?• Which countries have the best property price growth prospects?• Who suffers from the greatest amount of inflation?• Which country is the least transparent?

and

• How much you should expect to pay estate agents in each country?• Which country has a zero capital gains rate?• Which country has a 1% property purchase tax?• In which countries is finance available (either inside or outside of the country?)

and much more…




1.1.7 Section 9 - 16: East European investment verdicts

OK, so you have your strategy, you are clear about what you expect of your

investment’s performance, you know how much you can afford, perhaps you evenknow what kind of property you want to buy. In short, you’ve considered all theangles.

Now you need to think about location. The old adage is as true today as it’s ever been – the three keys to buying real estate are location, location, location.

Location is essential at both the micro and macro level. But in this section we’ll startwith the big picture.

You need to weigh carefully the advantages and disadvantages of investing in each

country. While, for the most part, it’s fair to talk about the east European Eight as abloc, they are also individual states with separate cultures and economies. For example, Slovenia has very little in common with, say, Lithuania.

Their prospects for development are not all the same and their real estate marketsare not at the same level of development. How attractive they will be in the future isalso likely to be different.

So, even if you have a pretty good idea about where you want to invest – perhaps for reasons of family ties – that’s fine, but the smart thing to do is to at least ask yourself ‘Is this the best investment decision I could make?’

Maybe you will decide that although it isn’t perhaps the very best investment, it is stillan acceptable one and anyway other considerations outweigh the investment factor.

Again, fine – so long as it is you, armed with as many of the key facts as possible,who is making that decision.

As I‘ve said before, the key is to avoid, as far as possible, meeting with surprises – atleast the nasty kind.

So this section aims not only to introduce you to each of the Eastern Eight countries,their economies, the state of the real estate industry and a brief overview of howbuying and selling works in that country.

The investment verdicts also try to point out some factors that may influence your decision about whether a location is right, not just for investment, but for you.

Let’s face it, some countries have more going for them than others and this is animportant factor when you come to think about investment potential, both returnsfrom rental and resale value.

You need to know the kind of risk bracket a country falls into.




Key Tip

If there is no dual taxation treaty between your country and the countryyou purchase property in, you run the risk of being taxed in both

countries on rental proceeds and capital gains on your property.




2. WHY IS EAST EUROPE SUCH AN EXCITING

INVESTMENT?

In this chapter you will learn:

• About the East European Eight (see section 2.1) • What EU membership tells us about these

countries (see section 2.4) • Why it is still not too late to take advantage (see

section 2.7) • The drivers in the East European market (see

section 2.8)

• The risk – Government spending and currencies(see section 2.11)

The countries of Eastern Europe this book focuses on may well contain a fewsurprises for the uninitiated.

These states have been widely ignored by the average man and woman in the streetafter a brief flurry of interest when they made headlines in the late 80s and early 90s.

At these times they were known either simply because they gained independencefrom the old Soviet Union when it collapsed, or for breaking away from Russia, or splitting internally (the old Czechoslovakia is now two countries).

Since then, for the most part, these places have escaped media attention.

And yet a silent revolution has been taking place as this group of newly-joined EUmembers have been quietly developing, in fact literally transforming, their economies.

This is what drove them along the road to EU membership and reintegration into the

outside world.

That sounds pretty grand but it has big consequences for anyone in search of greatproperty investment potential. We’ll take a look at why in a moment….

But first let’s take a glance at a few facts and figures about the EU and the eightcountries that are creating all the excitement.




2.1 Do you know…….

• The EU grew by more than 30 per cent geographically in May, 2004 when the

new members joined.

• The addition of new members has made the EU the world’s largest tradingbloc – a market of 25 countries and almost 500 million people.

• Joining the EU means countries have adopted the so-called acquiscommunautaire, which includes applying 80,000 pages of EU law, raisingstandards of administration and strengthening their judicial systems.

• The average GDP per person in the Eastern Eight is less than half that of the

other 15 EU countries.

• Joining the EU does NOT include adopting the Euro – at least not for the timebeing. Most experts agree it will be 2007 before the eight countries join theEuro.

• Billions of Euros is being handed out in development funds to the newmembers – Poland is so far the biggest recipient, with an estimated €11.4billion coming its way in the first two years after joining.

• EU surveys show that organised crime is among the top three concerns of

people within the new member states. And the biggest fear of Latvians,Lithuanians and Estonians is an epidemic.

• Around a quarter of Latvians, Hungarians and Slovakians do not know thatEuro MPs are elected by popular votes.

• Surveys show that Slovakians consistently feel the most European, with 68%saying they feel European to some extent as well as Slovakian.

• The combined population of the Eastern Eight is 73.6 million. Poland is thebiggest country (pop: 38.6m people) and Estonia the smallest (pop:1.4m).

• The average cost of a Big Mac in the eight countries is $1.76 (£1.12)

• Total forex reserves for the eight countries amounts to $55.5 billion




2.2 Seven key reasons for investment now

It is clear that EU membership is a massive stabilising force as well as an economic

boost and a measure of how far the accession countries have come.

Because of this there are a number of reasons why now is the best time to makeyour investment move.

Let’s sum up those reasons.

• Foreign investment in these countries has increased since EU membership,and will continue to do so.

• Greater economic activity will create more domestic demand for property.

• Most of these countries’ property markets remain relatively undiscovered byoutsiders – and domestically, property ownership is still a relatively newphenomenon.

• Most countries have a number of highly attractive locations for tourismdevelopment and vacation homes – another factor to increase demand asthese areas are developed.

• Restrictions and barriers to foreign ownership of property, where they exist,are almost certain to decline, as will overly complicated procedures for purchasing, which will boost property demand.

• Generally there is a good stock of old, character properties to be restored.

• Entry-level prices into these real estate markets are still extremely low outsideof the most popular tourist destinations.

We’ll explore these points again when we come to look at individual countries’property investment prospects. But, in the meantime, I want to turn to two other particularly important factors why I believe now is the time to invest in this part of theworld. Let’s look at those reasons.

2.3 What is so EXCITING about investing in this region?

Being a trailblazer has the potential for the greatest rewards.

These markets represent fabulous untapped potential, especially for tourism in the

major cities.




EU membership, with all its checks and balances, offers a high level of security for investors.

There are FOUR clearly identifiable phases that are central to providing major booststo the property market…..

Key Tip

The FOUR key boosts to property markets in the Eastern Eight:

• Anticipation in the run up to EU membership• Advent of EU membership• Anticipation of membership of the Euro zone• Actual introduction of the Euro

Bear in mind also how, as we’ll see below, investment in new EU member countriestends to rise several years after they join. We can even consider this to be another key phase.

And the savvy investor will consider all of these phases as investment opportunities.

Key Tip

Think like a big-time investor and identify the key phases that will helpact like turbo chargers to the property market in these countries.

It’s also important to bear in mind that there are currently some barriers in place insome of the markets we’re considering. In the Czech Republic, for example, it is notpossible for a foreign individual to own property. The same is true in Slovakia.

While there is a fairly simple way around this restriction, it acts nevertheless as a

psychological hurdle that dampens foreign property investment in the countries.

It’s true that some of the barriers that had previously been in the way of investment inthese countries came down when EU membership took place. Some, however,remain. And they’re likely to remain for several years.

We’ll look more closely at these restrictions when we focus on the individualcountries making up the Eastern Eight. But it is important to not only appreciate therestrictions as they stand now, but also to see the positive opportunity they represent.




Key Tip

When more of the barriers come down, as they surely will, then if all

other factors are equal, increased property investment is bound tofollow.

2.3.1 Maximising the East European investment opportunity

Before we look in depth at the pluses and minuses of each of the Eastern Eightcountries, it’s well worth taking a little time to plan precisely what we need to keep tothe fore as we plan to exploit our investment opportunity fully.

We’ve considered many aspects of the big picture, and it’s important, as I’vestressed, to make assessments in terms of the big picture – after all it’s the bigpicture that has made much of Eastern Europe attractive to the individual investor,whether he realises it or not.

It’s big picture politics and economics that are causing such a stir about thesecountries in investment circles.

It’s vital not to forget that without EU accession being a success for these countries,

without EU investment, followed by private capital, the property boom would notaccelerate, indeed, it would quickly end.

It would be hard to find an analyst who sees matters in such bleak terms, but this isan illustration of how property prices do not rise in a vacuum – they are a product of asuccessful economy.

• Rising prices are a product of demand.

But for a successful formula leading to property investment profits we also need toconsider the smaller picture. The vital points we need to think about every step of the

way when we set out to invest.

The watchword here is ‘caution’.

That’s true of property investment anywhere, but it’s especially true of investing inmarkets that are causing a lot of excitement, markets that are relatively new, andmarkets that are being given a series of powerful kick-starts.




Key Tip

Before making any investment decisions, and certainly beforecommitting any money, take expert advice from well-established

professionals.

So, what’s the secret to virtually guaranteeing positive returns on your investment inEastern European property?

In a moment, I’m going to spell out a three-step, foolproof plan.

But first I want to stress that, as with all big plans and successful formulas, the bigpicture, or the theory, if you like, is one thing. Success or failure certainly depends

on whether you apply correct theory to your investments.

But, even if your theory is correct and based on sound logic, it will still fail if you don’tget the little stuff right. What we mean here is you still need to concentrate on thedetail.

For example, if we look at where to invest. Location is the key to successful propertyinvestment, right? But there’s location at a macro and a micro level.

We may decide that the Czech Republic is the best location to invest in property. Butwhere, exactly? Prague, maybe.

But which area and in which street and how near to certain facilities and on groundlevel or first storey level, and so on. You get the picture.

And, beyond that, what if you deal with a bad estate agent and you overpay for your property, which then turns out to have serious legal complications.

These may be concerned with, say, sitting tenants, or disputes about adjoining land,and it then emerges that there are plans to build a refuse collection plant next door tothe property and you didn’t allow for this in the price.

Then, well, it’s pretty clear that even with the best location in the world, you are goingto have a hard time even selling this property, let alone making a profit on it.

None of these problems, in themselves, or even taken as a whole (and you’d be veryunlucky to confront all of these difficulties simultaneously), makes a property un-saleable.

After all, anything will sell – for the right price. What it does mean, however, is that if you didn’t allow for these factors when you agreed on the price, then you havealready taken a hit on your investment.




All this is simply by way of a warning, really, not to get carried away with the bigpicture and lose focus on the smaller issues.

2.4 What EU membership tells us about these eight countries

Acceptance into the EU club is a measure of just how far the Eastern Eight countrieshave travelled since the early 90s.

For many of us in the West it is difficult to imagine the scale of transforming acommunist state in which free enterprise, an impartial judiciary, open governmentand freedom of movement are unknown, into a country fit to join the European Union.

It is worth bearing in mind what the European Union - despite the many criticisms itfaces - is all about: creating a free market by removing barriers to trade as well as themovement of goods, services and people between member states.

It is, as symbolised by the Euro currency, as much about political unity and commonprinciples as it is about trade.

But what makes all the difference from an investment viewpoint is that acceptance asEU members means that no longer do these countries quite literally operate lawsunto themselves, they are bound by common rules.

The European Council, meeting in Copenhagen in 1993, laid down the precise waythese countries are assessed and the points they need to satisfy before EU

membership is possible.

This yardstick has become known as the Copenhagen criteria. Countries must show:

• Stable institutions guaranteeing democracy• The rule of law and respect for and protection of human rights and minorities• The existence of a functioning market economy• The capacity to cope with market forces and competition from within the union• The ability to take on the obligations of membership, including economic and

monetary union.

In short, all the countries must be party to the acquis communautaire (the EU’s set of legislation governing standards in various areas of administration for all member states).

So, if you’re an investor you know, for example, that an EU member country isunlikely to collapse economically. You know that some weird draconian law will notbe enacted to seize all property owned by foreigners and you know that there will berespect for contract law.

The all-important relevance of this for the real estate investor is summed up in oneword: stability.




2.5 Foreign and EU money is already pouring into EasternEurope

Foreign investors have already recognised the significance and have been taking intoaccount the EU factor for some time now. This has had a huge effect on foreigninvestment and, as a consequence, on many countries’ growth.

As I’ve already mentioned, Poland, for example, as the largest of the eight countries,will have received an estimated €11.4 billion in the first two years after joining the EU.

Slovakia is on the receiving end of €1.7 billion of regional development aid from theEU.

Inward investment into the ten European Union (EU) accession countries (thisincludes Malta and Cyprus), increased by 14% in 2002 on the previous year,according to the Ernst & Young European Investment Monitor 2003.

That compares with a decline of 11% into the EU itself.

2.6 Huge cash injections are being made to stimulate economicgrowth

The main objective is to use the money to stimulate economic growth,

competitiveness and new jobs while also trying to smooth out big regional differenceswithin the countries.

The EU’s primary vehicles for assigning money to Eastern European countries arePhare, to help build institutions; ISPA, which funds transport and environmentalprogrammes; and SAPARD which helps support rural areas and agricultural projects.

The programmes were set up in 1989 after the fall of communism in Europe.

The aim is to help countries rebuild their economies by focusing on businessinfrastructure and the development of existing and new businesses as well astransport, agriculture and developing more isolated rural areas.

Education and training programmes are also funded.




Here’s a look at the kind of amounts we are talking about…

Country

Annual funds

from Phare2000 onwards

SAPARD

Annualfunding

ISPA annual

funding

Total annual

allocation

Av. Phare

allocations 1995-99

€m €m €m €m €mmin max min max

Czech Rep. 79 22.1 57.2 83.2 158.3 184.3 69

Estonia 24 12.1 20.8 36.4 56.9 72.5 24

Hungary 96 38.1 72.8 104 206.9 238.1 96

Latvia 30 21.8 36.4 57.2 88.2 109 30

Lithuania 42 29.8 41.6 62.4 113.4 134.2 42

Poland 398 168.7 312.0 384.8 878.7 951.5 203Slovakia 49 18.3 36.4 57.2 103.7 124.5 48

Slovenia 25 6.3 10.4 20.8 41.7 52.1 25

Source: Eurostat

Most interesting of all is that the Phare programme for 2000–06 has a budget of over €10 billion.

This kind of investment through the EU is vitally important to the real estate investor.

2.6.1 How to follow the money

For the serious investor it is certainly worthwhile monitoring where this money isbeing spent or where there are plans to spend it.

Probably the best way of doing this is through the European Commission’scomprehensive Internet siteeuropa.eu.int/comm/index_en.htm which supplies frequent updates on newsconcerning EU accession countries.

The European Bank for Reconstruction and Development is a major property investor in Eastern Europe and details of its projects are worth following at its website -www.ebrd.com/about/index.htm

http://europa.eu.int/comm/index_en.htm

http://www.ebrd.com/about/index.htm



http://europa.eu.int/comm/index_en.htm




Key Tip

Follow the money by investigating where major EU investmentprogrammes are taking place. The kind of money available is capable

of turning an economic backwater into an area with the potential for areal estate boom.

An influx of EU cash on this scale can generate new employment opportunities andnew businesses, which in turn, of course, stimulates demand for real estate and,therefore, leads to price inflation.

Those areas that benefit most from inward investment, whether it is EU cash or private money, are likely to be some of the places where real estate investors have

the best chance of seeing the most attractive returns on their money.

Vast sums of money are not just coming from the EU; private money is also pouringinto the eight countries.

In Slovenia, for example - a tiny state of two million people - the amount of foreigndirect investment (FDI) for 2002 alone – well before EU accession – was 10 per centof GDP, or just under $2 billion. That is almost equivalent in one year to the totalamount of FDI for the previous ten years!

I mentioned earlier that real estate prices in some parts of the East European Eightwere responding to the EU accession even before it took place, and they certainlyhave done since.

Some people have even argued that, in many places in Eastern Europe, anyoneconsidering investing in real estate has already left it too late.

But if past patterns of investment flows of private capital are anything to go by, thosepeople are making a mistake.

2.7 Investment peaks later – take advantage now

The fact is that, in the past, while foreign direct investment began in anticipation of acountry’s EU accession, it increased massively afterwards.

It’s important to remember why this flow of investment matters.

It’s a simple and virtually foolproof formula –

Investment equals demand and demand (if not met in full), will push up prices.

The more investment coming into these countries, the more demand there will be for goods and services, and real estate.




And the more rapid the investment is, the more rapid the demand will be for property,and the less likely it is to be met immediately.

This will push up prices.

Research by PricewaterhouseCoopers reveals that many Western businesses,particularly the larger ones, planned for EU enlargement several years ago and arealready moving into Eastern Europe.

Smaller businesses – perhaps those that don’t have experience operating outsidetheir own national boundaries – tend to wait, however, until they actually see thepolitical and economic stability that EU membership brings.

But what the statistics show is that until countries formally become members of theEU, businesses do not feel sufficiently confident of political and economic stability to

invest most heavily.

Whatever the reason for their hesitance, the figures show that inward investmentreally takes off not at the time of accession or even in the year or so afterwards, butsome six to eight years later.




As an investor, the really important factor to appreciate then is that you should not somuch be looking for the boom in real estate prices now, but several years afterward.

So, while it is unlikely that you will have missed the boat as far as real estate prices

go, it is nevertheless important to make your move now and to devise your strategyin order to maximise investment profits.

2.7.1 Excellent economic performance prior to joining the EU

It is a startling fact that just a few hours’ flying time from some of the mostsophisticated cities in the world – London, Paris, Milan, Frankfurt – there arecountries that have just joined the EU that can boast economic performances moredeveloped countries would die for.

GDP growth figures of 5 per cent or more are, by any standard, considered a boom.And, in total, 16 of the 27 Central and Eastern European countries registeredeconomic growth of more than 5% in 2000, according to World Bank figures.

Strong growth has continued, albeit sometimes at a less dramatic rate.

Following the tough adjustments to their economies during the mid-nineties, thesecountries have gone from strength to strength, even though those most closelyconnected to trade with Russia were badly buffeted by the Russian currency crisis in1998.

2.7.2 Size does matter – and small can be beautiful

Again, according to figures from the World Bank, we can see that it is often thesmaller countries that actually perform the best, especially in terms of trade andforeign investment.

They often have less of the burdensome heavy industries that are the legacy of thecommunist era.

Closing these down or restructuring them often means high levels of unemploymentand all the associated ills this brings.

Estonia, for instance, is the star performer for exports of goods and services as apercentage of GDP, with an enviable 80%.

Slovakia and the Czech Republic both have export sectors that make up around 70%of GDP.

Because the larger countries have economies that often rely less on trade and just asmuch on domestic demand, they tend to trail smaller countries by ratio of exports to

GDP. Poland’s GDP, for example, is only 27% export-led.




2.7.3 Investment tends to follow the most successful traders

Generally speaking, FDI seems to be attracted to countries that show themselves to

be the most successful traders.

In absolute terms, of course, the bigger countries, such as Poland, attract the mostFDI. But smaller economies like the Czech Republic, Slovakia and Hungary arepulling in FDI at a level that is almost as high or even higher per capita.

This is highly important for investors because the best returns on real estate arealmost certain to be in countries with the most foreign investment, becauseinvestment will lead to growth and the real estate market will move in synch.

2.8 The drivers of the new East European property market

A combination of factors makes the property markets in these countries attractive for the medium to long term investor.

We have already looked at the sort of money that will be invested by the EU andseen how vast sums of private capital are also likely to follow.

But there are also other important factors that are altogether more human incharacter and can only truly be appreciated by visiting these countries and talking to

the people – equally by talking to people in the West who have visited EasternEurope.

On the one hand there is a curiosity about these hitherto closed communist countriesamong Westerners, who have yet to really discover these places beyond the familiar tourist trail of Warsaw, Prague, Budapest and perhaps Krakow. This will change.

In fact there is anecdotal evidence to suggest it already is changing. Many peopleare also rediscovering countries in this part of the world.

One British-born tour operator in Lithuania refers to an increasingly common pattern.

“My father is from Lithuania but has lived in Britain for many years. When he retireda couple of years ago he decided to revisit. He loved it so much he decided to livethere – he could afford a better standard of living all round.

“I went over, not really expecting much at all. But I loved it too and decided to stayand set up a tour business. Most of our clients are first-time visitors and are simplycurious. I think it’s true to say almost all of them are very pleasantly surprised bywhat they find.”

This trend is almost certain to increase as these countries open up more and become

even more accessible.




2.8.1 Pent-up aspiration is a key driving force

There is an undoubted hunger among the younger people of these countries to open

up to the West and to the free market. A desire to travel, mix with other cultures andto embrace the sense of being European that membership of the EU is capable of creating.

On top of that there is an almost palpable sense among many young people of astraightforward desire just to have more of the good things in life – to get richer.

Part of getting richer, as we know in the West, usually involves owning your ownhome.

Demand then for property to purchase in the Eastern Eight is not just likely to

increase because of money coming into these countries, but also from strong andincreasing domestic demand.

One of the key drivers of these economies then is the dynamic of pent-up aspiration.This is hard to define and encapsulate, but it should not be underestimated. It makesan economy buzz and generates growth. This is the power of the emerging middleclass.

What marks these countries out as great investment opportunities is their uniquesituation.

The fact that they have just become part of a gigantic free trade area – and yet their GDP and, by any reckoning, their standard of living, is below pretty much anythingseen in the West.

In addition, these countries house populations that for decades were denied anychance of flourishing economically. Add all this together and you create a highlycharged set of circumstances.

2.8.2 Big potential returns also carry a certain amount of risk and

uncertainty

But, as with most high-return investments, there is usually an element of riskinvolved.

The countries of Eastern Europe – even those EU accession countries who are far down the road to transition between centrally planned and free market economies –are not without risk for the property investor.

These countries, as we’ve seen, have outperformed the feeble growth seen in mostmembers of continental Europe over the last few years.




But, as Steven Fried, deputy chief economist with the European Bank of Reconstruction and Development, points out: ‘The experience of transition, however,has been too much wasted investment and innovation.

‘Resistance to adapt to market pressures has been strong and governments all toooften have conspired with vested interests to impede this process.

‘The result has been a relatively poor business environment in the region beset byarbitrary taxation and business regulation, corruption and poor legal systems.’

None of which seems particularly attractive if you’re thinking of dipping your toe intothe property markets of one of these countries.

2.8.3 But change for the better is occurring

These concerns led the EBRD and the World Bank to launch a massive surveyamong businesses within transition countries – 10,000 interviews to hear frombusiness people themselves about what hurdles they face.

And what the survey reveals is that significant improvements are being made thatmake doing business a more stable process – which, of course, if good for thepurposes of attracting foreign investment.

Steve Fries reports: ‘Discriminatory practices that favoured the old socialist dinosaursover small firms and start-ups have begun to diminish. Tax regimes have improved...

‘Even corruption is starting to diminish, as fewer firms report paying bribes. Andthose that do, pay less as a share of their annual sales revenue – an average of 1.5% in 2002, down from 2% in 1999, when the first round of the survey wasconducted.’

The report goes on to warn that there is still a long way to go, and in particular:

‘Courts still have a long way to go in providing timely enforcement of property rightsand contracts.’

For the investor, the report’s conclusion is enlightening.

‘Despite the vulnerabilities, prospects for the region have clearly brightened and havesparked growing investor interest. The current period of resilient growth, however,should not give rise to complacency.

‘There are both pressing medium-term challenges to maintain macroeconomicstability, and longer-term challenges to build sound market supporting institutionsnecessary for catch-up growth.’




2.9 Making your investment at the right time in the economiccycle will create the quickest returns

No one, not even the finest economist in the world, can accurately predict the dipsand troughs of economic cycles. Simply, the world is far too complex a place and thefactors that influence economies too numerous and too anarchic for their effects tobe fully anticipated.

This is why many investment experts will advise a buy and hold strategy. This waythe inevitable and unforeseen ups and downs of the market cancel each other out.So long as the general value trend over the medium to long term is upwards, theinvestor wins.

This makes good sense, particularly with a property investment – that involves aproduct that is not portable or relatively easily or cheaply exchanged for cash.

Nevertheless, it is obvious that if you can time your investment so that you buy at or near the lowest point of an economic cycle and sell just before or at the highest point,you will maximise your profits.

In fact, if you could do this repeatedly, you would be fabulously rich! The truth is thatno investor can get this right all the time.

But we can make intelligent decisions about what is likely to be the state of any given

market at any given time based on expert opinions and informed organisations. Theymay not get things right all the time, but they are the best guide we have.

This is why it’s worth taking a look at the predictions of such groups as the inter-governmental Organisation for Economic Co-operation and Development (OECD).The generally held view is that the growth of the economies of these eight countrieswill accelerate in the years after accession.

2.10 The Irish experience – to be repeated across EasternEurope?

A question worth asking is which of the Eastern European countries that are new tothe EU will do what Ireland did around ten years ago – i.e., blast off into an economicboom unprecedented in the country’s history.

When you look at the Eastern Eight, it’s obvious that Ireland is a great yardstick for spotting the best place to invest.

Simply put, many of the reasons for Ireland’s spectacular growth are present, or potentially present, in the EU accession countries of Eastern Europe.




Right now, you would be a brave investor to buy into Ireland’s real estate market.Most experts agree that it must be near the peak of its cycle, if not near a sharpcorrection.

But had you bought into the market some ten or twelve years ago, you would have

seen gains as good as anything in the world, with rises running well into double digitgrowth year after year.

No single factor accounted for this boom, but rather a combination.

It’s worth spending a few moments identifying what those factors were because theyare definitely worth applying to Eastern Europe.

Of course, we can breakdown the growth in property prices into two parts – demandand supply.

On the demand side, price inflation was fuelled by:

• A huge increase in employment during the 90s of some 30%, brought aboutby a massive influx of investment.

• Unemployment fell from 16% to less than 5% in the last decade.

• Major reforms of personal taxation that have helped create an annualised 7%increase in disposable income

•

Big reductions in business taxation

• Big cuts in government spending – not just in real terms, but more importantlyas a percentage of Ireland’s GDP

• A dramatic drop in interest rates as a result of Ireland’s entry into ERM andlater the Euro, meaning that monetary policy (i.e. interest rates) was effectivelydecided in Frankfurt rather than Dublin. The effect of this has meant thatmoney became cheap to borrow. Real mortgage rates have been on adownward trend since 1992 when they stood at 12%

• A big increase in migration into Ireland, said to have created up to 25% of housing demand during the 90s

• A bulge in the population of 25 to 44 year olds – the portion of the populationmost active in the housing market

• And, on the supply side, Ireland began its boom with a low stock of housingquite unable to meet the new and sudden demands. New builds increaseddramatically – between 1993 and 1999 there was a 16% rate of yearlyincrease in new housing stock.




2.10.1 Inward Investment

While we can see that a number of reasons led to Ireland’s house price boom, the

key factor is inward investment, which created more jobs and disposable wealth inthe country.

So, for the real estate investor with an eye on Eastern Europe, the question is whydid that money head for Ireland?

Perhaps even more interesting is where predominantly it came from.

First, from the EU and, when this began to taper off, from private business, led by awide margin by the United States.

What led to this private investment and do the same conditions apply to the EasternEight?

We’ve already looked at what attracts big business to invest in a country. Let’s looka little more closely at why Ireland seemed to have it all.

Certainly, its boom began at the start of an investment and growth cycle – since 1993economic recovery in Europe and, most importantly, in the US was solid.

As the era of new technology and the Internet boom took hold, investment grewexponentially. Ireland reaped the benefits of this.

To a large extent, how much investment flows into Eastern Europe will depend onhow well the global economy performs, especially how well recovery in the UnitedStates takes hold.

Ireland was a relatively cheap source of labour, labour that was also well-educatedand spoke English.

It also offered attractive and simplified tax incentives to big business as well as thelow interest rates dictated by the European Central Bank.

The government’s decision to set corporate tax at an ultra-low 12.5% (even lower than Hong Kong!) was possibly the single biggest factor in luring private cash toIreland.

More than 1,000 overseas investors are estimated to have set up headquarters inIreland as a result.

In addition, the government streamlined finances and exercised a cautionary fiscalpolicy – both of which are attractive to corporate investors looking for long-terminvestment potential.






2.11.1 The currency risk

If a government’s spending exceeds its income, two things are likely to happen

eventually:

• The country won’t qualify for entry into the Eurozone• International money markets will lose faith in the country’s fiscal policy

and will sell off the currency

This means the country’s currency will devalue relative to major internationalcurrencies.

For the property investor, this is bad news.

You may make a 10% capital gain per year on your investment, but if the currency inwhich you’re making the gain is falling by, say 8%, relative to your own currency, youare only making a profit of 2%. Subtract taxes and you may end up with a loss.

This is why a country’s fiscal attitude is so important.

Those countries with the most stable or strengthening currencies are likely to havethree qualities in common:

• They attract a lot of investment

• They keep government spending low • They have highly disciplined exchange rate policies, like, for example, a

currency board, possibly the most disciplined exchange policy of all

Government over-spending also means that the long – and often painful – journeyfrom centrally-planned and controlled economies to the free-market is beingartificially slowed down.

The best place to invest in property will prove to be those countries that introduceserious measures (not just window-dressing ones), to bring down public spending.

Here are some examples of high spending from 2002:

• Hungary’s government spent 53% of GDP• The Czech Republic spent 47%• Poland spent 44%• Slovakia spent 41%

In Hungary it is estimated that the government will run a current account deficit of 5.5% in 2003, falling to 4.5% in 2004.

The big three accession countries – the Czech Republic, Hungary and Poland – areall running massive deficits of between around 5.5% and 6%.




Joining the ERM, as countries are supposed to do before adopting the Euro after twoyears, makes their currencies vulnerable to speculators who see the weakness of agovernment’s fiscal policy and bet that the currency is artificially valued up.

As we’ve mentioned above, the key reason for Ireland’s hugely successful period of growth from the late 90s onwards, has been low, low taxes and big, big cuts ingovernment spending.

Certainly no government can afford to run a current account deficit for long. If theydo, they are likely to see investors lose faith in their currency and sell it, provoking acurrency crisis like that in the Czech Republic in 1997.

Since 1998, Ireland’s administration has kept spending to below 35% of GDP.

This speaks for itself.

2.12 Years of growth potential remain

The other (and perhaps the key) reason supporting the view that the Eastern Eightwill see huge growth is that they have years to go before they will approach anythinglike the level of output or GDP of their fellow EU members.

Writing for the Urban Land Institute, David Hutchings of property consultantCushman & Wakefield Healey and Baker and Monika Bukowska, research consultant

at Cushman and Wakefield Healey & Baker, have made some calculations that willbe of interest to any investor who fears they have missed the boat.

Using data from a variety of sources - EIU, Euractiv.com, Eurostat, Cushman &Wakefield Healey & Baker – they calculated the time it will take Eastern Europeancountries to match 75% of the 15 states of the EU’s average per capita GDP basedon current rates of growth.

Here are the results for the eight EU accession countries:

Countries Time to match 75% of the average GDPper head of the EU 15

Hungary 11 years

Czech Republic 15 years

Poland 33 years

Estonia 19 years

Slovakia 20 years

Slovenia 1 year

Lithuania 31 years

Latvia 27 years




Excluding Slovenia - which stands out from the other candidate countries in manyways - then we are talking of, at the least, more than a decade of growth beforethese countries match even three quarters of the economic muscle of the WesternEU members.

Therefore, even with Eastern European countries outside of the candidate countries – Russia, Romania and Bulgaria, for instance – competing for inward investment andadvertising themselves as low-cost centres, there is still huge growth potential withinthe Eastern Eight.

2.12.1 Average monthly salaries

Monthly salaries provide another way to estimate how much lag there is betweenthese countries and their new EU partners (and therefore how much growth potential

remains).

This data provides fascinating comparisons.

AVERAGE MONTHLY SALARIES (GROSS) IN EUROS

(Source: Investing in Central and Eastern Europe, Dresdner Bank)




These two indicators – GDP comparisons and earnings lag - really highlight just howfar the Eastern Eight have to go economically to catch up with current EU members.

And what that adds up to is a lot of real estate growth potential as big business and

industry takes advantage of lower costs, along with the stability EU membershiprepresents.

2.12.2 Massive property price growth potential from within these countries

What is also exciting about these countries is a twin boost to property markets fromwithin. That is:

• Ultra-low levels of domestic mortgage penetration• Huge growth rates of mortgage sales

Put another way, this means that very few people in most of these countries havemortgages and yet the number of people acquiring them is growing exponentially.This demonstrates a huge appetite for home ownership that will increasingly fuel theupward trend in residential property prices.

These twin phenomena are true, to greater or lesser extents, in most of the EasternEight.

But let’s focus on Latvia – one of the three Baltic states of Latvia, Lithuania and

Estonia, which are often lumped together as they are so small and their existence sointer-woven, culturally and economically. We can see the extent of what we aretalking about …

The fact is there is a quiet revolution taking place in the banking and credit sectors of this country, and it’s being fuelled by foreign cash deposits.

Non-residents made up an extraordinary 52% of all depositors in Latvian commercialbanks in the first six months of 2003. This compares to 4.8% in Lithuania and 11.4%in Estonia. And this money is being used to fuel the domestic debt market,particularly mortgages.

According to assessments made by Latvia’s Latvijas Unibanka, total assets in allbanks in the three Baltic states grew by 7.1% in the first seven months of the year. Inreal figures, this is growth of €1.26 billion to €18.99 billion.

In the first six months of 2003, the number of mortgages approved by Latvian banksfor the purchase of apartments went up by 42.8% to €522million, according to theAssociation of Latvian Commercial Banks.

Around 55% of these credits were issued by just three institutions – Hansabanka,(23,4%), Latvijas Unibanka (18,8%), and Hipoteku banka (13%).




This is massive rise and yet a relatively small amount of money issued by a smallnumber of banks.

This tells us three things:

• There is big and growing domestic demand to own property in Latvia• The amount of credit advanced for mortgages is still small• There is plenty of room for more competition from banks for the growing

business, so bringing more borrowers (and more money) into the market

Not only is the amount of credit advanced very small, the number of people doing theborrowing is still, as yet, tiny.

Key Tip

Although the rate of mortgage penetration is growing at an amazingrate in Latvia, it started from an ultra-low base.

There is therefore little to zero chance of rapidly growing domesticdemand causing the residential property market to overheat in thenear future.

This is vitally important because it suggests there is plenty of growth still to come in

the market and that, long term, it will not only be fuelled by foreign money, but bydomestic buyers.

Hence, a sustainable real estate market is establishing itself as a key component of the country’s economy.

Naturally enough the banks are fuelling the growing popularity of mortgages and theidea of property ownership. And, of course, Latvians are keenly aware of the kind of returns it is now possible to make in the property market.

But consider how few people actually have mortgages at present: in Latvia it is

around 7 or 8%; in Estonia, 12%.

Corresponding average figures for Europe are around 30-40%, even 50%.

In short, the potential in these markets is huge.




2.13 The Euro factor

Joining the EU is only half the story – that much is clear. I’ve already talked about the

impact on investment after joining. But what about the potential effects of the Euro?

The whole question of the Euro is not, as it first might appear, a simple one, but isactually quite complex.

Adopting the Euro will have a profound effect on not only the economies of thesenew EU member countries, but also their real estate markets.

In a nutshell, adoption of the Euro will:

• Eliminate currency fluctuations

• Stabilise and (mostly) lower interest rates

• Impose fiscal stability

However, as I mentioned briefly earlier, having joined the EU does not qualify any of the Eastern Eight to join the Euro. That will, or may, come later, at the earliest in2007.

Some populations have often been decidedly reluctant to adopt the Euro, often

seeing it as representing a loss of control over their economic affairs and a loss of national identity.

Many of the advantages are political rather than economic, but for a former communist state, membership of the Euro club is an important indicator of arrival onthe free market scene along with a clear signal that the country is a member of astable trading zone.

Certainly, the governments of the Eastern European countries that have recently joined the EU will all almost certainly want to also join the Euro as soon as conditionsallow.

2.13.1 Euro membership – don’t bank on it short term

It is important to recognise that, although the idea is that all countries will join – thereis no opt out, as for the UK and Denmark – membership is not certain.

It is not simply a case of when, not if.

This is a key consideration for real estate investors because those countries that arefirst to adopt the Euro are likely to see the quickest and most dramatic returns oninvestments.




There is an element of a gamble here as well because any country that fails to meetthe conditions necessary for Euro membership is likely to suffer in terms of investment and, as a knock on, in terms of real estate price inflation.

While none of the new member countries have the option of an opt out in theory, it is

also the case that they cannot either be forced to join.

Remember that Sweden had no opt out either, but despite this it held a referendumand rejected the Euro.

Key Tip

Anyone trying to anticipate which countries will be first to join the Euroshould not expect entry conditions to be necessarily the same asthose laid down in EU fiscal policy.

Criteria for Euro membership currently are those conditions laid down for the first 12members – low inflation and low long-term interest rates, budget deficits that arebelow 3% of the country’s GDP and government debt that is below 60% of acountry’s GDP.

In addition, candidate countries are supposed to peg their currencies to the Euro for at least two years within the exchange rate mechanism (ERM2), and keep their currencies to within a 15% band of that fixed rate.

But, for some existing members of the Euro club, rules about debt and exchangerates were not rigidly applied. The same loose approach may well re-occur for newmembers.

Most of the East European Eight have already linked their currencies to the Euro inanticipation of adopting the currency.

But few analysts believe any country will join much before 2007.

Indeed, racing toward Euro membership is not necessarily desirable for all the newmember countries.

Many of the countries have big budget deficits well in excess of the required 3% of GDP maximum (most notably in Poland and Hungary), and bringing these downrapidly may well have an undesirable effect on income growth, and thereforespending power.

The European Central Bank has been keen to focus the minds of the candidatecountries’ governments on fiscal structural reform rather than quick membership of the Euro.






The likely adoption of the Euro will be a factor here, but not the main one, I believe.

So, while taking into consideration the likelihood of the Euro being adopted in anyone country, I would recommend that the real estate investor places greater weight –at least in the short to medium term - on how attractive a country is to big corporate

investors.

And what those investors look for are a number of key factors:

• How easy is it to set up a business operation – i.e., how much red tape isthere?

• Low tax regime?• How good, how available and how cheap is the labour pool?• What are the cost extras, the hidden or unofficial costs?• How forward-looking is the country’s government in creating new sectors in

the economy – finance and banking, for example (Estonia), or car manufacturing (Slovakia).

The answer to these questions is the most likely indicator of whether or not a housingboom is on the way.

2.14 Pluses and Minuses of investing in the East European Eight

Let’s consider both sides of the equation.

Naturally, it’s not all good news – high returns rarely come without a certain degree of risk. And it is as well to be fully aware of the downside before you make anyinvestment decision.

Bear in mind that each country has specific advantages and disadvantages (whichwe’ll explore in the individual country chapters), even so, there are some generalpoints we can establish right away.

You also need to consider carefully what it is you expect to get from your investmentand how long you are prepared to wait to get it. Generally speaking, in anyinvestment, the higher the return the greater the degree of exposure and risk is

involved.

2.14.1 What is good about investing in the eight?

This, basically, boils down to two things – cheapness and growth potential. But, tobe more specific…

• Fairly new, but firmly established property buying processes in most countries• Barriers that exist now will almost certainly lessen in the next few years –

increasing investor interest and therefore prices• Abundance of basement-level investment opportunities




• Prices, even in more established areas, are often relatively cheap• Growth potential in these countries is huge and certainly far greater than their

Western European neighbours• The advent of the Euro in a few years will increase the attractiveness of

property investment from European neighbours• Large stocks of character properties to be renovated

2.14.2 What is risky about investing in the eight?

And this breaks down quite simply also – a certain amount of risk involved ininvesting in relatively unexplored markets. But, as usual with investments thatinvolve risk, they also carry with them the potential for high rewards. Risk, for themost part, is, I believe, psychological. Here’s a more specific look at concerns …

•

Potentially less stable markets than those of Western Europe• Will all the promised inward investment flow to just one or two luckyrecipients?

• Lack of historical property price data stretching back more than around tenyears

• Uncertainty about what kind of housing stock will be in demand in the future• Currency risk – government over-spending may lead to devaluation in the

local currency• With the potential for high profits from property and with a relatively new

market, the potential for coming across cowboy operators is high• There’s always the possibility that greater growth in property prices will occur

in countries in Eastern Europe outside the Eastern Eight.

2.14.3 How the Eastern Eight might actually lose out by joining the EU

We need to look at all the negatives carefully and, like a good, level-headed investor,not get too carried away by the exciting prospects that are represented by theEastern Eight.

Some analysts will argue that EU membership will damage the prospects of theEastern Eight countries attracting foreign investment.

Now, while there is very strong evidence to show that this is false picture, we need tobe aware of the argument.

The Economist Intelligent Unit, for example, predicts a decline in FDI in the EasternEight, despite conceding that 2003 being a record year overall.

It reports that between 1998 and 2002, the Eastern Eight attracted almost two thirdsof the US$143 billion invested in transitional economies in the region.




For 2003 to 2007, the EIU predicts that this share will fall to below 50 per cent of theestimated US$200 billion invested in the region. Still, of course, a huge chunk of money.

And the EIU points out that this is not a ‘zero-sum game’ and that the inflow of

investment will remain ‘substantial.’

Among the reasons for a possible decline in business investment are the facts thatEU membership:

• Requires businesses to adhere to certain relatively expensive rules andregulations governing such areas as labour laws

• Means the end of special incentives to attract businesses

Despite this argument, the EIU predictions of investment in the Eastern Eight that areimpressive, to say the least, when compared to regional rivals of similar size.

2.14.4 Predictions of annual foreign investment 2003-2007

EIU predictions of annual foreign investment in US$m between 2003-2007

CZECHREPUBLIC

5,000 RUSSIA 9,400

HUNGARY 1,770 KAZAKHSTAN 2,470

POLAND 7,300 UKRAINE 800SLOVAKIA 2,100 ROMANIA 1,800

SLOVENIA 800 CROATIA 1,350

ESTONIA 430SERBIA &MONTENEGRO

850

LATVIA 610 BULGARIA 840

LITHUANIA 890 GEORGIA 190

2.14.5 Why the pessimists will be wrong….

So, there is a body of opinion that says the EU factor won’t count for a great deal.

This will be proved wrong over the short to medium term.

Why?

Well, let’s recap on what was said earlier.

• EU investment will be an important driver of foreign investment initially




• Private capital investment does not start to peak until several years after EUmembership, as has been seen in other newly joined countries

• The psychological security of a country being in the EU will outweigh many of the cost disadvantages for business

• Even the worst-case scenario investment predictions show very impressiveamounts of money being injected into the Eastern Eight

Key Tip

Business investors like stability and predictability only slightly lessthan they like low operational costs and special investment incentives.

And here’s another reason to inspire confidence that EU membership will deliver when it comes to property investment.

Latio, the oldest and most respected real estate agency in Latvia, found thatapartment prices in Old Riga leapt by approximately 10 per cent in the month rightafter the positive vote by Latvians to join the EU.

What better indicator could there be that confidence – which is what ultimately fuelsthe property market anywhere – will continue to be boosted by EU membership?

Interestingly, Latio, in the same report, also makes the point that one of the factorsholding back foreign investors in Latvia’s property market is ‘lack of information’.

This applies, to a greater or lesser degree, to all of the Eastern Eight.

2.15 The Eastern Eight vs established property investmentcountries

There is no doubt that most people would regard these countries warily asinvestment targets and anyone buying property there will probably be thought of assomething of a pioneer. The key factor here is, of course, uncertainty.

Investors, for the most part, feel safer and more certain about what is familiar.Second property buys by foreigners in Spain, Portugal, France, and Italy – to nameonly the most popular countries in Europe – are now very common.

Certainly, buying as a foreigner in Spain and so forth is anything but risk-free, and yetit probably feels less risky than buying in Eastern Europe.

The truth is that the risk in most of the Eastern European countries is probablyonly marginally greater than in the more established markets.




And yet, the potential returns are substantially greater!

The ‘marginally greater risk’ view will be true if you stick to the areas of the country inwhich dealing in real estate is the most established – in reality this will often mean

the big cities.

The other reason why the risk is not as high as our perception might expect isbecause these countries are in the European Union and EU laws and jurisdiction nowapply.

This will undoubtedly give comfort to the more nervous investor.






3.1 Choosing an investment location based on the risk factor

To most property buyers who are solely in search of the biggest gains, it probably

won’t matter much which of the Eastern Eight they end up investing in.

If, however, you have some kind of link with a country – even if it’s only that you’vevisited it – then you are probably drawn to that country as an investment target. It’squite normal to seek out the more familiar, where risk and money are involved.

Risk is the big factor here, though. What any investor will want to know beforespending capital is: what is the risk?

The question is, it will come as no surprise to learn, unanswerable. And yet, thereare certain factors that can be weighed up in order to give something like anobjective assessment.

There is no absolute science to this process and pretty much anyone can carry outthe same exercise as the experts. Very often a layperson’s assessment will be just asvalid as an expert’s.

Having said that, it’s worth taking account of what the experts say. The EU hascarried out these kinds of country assessments, without producing actual riskrankings for countries.

Pretty much whatever criteria are used, three countries always seem to emerge aswhat we might call the best in terms of potential set against risk. In other words, theleast risk for the most potential.

These countries are: Poland, Hungary and The Czech Republic.

Property experts Cushman & Wakefield Healey & Baker carried out a detailedanalysis to determine the equation between growth and stability for countries in thisregion.

Almost 50 factors were examined and covered such areas as the countries’

economies, politics, levels of corruption, property market structures as well asoccupier and investor demand.

Data from findings was then converted into a score to provide country rankings.

As Cushman & Wakefield Healey & Baker point out, the findings produce no morethan a snapshot of the markets – ‘and one that can change quickly’. The researchincluded Russia, Bulgaria, Turkey, Romania and Croatia, which for our purposeshave been excluded.

Below the Cushman & Wakefield Healey & Baker findings are presented in three

parts – rankings for stability/risk first, then rankings for growth and then overallpositioning.




3.2 Country by country risk and stability rankings

Cushman & Wakefield Healey & Baker’s Rankings for Risk/Stability - the less risk

and more stability, the higher the ranking.

Rank Country Score

1 Hungary 83%

2 Czech Rep 80%

3 Poland 74%

4 Estonia 67%

5 Slovakia 61%

6 Slovenia 61%

7 Lithuania 59%

8 Latvia 52%

It is possible from these figures to see Hungary and the Czech Republic as onegroup, with Poland and Estonia as another and, then Slovakia, Slovenia andLithuania as the third grouping, leaving Latvia trailing in a group of its own.

These are all interesting assessments, and, to a large extent, coincide with EUfindings.

But, as the data’s authors, Cushman & Wakefield Healey & Baker, caution, suchrankings, however comprehensive the considerations, are no more than a snapshot.In fact there are very good reasons for seeing Latvia as an excellent investment

target.

They can never be a truly complete picture and they can, of course, be altered bychanging circumstances.

There are other criteria that can help you through the country maze. We’ll comeback to an examination of each of the eight countries in the next chapter andconclude with investment verdicts on each.

In the meantime, have a look at the following table – FDI per head of population –another measure of how affluent a state may become and how much confidenceinternational business has in a country. In fact, it maybe the best measure of all.




FDI Stock per capita as of 2002 in $

Czech Republic 3,603

Slovenia 2,754

Hungary 2,659

Estonia 2,647Slovakia 1,859

Latvia 1,282

Poland 1,191

Lithuania 1,040

Source: Eurostat

3.3 Choosing the right Country or Sector?

Having established the rationale for firmly believing that the Eastern Eight will pluginto a strong growth cycle at strategic points following EU membership, the really bigquestion must be: which countries will perform the best and, therefore, where do Idecide to make my property investment?

Curiously, perhaps, the answer to this question is not just about looking at the statsfor a country as a whole and then adding into the mix factors like, ease of doingbusiness, tax rates, and labour costs.

3.3.1 Perhaps not so much which country as which sector?

Competition for inward investment among the accession countries, and with their non-EU accession neighbours, is already intense.

Undoubtedly, just being able to show membership of the EU club has boosted whatwe might call each country’s branding.

However, how much money flows into countries and, especially, into sectors, bothgeographical and industrial, will depend on how well those sectors have adaptedthemselves to receive investment.

Basically, if the infrastructure and communications are poor, investors will stay away.If industries are working along out-moded lines, it is unlikely they will attract muchinvestment.

On top of that, it is likely that certain types of industry will attract more investmentthan others.






• Big infrastructure projects – roads, rail, airports• Large business investment

• Universities• Main and secondary cities

3.4.1 Tourism

Areas with strong potential for tourism are a great bet for property investors, becausemost countries will almost certainly try to develop this industry – said to be the fastestgrowing industry on the planet!

Areas that were once successful tourist destinations pre-communism, are certainlyworth looking at for investment potential.

Things to check:

What projects are on-going?

How is infrastructure being developed and is the ‘software’ in place, i.e., does thenearest airport serve the right destinations to bring in tourists? Are any of the budgetairlines planning routes into the nearest airport.

What is the tourism model and can it attract the affluent, foreign customer?

For example, a site for ancient hot spas that has been hugely popular in the past maybe thought to be unsustainable nowadays … unless new life is breathed into it bysome inspired and inspiring entrepreneur.

While, plans for a health farm, or sports holiday complex, are, perhaps, sustainable.

This is where your gut feeling comes into play.

What are the standards of service like both in the country generally and specifically inyour selected tourist spot?

You may conclude that they are not, at present, very good.

But if you know, for example, that a major international hotel chain whose serviceand facilities you greatly admire, is planning to take over and renovate somecrumbling Stalinist bloc of a building, then you may feel confident that money andknow-how is coming into an area and it will be revived.

Once again – follow the money. What you are really doing is using the experts withthe big money as your trailblazers. Basically, if they are willing to put money into anarea, then it’s probably worth you having a look as well.

It’s not a guarantee of success, but it’s certainly a useful pointer.




Properties in this sector have strong capital growth and rental potential. Ask yourself:what are you looking for?

3.4.2 Follow the budget airlines

With some exceptions, Eastern Europe has not been well served by the budgetairlines that have proved so successful at opening up property markets to many morepeople in the west of Europe.

There are a few exceptions – easyJet flies to Prague (www.easyjet.co.uk) andSlovakia’s budget airline, Sky Europe www.skyeurope.com flies to Bratislava andBudapest from many Euro destinations – but there is still massive potential for expansion. Ryanair (www.ryanair.com) has in 2005 put several East Europeandestinations on its route map.

Also worth keeping an eye on is the German and Austrian team Air Berlin and Nikiwww.airberlin.com . They already fly to a huge number of destinations aroundEurope and have now launched a site in Polish.

New routes opening up can have a radical effect on property prices. Suddenly anarea or city can become reachable for a weekend from Western Europe – notreachable by distance, but by cost.

3.4.3 Hi-tech industry and technology parks

If you become aware that large employers in the hi-tech industry are planning major investments, it is a good idea to plan to buy property for rent in the same area.

Such cutting-edge industries attract all kinds of other investments, so boostingdemand for property. Links at the end of the country sections may help you to keeptabs on such events.

But, in general, look to chamber of commerce groups, the EU, and any organisationsthat promote business in the individual countries for news of such investments.Industry-specific magazines can also be helpful.

3.4.4 Superstores and shopping mall developments

These developments can literally transform an area from a heartless, soulless zoneinto a thriving, trendy area in which people will want to live and work.

Along with big mall developments come all the accoutrements – at least, it’s as wellto check they are planned - like infrastructure: transport links, car parks, policestations, banks and so on.

http://www.easyjet.co.uk/


http://www.skyeurope.com/

http://www.ryanair.com/


http://www.airberlin.com/

http://www.airberlin.com/


http://www.skyeurope.com/





And as consumers are drawn into the area, so too are add-on businesses, likerestaurants, gyms, specialist shops and so on. Voila! You have a place in whichmore people will want to live and there will be more demand for housing.

Hence, the price of land will rise and, along with it, the price of existing good quality

housing stock.

3.4.5 Big infrastructure projects

Of all the signals that are worth looking for, this is probably the most significant.

Why? Because shopping mall developers and industry investors and anyone whowants to develop a tourist destination will first look at existing and planned transportto and from that location.

Roads, rail and, especially airports, are all signals that an area is likely to receive notonly investment in such projects but also a whole lot more will follow.

Major roads are likely in many of the Eastern Eight to be one of the priorities for EUinvestment as they are seen as absolutely vital for all of the countries’ development.

Obviously, we’re not really talking about a new road to take traffic away from a citycentre here, although this can be an important trigger, especially in a tourist location.

We are talking about major arterial routes that open up new areas of the country for easy access, or routes that form exciting trade links between cities, or between, justfor an example, a hi-tech development zone and its markets further west.

3.4.6 Business investment

Anywhere where business invests heavily in new production centres is likely to putthat area, and the area nearby, on the map in terms of property investment.

This is especially true of high-end foreign companies moving into an area.

If they are bringing their own personnel with them and/or hiring highly skilled andqualified local employees, demand for affordable and desirable accommodation inthe area or within a commutable distance of it will increase.

All countries have organisations to encourage this type of FDI and are only toopleased to trumpet new projects and contracts. There are helpful websites to checkin each of the country sections.






They are the kind of thing you would want to avoid anywhere and, for the most part,they are common sense. Here are a few examples: properties with ruined views;properties very near busy and noisy roads; properties with fundamental structuralfaults, etc, etc.

But beyond these considerations the investor needs to think about avoidance in thecontext of the eight countries we’re examining.

There are some factors specific to this region. Not all of them mean you shoulddefinitely rule out a property or location, but they are all certainly worth bearing inmind.

3.5.1 Countries and areas with old thinking

Areas that are selling themselves to foreign investors solely on the basis that they

can provide inexpensive labour pools and special breaks for businesses that invest.

It may be that a country does trumpet this fact, but note that we are talking here of areas that are using this as their ONLY or central selling point.

In the longer term, this will not be a sustainable model for attracting foreigninvestment.

It is old, pre-EU thinking.

The problem is simply that there will always be somewhere - probably next door -that is even cheaper and yet can also provide similarly skilled workers.

Many of the Eastern Eight are indeed pointing out their cheapness and also their geographic advantages as production centres - next to Germany, for example.

But most the administrations, central and regional, are aware that more needs to bedone in the long term.

Ask yourself, for example, what is a location doing to become a hi-tech productioncentre, not just a centre for cheap labour?

Is money being put into infrastructure to demonstrate long-term commitment?

Are there programmes for improving language skills, especially English? This maycome from the state or the private sector. It doesn’t matter, so long as there is anactive and dynamic effort taking place aimed at developing the right skills for thefuture.

If the answer to these kinds of questions is ‘No’, then think very hard about whether this is an area that is going to grow in desirability and therefore property demand inthe medium to long term.




Key Tip

There is an irony here. And that is that the reason the cheap labour and special breaks for investors model is not sustainable is the veryreason these countries are attractive to investors - membership of the

EU.

Along with the backing and stability provided by the EU’s institutionsand its financial clout, comes the downside.

Members have to agree on what is more or less a level playing field.

Many, if not most, of the special breaks for investors vanished whenthese countries became EU members.

Those countries on their borders, further east and still outside the EU,

are still able to use special incentives to attract investment and arguethat they are still cheap sources of labour.

Membership of the EU not only means the disappearance of many country-specificincentives for investors, it will also almost certainly, through a more regulatedworkplace, increase the cost of labour.

And it is not just the EU that will act against the ‘we’re the cheapest’ slogan. Thevery fact that a country is successfully growing economically will lead to greater wealth and higher wages and land prices. It will therefore lose its edge as a low-costcentre for business.

3.5.2 Areas dependent on a single industry

Be wary of any location in which the local economy is based solely on one industry.Pockets of this kind of Soviet-style centrally-economy still exist.

It may be that an area once-dependant on, say a giant steel works or a system of

coal mines, or some other heavy industry, may attract large amounts of money fromthe EU aimed at revitalisation.

But there is no guarantee this will be successful.

And the chances of such heavy industry, unprotected from the efficiencies of themarket-place – which is what the EU means – surviving are not good.

So, check out what makes the local economy tick before jumping to the conclusionthat the small pocket of basement-level priced properties you’ve discovered is indeedthe bargain it may appear.

It may be basement level, but it may stay that way!






They may be the concerns of a dying, parochial, insular mentality. Nevertheless,even if this is so, it does not make the concerns any less real for some people.

And it is as well to be aware that such feelings may possibly lead to a politicalbacklash of some kind.

Many surveys and polls have shown that too much foreign ownership is a coreconcern for many people.

Obviously, such a political reaction would not be advantageous from a propertyinvestment viewpoint.

It is probably true to say that such concerns about a foreign invasion of money areprobably linked more to a fear of losing a perceived national identity as much asanything else. This is certainly true in Slovenia, for example, as well as border areasin Hungary and Poland.

But if people feel that things are getting better after their country joins the EU, asense of loss or of grievance will not develop.

Once again, it comes down to selecting those countries, regions or sectors that youexpect to do well economically from becoming part of the EU 25.




4. INVESTMENT STRATEGY


• Securing your investment (see section 4.1) • Figuring out your investment aims (see section 4.2) • Should you invest directly or through a fund? (see section

4.3) • The ABC of investment (see section 4.4) • How to ensure your investment is cash positive (see

section 4.5)

Let’s take a moment to bring things into focus and to summarise the pluses andminuses of investing in the eight countries we’ve been discussing.

4.1 Securing your investment

Bear in mind that your circumstances can alter. For this reason then it’s important tothink long-term.

You need to consider whether a property not only meets your current needs andaims, but whether it can serve you well in a changing environment.

The most important consideration is undoubtedly – can I resell this property easily?

You may well consider the property as a long-term investment, perhaps towardsretirement. Nevertheless, it is wise to look for properties that you know or at leastbelieve will sell easily, just in case at a later date you need to realise the capital youhave tied up in the place.

Key Tip

To protect yourself from changing personal circumstances, look for aproperty that you know will grow in value at least in line with themarket rate, and one that will always be letable and sellable.

Now let’s look at some questions you should ask before you buy.




4.2 Your investment aims

It is important to establish, right from the start, what you intend for your investment.

Just about the worst thing you can do is go into property buying with only a vaguenotion of a place being ‘a good investment’.

You need instead to be clear what you expect so that you can at least estimatewhether a property you have in mind meets your criteria.

In general, your aim will be one of the following:

• You want capital growth (and a holiday home)• You want rental income (and a holiday home)•

You want to highly leverage your assets and achieve both – so you need ahigh yield to service a big loan

4.2.1 If you want capital growth from a holiday or primary home

Whether your property is to be used as a holiday home or you are planning to live init full-time is not nearly as important as the fact that you are not relying on rentalincome.

From an investment view, this gives you a big advantage. It means you can afford to

consider properties in areas where prices have not yet taken off and sit it out untilthey start to accelerate.

However, even if your plan is for long-term investment, you should still be cautiousabout being too much of a trailblazer, as we’ve discussed before.

4.2.2 If you want rental income and a holiday home

If this is your aim, and you want to maximise that rental income, then, quiteobviously, you are going to have to choose a property in an area with an already

established pedigree for rental – in other words, where there is plenty of demand.

If you also want to use the property as a holiday home, then this shouldn’t be aproblem for you.

But one thing to remember is that if rental income is very important to you, then youneed to be guided far more by the market than by your personal preferences.

And, of course, you need to consider the short-term rental market or the holidayrental market. If you want to use the property yourself for a certain amount of time ayear, then longer-term lets are out of the question.




4.2.3 If you want to buy purely as an investment

In these circumstances you have only two central considerations:

Where is property price inflation the fastest?Is there a rental demand for the kind of property I am considering?

You will be looking for a property with potential to rent for the longer-term, mostprobably in a city, say, for example, Prague or Budapest.

Here you know that property price inflation is likely to be strong, if the two countries inquestion remain buoyant economically and if the two cities remain central touristdestinations.

Another advantage of sticking to main cities is that maintenance and management of your property is likely to be easier.

You will be able to locate experienced managing agencies and therefore have aslittle to do with caring for the property as possible.

Here are the most straightforward pure investment methods:

4.2.4 Buy New

Buy a new/renovated apartment, rent it out then sell in two to five years time,depending on the precise state of the market.

This is perhaps the easiest option of all. So long as you buy an easily maintainedproperty (preferably an apartment in a large city) and make sure it has good rentalvalue, it’s hard to go wrong.

4.2.5 Buy, renovate and rent out

Buy an old property, renovate it yourself, rent it out and sell in two to five years time,depending on the precise state of the market.

With this option you certainly stand to make a bigger capital gain than with the firstoption., However, there is the added complication of having to decide exactly howmuch to spend on renovation in order to maximise profit.

Also, picking the right property is far more difficult.

Dividing a large property into smaller units is one tried and tested method of increasing the return on an investment.






Fund investment

For:

• Safer – less risk as the investment is spread• Easier – you just write a cheque• You plug into the judgements of experts• No need to manage your property• Can be tax efficient• Less homework needed before investing

Investing directly

For:

• Higher potential profits – and you get to keep them all• More control – you do the background research, do the sums and you make

the investment decisions• Can be tax efficient – setting up a company, for example• No fees• You’re far more likely to be leveraging through a loan – in other words your

percentage return will be much higher.

4.4 The ABC secret of successful investment in the EasternEight

The fact is that when assessing a market like that presented by Eastern Europe, it isnecessary to be clear about what is required in principle to make your investmentwork.

We have already discussed the fact that the property market in these countries islikely to be driven by a series of significant price spikes.

What we cannot determine, however smart we are, is the timescale in which thesespikes will occur. We can certainly look, as we’ve done already, at other examples of countries joining the EU and when investment has kicked in for them.

But, while this kind of examination acts as a good indicator for the future, it is, of course, no guarantee.

So how can we be sure of a good buy, when we can’t be certain of the timescale of price rises?




Here’s the ABC answer:

A. Buy property that is easy to rent to high-end tenants. This means making inquiriesabout which areas are most in demand and by what kind of renter.

What this useful combination adds up to is: high occupancy and low maintenance – alandlord’s dream!

B. Only ever buy property that is cash positive, in other words the rent covers anyloan you may need to take out for the purchase as well as any other letting costs.

C. Buy property in an area that, based on all the criteria in this book, has excellentmedium-term capital growth prospects.

If you can honestly say that your property investment meets these three criteria, then

you can be pretty certain that you have backed a winner. We’ll look at selectingareas according to positive signs for growth later.

Meanwhile, the big question, of course, is exactly how long is the medium term?Well, whatever anyone might tell you, the truth is that it’s quite simply impossible tosay with any real precision how long you will need to wait for an acceptable return onyour investment.

Naturally enough, this will also depend on what you consider to be an acceptablereturn.

For all the reasons outlined earlier, there certainly will be a series of spikes in theprices of property in these countries – either that, or a gradual and sustained rise inprices in the years following EU entry.

And, in fact, the beauty of this ABC strategy is that the question: ‘how long is themedium term?’ becomes less important. So long as your investment is cash positive,how long you have to wait for the property price spike to kick in is not relevant.

However long the medium term ends up being, you, the investor, are in a fineposition to sit things out. You can hold the property without risk whatever the medium

term turns out to be – two years, or ten years.

4.5 How to ensure your property is cash positive

The ABC strategy sounds simple enough – and it is!

Simple, that is, so long as you take great care over the details of your investment, asI stressed above.

One sure fire way of messing up an investment is to get your sums wrong and leap

in, lured by the promise of fabulous investment returns.




The key factor here is to calculate correctly when deciding whether your property iscash positive. Let’s take a closer look at what this means.

It’s quite true to define it as above – ‘rent to cover any loan you may use to invest aswell as other letting costs’.

But, one of the commonest mistakes investors make is to underestimate the on-goingcosts of maintaining and letting a property.

There is no big secret to getting the sums right so long as you don’t overlook costs.They include:

General maintenance of a property – this can easily turn into a monthly expense,especially if your property is old.

Making allowances for fussy tenants who constantly demand items to be fixed and

which require tradesmen to be called out.

Problems that you could normally deal with quickly and easily yourself, such as faultyboilers, leaking radiators, dripping taps, etc, will require the attention of a skilledtradesman in a managed property.

In your absence you will almost certainly need to have an agency manage your property – i.e. find tenants and monitor the building, etc. Allow for the cost of this.

Tax: bear in mind that your rental income will be taxable.

Legal costs – you may be unlucky enough to find yourself in dispute with tenants. If this happens and you need to take action to evict, you will incur legal costs.

It’s worth making sure you’re reasonably clear about the costs and expense of thisprocess in your selected country before you buy to let.

Your costs – if you plan to visit your property at certain times of year, then allow for the cost of this.

If you plan to keep it clear of renters for a certain number of weeks a year in order to

use the property yourself, again, allow for this and consider it as a cost.

If you’ve re-mortgaged to buy this property, you’ll also need to think about how youintend to approach the matter of currency fluctuations.

Keep in mind that if you borrow in, say, dollars, and your rental income is in another currency, a devaluation of that currency against the dollar will affect your ability toservice your loan. Seems obvious, and it is, but it’s often overlooked.

Of course, this could work the other way around – a rise in value of the foreigncurrency against the dollar would make your loan easier to repay and give you more

surplus income – but there is little value in planning for such happy eventualities!




5. FINANCING YOUR PROPERTY INVESTMENT IN EAST

EUROPE


• How finance leverages your investment (see section 5.1) • Can you borrow against a property in your chosen

country? (see section 5.2) • The effects of re-mortgaging another property (see section

5.3) • Why pay in cash and refinance later? (see section 5.4)

• How much money do you need to invest? (see section 5.5)

When you start to examine where to invest, a key factor is obviously going to befinance.

You have several options to look at:

• Borrow at home/in the country where the property is located• Re-mortgage your existing property• Buy for cash• Invest through a fund – again for cash

5.1 How finance leverages your investment

The great thing about borrowing to invest is that when you make a capital gain youdo it for the most part with someone else’s money!

Borrow money to invest and your percentage gain will be far greater than if you buy a

property all with your own cash.

Here’s how a 70% loan to value mortgage can help you make massive percentagegains when compared to buying for cash.

Let’s assume you buy a property for the equivalent of €100,000.

And the property rises in value by 15% per year.

End of year 1 = €115,000End of year 2 = €132,250

End of year 3 = €152,088




Profit = €52,088 (rounded down)

If you buy for cash you have made a profit of 52% over three years. Not bad.

Now let’s see what happens when you take out a mortgage of 70%.

You invest €30,000

At the end of year 3, your property is worth the same €152,088. And your profit is thesame €52,088.

But, as a percentage of your €30,000 investment, this represents a massive 73%profit spread over three years.

Which rate of return would any sensible investor favour? Not difficult, is it?

5.2 Can you Borrow Against an Eastern Eight Property?

The fact is that most of these markets are not as established for foreign buyers as,say, France or Spain are.

Lenders outside the country where the property is located will often be wary of providing mortgages. In many cases, it will simply be impossible – or not economic –to borrow to buy in your home country.

Things are a little easier in some of the Eastern Eight.

It is very difficult to be categorical about loan availability, but after thorough searchesof what is available, here is a summary…

CountryLoan outside the

countryLoan inside the

country

Czech Rep Possible Possible

Poland Possible Difficult

Hungary Possible DifficultEstonia Highly unlikely

Possible, but difficult if non-resident

Latvia No Possible

Slovakia No Possible

Slovenia Highly unlikely Extreme difficulty

Lithuania No No, unless resident

Lenders will, perhaps not surprisingly, favour the more established markets that atleast sound less risky. These tend to be:






5.4 Pay in cash now – refinance later?

This is traditionally seen as a highly unattractive option for the investor. Here’s why:

Paying in cash

Cost of property €100,000.Buy for cash.One year later property is worth €120,000.

Profit = €20,000.Profit as % of original investment of €100,000 = 20%

Borrowing

Cost of property €100,000Put down €10,000, borrow €90,000One year later property is worth €120,000

Profit = €20,000.Profit as % of original investment of €10,000 = 200%

So, basically, paying in cash when you can borrow is dumb…

…or perhaps not always?

One element of investing in property in the Eastern Eight countries is that it is moreof a gamble, perhaps, than investing in more established property markets.

So, an extra gamble you may be willing to take is that the mortgage market in your country of choice will develop so rapidly in the next two to five years that you can buyfor cash now and mortgage easily in a couple of years time.

This is a distinctly realistic option. Once these countries have settled in to the EU, it

is very likely that the tiny mortgage market will blossom.

And, if it doesn’t and you are unable to re-finance, you still have the capital gain, soyou sell the property and re-invest elsewhere.

Where is likely to develop mortgage markets fastest? This is a tough call, butexamine the Czech Republic, Estonia, Latvia and Poland.




5.5 How much money do I need to invest?

£50,000 per property is definitely realistic for a good investment apartment in a lot of

the Eastern Eight countries.

Even in Prague or similarly expensive capitals, it is possible to pick up reasonablequality property for less than £100,000.

So, the answer to the question of how much you need is the following:

Cost of PropertyCost of Purchase and set up

Less mortgage available (if any)

Working on a conservative estimate of a 50% loan to value mortgage, you wouldneed the following:

In Czech:

£50,000 property£5,000 purchase and set up costs

Less £25,000 mortgage

Therefore, you’ll need £30,000 per property.

Remember, this is just a rough guide and will be greatly influenced by your ability(and desire) to raise finance, but it will help give you a reasonable starting point of what you should be expecting to invest.




6. A TWELVE-STEP PLAN FOR SUCCESSFUL PROPERTY

INVESTING IN THE EASTERN EIGHT

In this chapter you will learn about:

• Legal advice and selecting an estate agent (see sections6.1 and 6.2)

• What to beware of, and your investment goals (seesections 6.3 and 6.4)

• Restoration and Rental Potential (see sections 6.5 and6.6)

• What to check – including local taxes (see sections 6.7 and 6.8 and 6.9) • Funding, using cash and finance to maximise returns (see

sections 6.10 and 6.11 and 6.12)

Let’s now summarise the key steps to succeeding with your East European propertyinvestment.

6.1 One - Legal advice

Whatever else you may decide, do not be tempted to dispense with the services of alawyer. Strictly speaking, you may not need one to actually purchase a property(although I would recommend you employ one).

But at least consult one before you begin the process. If nothing else you will fullyunderstand what is going on.

Unless you are an expert in a country’s property law you will be very rash indeed not

to consult a lawyer who is an expert in this field. Why? Well, read on and theanswers will become pretty obvious.

6.2 Two - Selecting an estate agent

It’s probably fair to say that estate agents or realtors around the world are not themost trusted of professionals. Some of this reputation is, of course, undeserved.But, just as in any country, there will good and bad estate agents in the EasternEight.

The main difference in these markets, however, is twofold.




• First, the property markets have been showing big returns for several yearsnow and further booms are expected

• Second, the markets are still relatively immature

Added to this there is the complication of some corruption in many of the countries.

These factors are going to attract some less-than-desirable operators.

If you do business in a system that depends on a certain amount of corruption tofunction, then such practices can and do rub off on business people. You have beenwarned!

This all adds up to a breeding ground for unscrupulous, get-rich-quick operators whoare only too eager to grab dollars, euros and pounds from any unsuspecting foreigninvestor.

Well, it is, perhaps, not quite so bad as that.

Nevertheless, who you deal with when you decide to buy property is cruciallyimportant.

There are really only guidelines to follow on this, not hard and fast rules that cover allcountries.

Only deal with well-established agencies who have been in business for several

years.Make sure they belong to the professional body governing their business. Do not justtake their word for this. Check.

Insist on meeting other clients of the agency, preferably of the same nationality asyourself.

Make certain an agency’s terms and conditions are completely clear before dealingsbegin – both for buyer AND seller. Get them in writing and make sure they aresigned by both parties.

Make certain that you are reasonably clear about what the buying process involvesbefore you deal with an agency. You will almost always have to pay a commission for buying a property – get the amount in writing.

Be specific about what kind of property you are interested in and make it clear if youare being shown inappropriate properties.

This almost certainly indicates the agency has nothing of the kind you are looking for on its books.

Be wary of ever paying any fees, charges or deposits before signing agreements.




Unless you are very clear about what a contract says, and you fully understand it, geta lawyer to check it. In many of these countries, contracts will be in the language of the country, not in English. I would advise getting a verified translation.

Be wary of being asked to deal in cash, unless you have proper receipts for your

payments.

In some of these countries foreigners are currently not allowed to own land directlyand need to purchase through a company. Beware of any other suggestions to ‘getaround the rules’, unless you fully understand what is taking place.

Shop around – even if you feel comfortable with a particular agent, try others too.

These warnings probably make doing business in the Eastern Eight countries soundlike a nightmare. You will be wise to be wary, but if you proceed with caution, this isnot the case.

The main point is to keep common sense to the fore, do not take anything for granted, and do not expect proceedings to be the same as in the West.

6.3 Three - Beware of what seems too good to be true

Because it probably is just that.

This may seem obvious, but in a trail-blazing market it is easy to get sucked into

believing in unrealistic returns.

It’s also worth bearing in mind that the best investment is sometimes attained byavoiding the herd mentality – in other words, steering clear of what seems to be theeasiest way into a market.

For example, you can look at the market in Prague and see the obvious – that high-end apartments aimed at the corporate market have come down in value.

But examine the market a little more carefully and you can identify another opportunity – properties aimed at the growing middle class.

They may be more difficult to manage, but the returns will almost certainly make itmore worth your while.

6.4 Four - Be clear about your investment goals

It’s important to understand your investment goals in order to assess whether aparticular property is right for you.

For example, if your desire is to generate constant rental income throughout the year,then you may be better off buying an urban property rather than something in aseasonal tourist resort.




6.5 Five - Restoration opportunities

Restoring a property that, although dilapidated, is full of character and original

features, is a great way to get a good return on your investment – provided theproject is carefully planned and managed.

Taking a large property and then dividing it into apartments is one well-tried methodof boosting an investment return.

But before a project like this is undertaken it is vital to have the property properlyassessed by a professional and to be sure of the amount of work you are taking on.

Also make sure that skilled craftsmen are available in the area to carry out thenecessary work. Make sure you inspect their work on other properties.

Get detailed quotes for labour and materials and assessments of how long the jobwill take.

Do all your sums BEFORE you make an offer.

6.6 Six - Rental potential

If you’re relying on rental receipts to fund the purchase of your Eastern European

property, you are going to have to carry out some detailed research beforehand.Anecdotal evidence will simply not do.

Generally speaking, if you need to rely on rental yield before you decide to sell aproperty, then I would recommend that you look towards the major cities.

This is where the consistently high yields are likely to be and, aside from temporarytrend reversals, prices of property in these cities are unlikely in the short to mediumterm to stop rising in value.

In fact, they are the most likely properties to benefit immediately from the various

boost stages we’ve talked about.

Right now, property price inflation in the medium term of around, or well in excess of,15% per annum is not unlikely.

Then again, the downside to buying in the major cities, such as Prague, Budapest,Warsaw and so on, is that prices are already high. These are, to a certain extent,already tried and tested markets for foreigners.

For really big capital gains on your property, you will probably need to consider locations that are a little less discovered.




6.7 Seven - Check before buying

Don’t, whatever else you do, be rushed into buying. Even if you believe you need to

hurry to take advantage before an upward climb in the property price cycle, makesure you don’t act in haste.

And ask the agent to show you which other properties they’ve sold in the immediatearea and for how much.

Visit the property more than once and at different times of day. Check out theneighbours, what kind of people are they? Locals, expats? What kind of profession?What are nearby facilities like? Are there schools, shops, a hospital?

These factors may all be important to give you a flavour of the kind of neighbourhoodyou are in, rather than listening to an estate agent’s selling pitch. And, if you careabout renting, short or long term, then you should consider some of these matters.

6.8 Eight - Understand the tax implications of selling

Before you buy, you must make certain you understand the effects on your tax returnif you sell at a profit. To a certain extent, this will depend on where you are living.

But, if your country of residence does not have a dual tax agreement with the country

you purchase your property in, you could find yourself paying tax twice – once in thecountry you sell in and again in your country of residence.

6.9 Nine - Avoid being the first in an area

Unless you are truly confident you have got all assessments correct, or you are thekind of person who likes to play for higher stakes and does so with calm detachment,I would always try and avoid being ‘the first’.

That is, being the first ex-pat to invest in a particular area or even a type of property.

The object of the exercise here is to be early, but not the very first to arrive at theparty. That is if you want to minimise investment risk.

6.10 Ten – Can you fund it?

If you’re buying to invest – pure investment, or with investment as the purpose aboveall other considerations – it is always best to take a cold hard look at what you canafford before you start looking at properties.




Sure, you may have made a decision about what you want to afford, or can afford,and then, once the hunt begins, you realise that you want to commit more funds toyour investment. That’s fine, if you are still swimming well within your depth.

Do not be tempted to over-extend yourself because you become convinced the

returns, from either capital gains or rental, are pretty much guaranteed. They never are – not even in this exciting market.

6.11 Eleven - Use the power of cash to get a better price

If you’re property hunting with cash in your pocket, make sure you use this to your advantage.

If you are a cash buyer, you are at a huge advantage in any market. You areimmediately massively more attractive as a buyer than nearly all domesticpurchasers.

Why?

Because they will, in nearly all cases, be afflicted by those twin property buyingheadaches:

Finance and a chain.

By that I mean they will be buying with a loan and this will need to be approved for

the property they want to purchase. And they may well have another property to sellbefore they are in a position to go ahead and finance any offer they make on a newplace.

If you have raised capital either from savings, from re-mortgaging your homeproperty, or from a pre-approved loan, then you are a cash buyer. You have nothingto sell and you don’t have to wait for a loan approval.

So, how does this give you an advantage in reality?

It means that, as a foreigner, the Eastern European estate agent will see you coming.

They will know that, if you are a serious buyer, you will have cash to buy. They willoften allow for this by, in a nutshell, jacking up prices.

This can actually be to your advantage because it gives you a pretext to make lowoffers, perhaps 25% below asking price. The seller can always say ‘no’. And youcan always walk away.

Of course, however, you need to use common sense here. If you are negotiating aprice in an area in which you know properties have exchanged for a certain price,you will not get very far if you make a very low offer.

Of course, being a cash buyer can also mean that you are buying with your own cash – completely.




This can make sense if you believe the prospect of re-mortgaging in the future islikely (see section 5.4)

6.12 But use finance to get a better return

Given the choice you should always use a loan to finance your purchase.

Why? Because you will basically be using someone else’s money to make a profit –and the percentage profit on your capital will be considerably higher (see section 5.1)

6.13 Twelve – Cut currency risk by ensuring that your loan andthe income are in the same currency

Euro, dollars or sterling, currency fluctuations are unavoidable.

However, if you know that you’ll fund your property from sterling or a dollar income,through a home re-mortgage, then a sterling or dollar-based loan will avoid anyproblems with changes in currency rates.

You’ll be unaffected by currency fluctuations. Equally, if your property will generatesufficient rental income in euros (or the transaction currency in the country of your investment) to service a loan, then take the loan in euros.

Again, this will avoid any problems with currency fluctuations.

If you are taking a loan to make your investment, there is another distinct advantagein taking out one in the same currency in which you make your purchase. Basically,this way you will be protecting the relative value of your capital investment.

But at the same time you will not be protecting your loan repayments againstcurrency fluctuations.




7. USING THE SNAP SHOT RETURN ANALYSIS

SPREADSHEETS

The purpose of the Snap Shot Return Spreadsheet software is to help you figure outif your potential investment is worth the trouble!

For instance, if your likely investment return is less than the returns you can achievein (say) Manchester or London, then there is no point going through the hassle of aforeign investment, in a foreign currency with a foreign language that you probablydon’t speak?

So, the decision on whether or not to invest in Eastern Europe will depend on thepotential returns and how they compare to the returns that you might achieve back

home, or on the Costa del Sol.In the spreadsheet, this is the 'average yearly growth of investment':

Average yearly growth of investment

In the example (for a property costing 70,000 pounds in Czech, and a 64%mortgage) the spreadsheet shows the following return:

Year 1 2 5 10

Average yearly growth of

investment -15.9% 3.9% 19.6% 19.4%

This means that by the 10th year of owning this property, you will have made anannual cumulative return of 19.4% per year!

To match this return, you would need a bank interest rate of 19.4%! (At the time of writing, you’d be lucky to achieve a quarter of that).

In addition, a rate of 19.4% is perhaps twice the level of return that you might expectfrom a good performing property in the UK.

However, it is based on a number of Key Factors that could increase further or decrease your investment return.




These are:

Key factors affecting your investment Czech Rep

Mortgage amount 45,000

Estimated property price growth 12.50%Estimated rental gross yield 10.00%Mortgage interest rate 10.00%Inflation rate 1.00%Gross Rental Income growth rate 3.00%Maximum (potential) currency devaluation 15.00%

For instance, if you were to increase the size of your mortgage, then the annual rate

of return after 10 years would increase to 20.6% simply by taking a 70% mortgageinstead of the example 64% mortgage.

Equally, you can increase or decrease your projected returns by adjusting theproperty price growth, the rental yield or any other figures.

Assuming that you manage to forecast these basic property items reasonablyaccurately, then the biggest two risks to achieving your projected return are:

• Potential Currency devaluation

and

• Mortgage Interest Rate rises

Let’s have a look at these in turn:

7.1.1 Evaluating potential currency devaluation

If you ever decide to repatriate your investment from the local currency to your owncurrency (whether that is £ Pounds, € Euros or US$ Dollars) you may find that thelocal currency has devalued.

If so, then the ‘value’ of your investment will fall.

Of course, if you intend to never return your investment back to your original currencythen you have a zero risk and can enter 0% for in cell B26.

Maximum (potential) currency devaluation 15.00%






7.2 Opening and using the Snap Shot Returns Calculator

Opening your spreadsheet software

There are different spreadsheets depending on your computer software.

Essentially,

If your PC runs Microsoft Excel thenClick here to open the Snap Shot Returns Calculator

If your PC runs Microsoft Works thenClick here to open the Snap Shot Returns Calculator

If you have problems opening or using the spreadsheets or any other parts of your Property Secrets e-book, there is a comprehensive help section online at thefollowing address:

www.propertysecrets.net/faq

7.2.1 Opening the Spreadsheets on an Apple Mac

According to Apple's website www.apple.com/appleworks/

the latest version of Appleworks software should be able to read Microsoft Excelspreadsheets.

If you have Appleworks 6.04 then there is a small file to download to upgrade it toaccept Excel files at:

www.apple.com/appleworks/update/,

instructions are on the web page.

If you have an earlier version of Appleworks (6.0 or 6.03) then please go to:

www.info.apple.com/usen/appleworks to upgrade to Appleworks 6.04, then use theabove link (www.apple.com/appleworks/update/) to upgrade to Appleworks 6.1 first.

It seems a little complex - but all the info is on Apple's support page for Appleworks.At the time of writing, the upgrades are free.

http://spreadsheets/snapshot_return_excel.xls


http://spreadsheets/snapshot_return_works.wks


http://www.propertysecrets.net/faq


http://www.apple.com/appleworks/


http://www.apple.com/appleworks/update/


http://www.info.apple.com/usen/appleworks/






http://www.info.apple.com/usen/appleworks/







7.2.2 Sourcing rental yields and property price growth figures

Speak to your local estate agent to estimate rental yields and potential property price

growth figures.

However, failing this, use the estimates as set out below in section 8.1.




8. IN WHICH COUNTRY SHOULD YOU INVEST?


• How to compare the Tax, Finance and Legal position of each property market (see section 8.1)

• How to compare the Property Buying Costs and PropertyMarket Potential of each property market (see section 8.2)

• How to compare the country risk and economics of eachcountry (see section 8.3)

• How to view the different East European countries (seesection 8.5)

My intention in the following chapters is to provide you with the tools to make your own decision. In other words, an investment guide that explains something abouteach country as well as its attractions and its drawbacks or risks from an investmentviewpoint.

There are many other considerations you could or should take into accountdepending on your personal investment profile.

What each country section will do, however, is include an investment summary, or verdict.

These verdicts are based on various data sources and the opinions andassessments of specialists in the field.

They are intended to be thumbnail investment verdicts and should be treated as aguide only. And, after all, you may reach a completely different conclusion – and youmay well be right to do so. Sometimes there is no substitute for a good old hunchabout an investment.

What is important is to know what you’re getting into before you make a decision.

What you really do want to avoid is finding yourself in the position where you areabout to take a plunge into a high-risk investment without realising it, or all thepossible consequences.




8.1 Country by country comparison - Tax, Finance and Legal

Finance available

Country Capital Gains Tax on rentNeed for company Locally

Outsidecountry

Comprehensivedouble tax

treaties

Czech R 28% 31% Yes Yes Yes Yes

Hungary

Individual - 20%Company - 18%

plus 20%dividend tax

18%+20%

Notessential,but good

idea

Yes Yes Yes

Poland19%, 30%

or 40%19%, 30%

or 40%No Yes Yes Yes

Estonia 26% 26% No Yes No Yes

Lithuania 15% 15% No No No Yes

Latvia 0% * 25% No Yes No Yes

Slovakia 19% 19%No if EUcitizen

Yes No Yes

Slovenia 30%

25% if throughcompany -

otherwise up to50%

NoYes with

ext.difficulty

No Yes

* If property is bought by an individual and held for 12 months or more




8.2 Country by country comparison - Property buying costs and potential

Estate Agent FeesCountry

Stamp duty/Transfer tax Buyer Seller

Projectper

Czech R 1% Usually nothing 3 to 8% Doub

Hungary 10% 3% + 3% +

Poland 5% 2 to 3% 2 to 3% Doub

Estonia 0.075% of sale price 4 to 6% 4 to 6% 1

Lithuania 1-3% Usually nothing 3% 5

Latvia 0.5%-3% Usually nothing 3 to 5% 1

Slovakia 3% Usually nothing 3 to 5% 1

Slovenia5%+20% VAT on new

properties3 to 6% 3 to 6% 10% (in








That, of course, does not necessarily give them the best property investmentpotential. Slovenia, for example, is not, as we shall see, especially attractive asan investment.

There is also a tendency to group together the three Baltic countries – Latvia,

Estonia and Lithuania.

8.5.2 The second-tier countries

I view the second tier of countries as Slovakia, Poland and Estonia.

These three have had specific problems relating to adapting their economies tothe EU. Estonia, however, probably holds the most promise as it is developing areputation as a banking and finance centre.

8.5.3 The third-tier countries

Lithuania and Latvia, by just about any economic measure, trail the other countries. They, too, however, have their strengths for the investor, especiallyLatvia.

And, of course, the fact that they are not as far along the path of reform as theother six countries, does make them more attractive for the investor who is lessrisk-averse.




9. THE CZECH REPUBLIC – AN ESTABLISHED

INVESTMENT TARGET

To many people, the Czech Republic is the most familiar of the Eastern Eight.This is probably largely due to the fact that Prague has long been a ‘must see’European destination – especially over the last ten years or so, for Americanvisitors to Europe.

And certainly Czech nationals are keen to embrace the outside world in the formof the European Union, if their response to the referendum on EU accession isanything to go by.

A massive 77% of voters backed membership of the EU in a referendum in June2003, with a mere 23% voting against.

The Czech Republic is positioned more or less in the centre of Europe, withGermany in the west, Slovakia to the east, Austria to the south and Poland to thenorth.




The country’s population of around ten million is centred mainly around thecountry’s five largest cities, with the capital Prague, being home to more than onein ten Czech citizens.

9.1 Czech - Business & Economic Overview

• The so-called Velvet Revolution (no one died), in 1989 led to the collapseof the communist government of Czechoslovakia and democratic electionsin December, 1989

• The Czech Republic formed after peaceful breakaway from Slovakia in1993

• The country is a parliamentary democracy. The executive and legislativearms are separate from the courts

• The Prime Minister holds the greatest political power. Government

executive power is through the Cabinet, appointed by the PM through thePresident• A proportional representation voting system operates

9.1.1 Country profile - Key data

Population 10.2 million

Land mass 79,000 sq kms

Capital city PragueBorders Germany, Poland, Austria, SlovakiaClimate Temperate, with cool summers and

cold, humid winters.Notes No coast.

Air and water pollution in areas of northwest Bohemia.Certain areas liable to flooding.






Main sectors

Transport and communications (49 %)

Manufacturing industry (20.2 %) of which car-making was 15.3 %,

Metal products (15.2 %)

Food processing (12.1 %)

Financial sector (14.8 %)

Real estate(6.8 %).

Source: Dredsner Bank

9.1.3 Labour costs and spending power

Within the industry and services sectors, average annual earnings per personare: €5,148. (2003)

The cost of labour is, of course, different to the salaries of those employed.Here’s a look at the costs:

Hourly labour cost inindustry and services

€3.90

Pre-2004 EU member states’ average

€22.19

Monthly labour cost per employee

€590

Pre-2004 EU member states’ average

€3,169

Source: Eurostat

These measures of wage costs per hour and per week starkly reveal just how far a country like the Czech Republic has to go before catching up with the wage

levels of the more established EU members.

If the hourly wage rate rose at an annual rate of 6%, it would take 30 years for the Czech worker to reach his fellow worker’s average in the pre-2004 EU-15 –and that supposes salaries within those 15 countries will remain static!

9.1.4 Currency policy

The government’s currency policy was turned on its head in 1997 when thecountry was hit by a crisis of confidence that did great damage to the Czech

Republic’s reputation as a model of stability amongst the post-Communist states.




In 1996 the country’s current account deficit reached nearly 8% of GDP. Thecurrency crisis in May the following year was the result.

Investors feared such a shortfall could lead to financial collapse.

The Czech government, in a repeat of the UK government’s ultimately futileattempts to bolster its currency against the market trend in 1992, spent around$3 billion trying to support its currency against a huge sell off.

The current account deficit was basically fuelled by higher wage demands notbeing supported by increased productivity and exports.

In reaction, the government introduced a tough programme of spending cuts,slashing its budget by 2.5% of GDP.

The Czech government’s policy for the koruna then has virtually turned full circle

since 1993.

Then, it was linked to a basket of currencies, but with the German Mark and theUS Dollar weighted the heaviest.

Initially, the currency was allowed to move within a range of plus or minus 0.5%before the Czech Central bank intervened. This was widened to 0.75% in 1996.

Following the currency crisis of 1997, the Central Bank allowed the currency tofloat freely.

Since then, apart from blips, the currency has appreciated strongly, showinggains of almost 10% in 2001.

During most of 2003, for instance, the koruna hovered around 31.5 to the €.

Stability has returned.

9.1.5 Economic overview

The Czech Republic is, by any standard, one of the most successful of theaccession countries.

It has thoroughly shaken off the shackles of the communist era and, in manyregards, has a thriving free market economy.

Foreign direct investment doubled between 2000 and 2002.

It is certainly one of the most successful of the accession countries in attractingforeign direct investment (FDI).

More than 99,000 Czech companies are now supported by foreign money andsince 1990 almost $36 billion of FDI has been registered.




According to Czech Invest, the organisation that promotes foreign investment inthe country, foreign-backed companies now:

• Produce 72% of all Czech manufactured exports

• Directly employ 359,000 people in the Czech Republic

• Provide contracts for an estimated 10,000 Czech suppliers in themanufacturing and service sectors and a minimum of 600,000 jobs in localsupplier companies – around 10% of the entire employed labour force

The country can be regarded as one of the most stable of the Eastern Eight,economically and politically.

The economy is still in recovery mode after being hit by recession in around mid-1999.

Strong privatisation programmes are underway in the banking, telecoms andenergy fields, which should encourage increased foreign investment over thenext several years.

Reforms already undertaken and underway, as well as investment incentives,have attracted large amounts of foreign investment to make The Czech Republicone of the leading recipients of foreign money among the Eastern Eight.

Economic growth has been around 3% over the past few years.

9.1.6 Problem areas for the economy – what to look out for

A high government-spending deficit remains a cause for concern and will requiretough measures.

The country’s current account deficit has averaged around 5% for several years.This figure can rise to 7.3% depending on how it is calculated, according to theOECD.

Either way, it is far too high. And this was the main reason for the currency crisisof 1997.

Big government deficits and borrowing requirements are undoubtedly going to beTHE BIG issue for many of the Eastern Eight countries in the next few years.

Those hoping to be early entrants into the Eurozone will have to meet strict fiscalrequirements, so tough decisions will have to be made, many of which will bepolitically unpopular.

But those countries that do face this problem with real determination willundoubtedly be seen as far more attractive investment locations for big business.




And that also makes them the best places for the individual property investor inthe medium to long term.

Unemployment is still relatively high, but is falling. Increased job creation should

result from inward investment following EU accession.

The OECD identifies a growing divide between the FDI-fuelled section of theeconomy, which has boomed, and the lacklustre performance of domesticallydriven growth.

In other words, there are still a lot of poorly performing industries from the state-supported era.

The OECD, in its 2003 report on the country, warns that the government mustguard against the creation of private monopolies. It cites energy and telecoms

and suggests these should be fully opened to competition because consumer prices are too high.

The same report also highlights the fact that taxes are considerably higher thanin other comparable countries. This hampers incentive for businesses to investand grow.

9.1.7 How open is the economy?

The US Heritage Foundation, in its Index of Economic Freedom for 2003, uses alarge number of measures to assess the openness of countries’ economiesaround the world.

It gives the Czech Republic a score of 2.5 (the lower the score the more free andopen the economy).

For comparison, the USA receives a score of 1.80 and the UK 1.85.

Hong Kong is ranked the freest economy in the world with a score of 1.45.

The Czech Republic’s score means its economy is far from open, but, even soit’s not bad for a country that only a decade or so ago had a centrally planned,communist-run economy.

Its ranking places it in fourth position amongst the Eastern Eight.

9.1.8 Does corruption affect the country?

Corruption and perceived corruption is a persistent problem in Eastern Europe. Itis often not a subject the authorities like to address or acknowledge.






The domestic mortgage market is worth around $5.1 billion – double its value in2000.

Key Tip

Around €2.7 billion was advanced by Czech banks for mortgage loansin the first half of 2003. This compares with €1.96 billion for the sameperiod in 2002.

That’s a staggering rise of 38%!

This tells you a great deal about what is and what will be fuelling themarket in Prague for some time.

Rent levels in desirable, central areas of Prague vary between around €12 and €15 per sqmetre, per month. Other districts vary from around €5 to €10 per sqmetre, per month.

The yield on residential investment should be between around 9% and 10.5%.

And, as a rough guide, the costs of buying an apartment in the centre of the citywill cost between €1,800 per sqmetre and €2,343.Outside of the centre, expect to pay between €1,250 and €2,343 per squaremetre.

9.2.1 Drawbacks to buying property in the Czech Republic

One problem with investing in the Czech property market is connected directly tothe system of registering a sale.

The fact that this process is so slow is cited again and again as a major problem.

In effect, it means that a property sale process from start to finish can take as

long as six months, simply because a sale is not complete until it is formallyregistered.

An official copy of the register showing the official owner of a property is the onlyrecognised method of ownership proof.

Without such a copy, not only is a sale considered incomplete, but, of course, are-sale is problematic. Obtaining insurance can also be difficult without proof of ownership.




9.2.2 Domestic driving force

Most experts believe that property demand will be driven as much by Czechs as

by foreign cash – in fact, far more so in the years ahead (see Investment Verdict,section 9.5)

Therefore, it is mortgage-borrowing rates and the spending power of Czechcitizens that will have the greatest effect on property price increases in themedium term.

The greatest demand for property following the collapse of communism camefrom the commercial sector – offices, mainly. Residential demand, where itexisted, was hardly catered for at all.

The average Czech would only have dreamed of owning their own propertyanyway. The reality was for foreigners and the very affluent few.

Now, the supply of commercial property has met and probably exceeded demand – this is why office rents have been falling for a few years now (see section9.2.3).

And, the fact is, that despite the huge increase in mortgage lending, which seemsset to grow even faster (so long as lending interest rates remain affordable),around 90% of Czechs still live in government-subsidised accommodation.

Key Tip

There is massive pent-up demand in the domestic market that will onlygrow as the country becomes more affluent through increased foreigninvestment and access to markets through the EU.

This is why such economic barometers as unemployment rates – or, more

importantly, employment levels (the two don’t always go together) – governmentspending levels and interest rates are so important.

Sustainable government spending levels, falling unemployment levels, a risingnumber of people in work, and low interest rates, help not only to create a pro-business environment but also a knock-on effect on demand for property andtherefore property prices.

They also create that all-important feel-good factor.






9.2.4 Czech investment verdict and tips

New builds, especially in Prague are continuing rapidly.

Construction in the country leapt by 9% year-on-year in the nine months toOctober 2003 as the building of some 27,199 new homes was underway,according to the Czech Statistical Office.

Of these, 13,000 were family houses, 25% more than the previous year.

In the third quarter alone, housing construction rose by 16.8%.

The increase is being fuelled by cheap mortgages, higher wages and a relativelynew aspirational attitude among the Czech people.

This kind of building programme must eventually lead to some kind of equilibriumbetween supply and demand, and probably an over-supply, just as hashappened in the office space sector.

And this has already happened to a limited extent at the top end of the residentialmarket.

9.2.5 Over-supply presents a buyer’s opportunity

But over-supply can mean two things for the investor, one relevant for investingnow and the second for investing later.

Bear in mind that the classic cycle from base of circle to peak that has beenwidely noted in property markets around the world is usually about seven years.

If we are considering investing now and we predict over-supply in the immediate,short and medium term, we can expect buyers to become more choosey.

Therefore, invest in good quality properties in up-and-coming areas.

But either wait a little until prices start to fall, or make offers well below thecurrently inflated asking prices.

Certainly, you need to be aware that a large percentage will be added onto anyrealistic asking price of a property in Prague, especially at the upper end of themarket.




Key Tip

You should make offers on apartments at around 20% below askingprice and on houses, around 10% less.

These properties may take a hit if there is a price correction, but, ultimately, theywill prove to be the best investment.

Prices at this end of the market have risen by double digits a year for severalyears now, and in many cases by over 100% in a year.

But bear in mind that rentals on properties at the very top of the market (the €2,000 to €5,000 per month bracket) have started to fall by big numbers – more

than 50% in some cases.

Such falls in rent must soon have a big effect on purchase prices.

When this happens it will present a great buying opportunity because, long term,such luxury properties (as in pretty much any capital city in Western Europe) willprove to be great investments.

9.2.6 Prestige properties in prestige areas away from the centre

Key Tip

The investment focus will become even more intensely trained onquality residential homes in prestigious areas.

In its 2003 market report, Colliers International notes a growing trend of companies moving away from the most central locations in Prague. In 2002,

Prague 4 was the most popular destination of choice.

Such decisions are clearly influenced by available infrastructure and, especially,Metro links.

Good quality residential properties in these non-central areas that are well servedby transport and other facilities are therefore a good tip for investment.




9.2.7 Falling yields for offices – more residential property

A huge influx of businesses demanding offices drove up prices in Prague

throughout the nineties. Institutional money, coming from investment funds,especially German-based ones, pushed up demand even higher.

This led to huge numbers of offices and business premises being built or converted from residential buildings.

The result of this is over-supply. The result of this over-supply is falling yields.

This, of course, will even out in the longer term as market forces play their part,but in the medium term there are likely to be many properties that are far morevaluable to their owners as residential units.

The start of the trend to re-convert old buildings back into residential unitspresents a useful opportunity for the smart residential investor.

Converting these properties into high-end luxury apartments is likely to prove anexcellent investment.

Apartments in renovated buildings in prestigious Vinohrady are now fetching from €1,875 to €2,187 per square metre.

This is the kind of investment recommended by many estate agents.

According to one estate agent, the Prague market has never ceased to surprisewith its ever-upward prices … and it’s likely to continue to do so.

“When apartments first came on to the private market in the early nineties, prices started at around €312 per square metre.Nobody expected such property at these prices to sell. But they did.”

9.2.8 Target property that Czechs will buy or rent

A winning strategy is to target property that Czechs can afford.

The rise of a young, relatively affluent middle class will have a marked andsignificant effect on the housing market.

This younger generation, multi-lingual and employed perhaps in a new industryor in the service sector, will have an increasing amount of disposable income andrising aspirations to match.

They will be one of the two engines driving the residential property market.




The second engine will be the low quality of current housing stock and theinability of new builds to keep up with demand.

One estimate, this one from the Czech Statistical Office, says that for demand atits current level to be met means 50,000 new homes need to enter the market in

Prague every year until 2010.

In the first nine months of 2003, according to the Statistical Office, buildersstarted work on just 27,199 new homes

The proportion of income spent by Czechs in the private property market isaround 30%, equivalent to private renters and buyers in the pre-2004 EU 15. Inmany cases, the percentage is higher.

This demonstrates a willingness to commit to property as a major personalinvestment in a way that is common in the West, but certainly not so in the recent

past in these former communist countries.

Small, modern properties – usually flats – that are affordable by the averagemiddle-class Czech are therefore likely to be great investments over the next fewyears. These are the kind of properties that will rent for below €600 per month.

And these are the properties that affluent Czechs are now starting to buy off-planin big numbers.

Here are some figures reported in the Prague Post:

Korunni Dvur Prague 2-Vinohrady 250 flatsConstruction not yet started, 40% sold.

• Podbaba Prague 6-Dejvice 700 flatsConstruction not yet started, 50% of thefirst group of 230 flats sold.

• Podvinny mlyn Prague 9-Vysocany 345 flatsConstruction not yet started, 85% sold.

• Andel City Prague 5-Smichov 106 flatsConstruction not yet started, 20% sold.

Many experts believe further price growth in the market is inevitable and thatdouble-digit figures will be achieved certainly over the next couple of years,possibly around the 20% mark.

Beyond that, double-digit growth is still anticipated, but a lot less, perhaps up toaround 10% to15%.

So, target new properties priced between €60,000 and €100,000.




Here’s an example of the kind of development that is being snapped up bydomestic buyers and will make an excellent investment.

These apartments Podbaba in Prague 6, are a construction project managed byICKM Real Estate and being sold through Lexxus. They represent modern

Italian chic at prices that are affordable to the burgeoning young Czech middleclass.

More information on this development at www4.podbaba.cz

9.2.9 Dismiss the EU factor at your peril

We’ve already talked about how people who say the EU has already been

factored into property prices are missing the point.

And this is especially so in the Czech Republic and other countries that willmaintain property-buying restrictions on foreigners even now that they’re part of the EU.

While it’s true that the restrictions are fairly easily circumvented (you set up acompany and buy the property through it), this process is still off-puttingcompared to a country in which you can walk straight in and buy whatever youlike without such hassles.

When this restriction is lifted, it will undoubtedly provide a big fillip to residentialproperty demand in Prague – and elsewhere.

http://www4.podbaba.cz/en/index.do?popup=true






But this factor is not all.

Despite its current account difficulties and the difficult round of public spendingcuts that have to be faced, The Czech Republic must surely be one of the

favourites to enter the Eurozone at the earliest opportunity.

So, combine these two factors and you have a complete lifting of restrictions onEU citizens buying property in the country as well as – for a majority of the EUcountries - a common currency.

In other words – no, you haven’t missed the boat, and, yes, now is a great time toinvest.

Cushman & Wakefield Healey & Baker, notes in its report, European citiesmonitor 2002 , that:

“Investing now may well be a wise move: while currently thecapitals of the three countries (Poland, Hungary and the CzechRepublic) are not among the most attractive European locationsfor business, recent research suggests that over the next fiveyears Warsaw can expect the greatest influx of companies inEurope and that Budapest and Prague are also part of companies’ expansion plans.”

9.2.10 Here’s a potted investment guide for Prague:

Prague 1 – the city centre. Anything from neo-gothic villas to modernpenthouses will sell rapidly here. Property is very difficult to find, however, andexpensive.

Mala Strana and the historical areas are the most sought-after. Prices arecomparable with those of many other big Western cities.

Prague 2 – this is a high-end, sought-after residential area with easy access to

the centre of the city.

The Vinohrady area in particular is in demand and has become a trendy areapopular for singles and the young.

Plenty of companies have also moved into this area creating a mix of businessand residential.

Prague 4, 5 and 6 – these are the high-end residential areas, popular withfamilies, and especially Prague 10. The international schools are also locatedhere. Prices are as high, if not higher, than comparable Western capitals.

Prague is unlikely to see huge price rises in the near term.




Steady growth is far more likely as the market reaches a more mature level.

The lifting of all restrictions on citizens of other EU countries buying property in theCzech Republic, however, is likely to see a boost to the more expensive end of the

market, as more investors move in.

Key Tip

Many investors will see Prague and perhaps later the Czech Republicas a whole as one of the gateway countries to property investment inthis region.

This is another reason why its remarkable price gains will continue inthe medium term.

It offers a sense of relative security from a fairly developed, confident economy,reasonably well-adjusted to a market forces environment.

So long as this is the case, business will be attracted to this centrally locatedcapital with its highly educated and still cheap workforce. And, in that case,property prices will rise.

But there is – and there increasingly will be – more to the country than Prague….

9.2.11 The spill-over effect – look outside Prague

Another possibility for the buyer is to end the foreign investor’s fixation withPrague.

For a long time now, property in the Czech Republic has meant only the capitalcity to the private buyer.

But it’s inevitable that as the country develops and becomes more affluent, other centres, both for tourism and commerce, will grow.

For this reason, the country’s second city, Brno, is a great bet for propertyinvestment.

The city has a lot going for it – excellent infrastructure, it’s attractive, and it’s lotscheaper than Prague – around one third of the price.

Not only this, but the city’s administration is hungry to get its hands on more FDI – and, more importantly, they’re active in trying to do so.




Vitally, as discussed earlier, they’re not sitting back and waiting for the attractionof cheap labour to lure investors. They are busy establishing the city as a centrefor business parks, academic research and cutting-edge industries.

The city is also selling itself as being in the centre of Europe – and it is.

Here are some facts about the city. It is:

• The country’s second-largest city with a population of just under 400,000 –200,000 are economically active, i.e., working

• The industrial and business capital of South Moravia

• Well on its way to becoming an important educational centre in CentralEurope for science and research. It is the second-largest centre for university education in the country with six state universities and 29faculties.

In its capacity as the highest receiver of FDI per capita, the Czech Republic willinevitably draw investors to new opportunities within its borders.

From an FDI perspective, the country is so heavily Prague-focused that there isgreat opportunity here for the early-bird real estate buyer – a near basement-level opportunity in a relatively secure, stable and yet still burgeoning economy.

No doubt Brno will not be the last major city in the Czech Republic to steal some

of Prague’s thunder, but it is likely to be the first.

9.2.12 …and beyond

And after Brno? Well there are other exciting investment opportunities in thecountry’s larger cities.

Undoubtedly, the country’s growing middle class will focus on Prague first, but,as greater affluence becomes more widespread, so too will the benefits form aripple away from the capital.

The Czech Republic’s third city, Ostrava, is also a good candidate for theinvestor who is a little more interested in basement-level opportunity than inplaying safe.

Ostrava’s big selling point is that it can serve as a distribution centre for Polandand Slovakia.

Over the medium term (five to eight years), these secondary cities may wellprove to be the best investment opportunity in the whole region.




Key Tip

In the Czech Republic, consider more than just Prague.

9.2.13 The peace dividend

Like many of the Eastern Eight, The Czech Republic has a significant militarylegacy from the communist era.

This legacy is now being put to more constructive use, however, as big effortsare being made to transform former military bases into valuable constructiondevelopments and infrastructure.

Again, this is a great opportunity for the property investor.

Some of these projects are on a very large scale and have the potential to put apreviously anonymous area on the map.

Buying property in such an area before it takes off is potentially a greatopportunity.

For example, there are advanced plans to turn the abandoned military airfield in

Hradec Kralove into an international airport for small planes.The abandoned military airfield, a mere 60 miles east of Prague, could turn intoone of the biggest development projects in this part of the country.

And it is just one site of many that are likely to come to life in the next few years.

Over the past decade, the government has abandoned military bases all over thecountry. When the land was first offered to other government bodies, no onewas interested. Towns and cities neighbouring the bases, however, snapped upthe free real estate.

The land in total is estimated to be worth around €62 million.

Besides Hradec Kralove, the other towns to take advantage of the land windfallare: Vimperk, South Bohemia; Rokycany, West Bohemia; Louny, North Bohemia;and Hodonin, South Moravia.




Military might….

Location What’s there What’s planned

Hradec Kralove

Military air base,

barracks andassorted buildings

An international airport

Aviation museumCommercial zone

Rokycany23 hectares of landand barracks

Split into two areas - onewill be residential andcommercial, one industrial

Louny35 hectares of landand barracks

Divide into three zones:one commercial and tworesidential

Vimperk

Barracks,recreationalbuilding, warehouseand water station

Create a commercial zoneplus a large recreation

area for ski and bike trails

Hodonin Barracks Not yet known

Source: Prague Post

The comments of local officials about the kind of developments that are plannedare interesting and show the forward-thinking, investor-friendly minded approachthat is attractive to anyone thinking of investing in property.

All are looking for the projects to attract foreign investment.

The mayor of Louny, Jan Kerner, sees three development areas emerging fromthe old barracks there – a business area, a central residential area made up of apartments as well as family-style houses in the eastern part.

He expects the site’s proximity to Prague 6 will appeal to commuters looking for accommodation outside of the city.

"This part of town will also be close to Louny's industrial zone, where in the

upcoming years about 1,500 new jobs will be created by foreign investors."1

hesays.

Hradec Kralove Mayor Oldrich Vlasak sees the airport within a transport networkthat will ultimately make the town much more attractive to “international high-technology and medical firms.”

“Right now the airport will be a supplement to transportation options," Malir said.

1 Mr Kerner was speaking to The Prague Post




"It will gain in significance after the D11 highway connecting Hradec toPodebrady is completed [in 2006]. Investors will find the completion of theseprojects very important."

Vlasak sees the airport as a destination for low-budget commercial jets.

Ultimately, though, the private contractor the town leases the airport to will decideits use. (See note 2 below.)

All these areas offer very exciting prospects for the investor willing to look outsideof the relative security of the Prague market.

9.3 Czech - How the Property Market Works

The first thing any foreigner wanting to buy a Czech property should note is …they can’t.

Well, that is, they can’t buy property directly.

In order to protect the ownership of land from a foreign invasion following thecollapse of the socialist government, restrictions were introduced.

In practice, while these restrictions are still very much in force, they are moreirksome than a real hindrance for the foreign buyer.

9.3.1 How to buy property in the Czech Republic

Non Czech residents can only buy property by setting up a Czech company.

This process is quite simple although it cannot be done without legal advice andexpertise, so a lawyer will be needed.

Forming a company and having it registered takes around two months and willcost between €1,000 and €2,000.

There are basically two ways of buying and holding real estate.

Limited Companies

A limited liability company can be set up by one or more resident or non-residents, whether they are another company or individuals.

There is a minimum amount of capital that must be invested, however – but thisis a mere $8,000.

2 Mr Vlasak was talking to The Prague Post




Joint Stock Company

A joint stock company is another option. This may be founded by one founder if that founder is a legal entity, otherwise it must be set up by two or more people.

A joint stock company has a minimum share capital of $80,000.

It is quite common to hold Czech property investment companies from overseas,but it is important to check that the jurisdiction in which the company is held is themost tax efficient.

Key Tip

It is definitely worth paying for the services of a specialist accountantto check the implications of the way you choose to hold your property.

Holland has traditionally been a favourite jurisdiction because of a favourabledouble taxation arrangement with the Czech Republic. Luxembourg is another possibility.

But didn’t this restriction disappear with entry to the EU?

The answer to this one is Yes…and No.

Yes, it will disappear eventually, but the Czechs, along with several other accession countries are sensitive about foreign money pouring across their border and buying up all their land and property.

As a result, they have negotiated a deal with the EU that allows the restrictionson foreigners – including EU citizens – buying second homes to stay in place for five years following membership of the EU.

Other rules apply to the purchase of agricultural land.

9.3.2 What about taxes?

The seller must pay a property transfer tax of 1%.

If the seller does not pay this tax for any reason, the buyer becomes responsiblefor doing so.

Rental income is subject to tax at the corporate rate and the same rate applies tocapital gains if a company formed to hold the property sells it.




There are many items that can be offset against this cost, such as interestcharges and wear and tear, as well as the cost of furnishing, etc, of your property.

The sale of land carries no VAT. And the same is true of the sale of buildings if

they are sold after two years of ownership. Otherwise they are subject to astandard VAT charge of 5%.

There are no restrictions on repatriating profits.

Here’s a summary of all the relevant taxes a property investor needs to knowabout (obviously these are subject to change by the legislature):

Tax Details

Corporate income 31%Personal income 15% -32%

Value Added 5% on services / 22% on goods

Property taxVaries depending on the type of property, itslocation and its use.

Property transfer tax 1%Inheritance and gifttax

From 7% to 40% for unrelated inheritors

Czech residents are taxed on their worldwide income, while Czech non-taxresidents are taxed only on their income from Czech sources.

To be defined as tax resident you will fall into one of two categories:

• Have a permanent address in the country, one in which you intend to livepermanently and live at this address for at least 183 days per year.

• Be a legal entity, such as a business registered and based in the CzechRepublic (not a branch of a business).

Corporate tax

This is what you will pay if you are a foreigner who buys property by setting up acompany.

Corporate tax is levied on income worldwide for companies based in the country.

Foreign or offshore companies pay tax only on income generated in the country.For 2003 the rate was 31%. It fell to 28% in 2004.




This is the rate of tax payable on any capital gain made on the propertyregardless of how long it has been owned.

This is one big disadvantage of owning a property through the establishment of acompany – individuals are given special discounts over time on capital gains.

Value added tax

This is imposed on what are called ‘taxable supplies’. These include: the supplyof services, delivery of goods, the transfer of real estate, buildings and structures.

All taxpayers, both individuals and companies, who have a turnover of more thanthe equivalent of $91,000 must register for VAT with the authorities.

Annual property tax

This tax is made up of two parts – land and buildings. Property or real estate taxis usually paid yearly by the registered owner of land or buildings.

Every taxpayer must file a tax return by 31 January of each year. The taxperiod is a calendar year.

Tax on land that has planning permission is a trifling CZK 1 per square metre.

Building tax is based on the registered ground area of the building.This works out as:

• CZK1, CZK5 or CZK10 per sqmetre for buildings used for business;

• CZK 1, CZK3 or CZK4 per sqmetre for residential buildings;

• In urban areas both these taxes are multiplied by a coefficient set by localauthorities. In the Czech Republic’s second city, Brno, for example, it is3.5.

Property transfer tax

Transfer tax was a minimal 1% as of January 1, 2004 payable by the seller ,although the buyer is the guarantor.

Inheritance and gift taxes

These are payable on property. It makes no difference whether the inheritor of receiver of the gift is resident outside the Czech Republic, they are still liable.




If a property is given, as a gift, to a non-resident, the resident/giver is liable to paythe gift tax.

9.3.3 Restitution status

As with all previously communist-run countries, there are issues in the CzechRepublic regarding the restitution of property and other items to their original andrightful owners.

These issues relate both to the communist era and to WW2.

The country introduced property restitution laws after the fall of communism.These first laws were mainly concerned with private property, farms and land aswell as religious buildings and works of art all relating to the period 1948 to 1989.

Later, this was extended to goods and property seized from 1938.

People claiming private property must be Czech nationals.

Anyone buying an old property now, however, is unlikely to be affected byrestitution claims.

Key Tip

The Czech government maintains that it has settled virtually all claimson private property.

Large parcels of land and many buildings claimed by the Roman Catholic Churchas well as other religious groups are still the subject of restitution claims,however.

This is likely to be the case for several years.

To give an idea of the scale, the Catholic Church is claiming ownership of 700buildings and 175,000 hectares of land.

Local authorities will know if a building is the subject of a claim.

While it is unlikely that the individual property investor will be affected by claimsof restitution, it is as well to bear it in mind when considering properties for purchase that may , possibly, fall into this category.




9.4 Czech - Property FinanceFinance is fairly easily available for property purchase in the Czech Republic.

Once you have established a company, loans of up to 70% of the value of aproperty (the lender’s valuation), are available at competitive interest rates,comparable with the West.

Loans are also likely to become increasingly available outside the country (seesection 5.2)

9.5 Czech - Investment Verdict

• One of the most stable of the eight countries to invest in.

• Returns may be less spectacular than elsewhere because the market hasbeen growing rapidly for some years.

• A safety first, good growth second investment location but still withexcellent returns, surely well into double-digit growth annually.

• Currently, rental yields of 10% to 15% can be expected, which is highlyattractive.

• In addition, the Czech Republic now has one of the lowest propertytransfer taxes of all the Eastern Eight countries by just 1%.

9.6 Czech - Links:

9.6.1 Government links

Site URL

Czech Statistical Office (CZSO) www.czso.cz/

Macroeconomic Analyses of theMinistry of Finance

www.mfcr.cz/

Czech National Bank www.cnb.cz/

Tradelinks www.tradelinks.cz/

http://www.czso.cz/

http://www.czso.cz/

http://www.czso.cz/

http://www.czso.cz/

http://www.mfcr.cz/

http://www.mfcr.cz/

http://www.mfcr.cz/

http://www.mfcr.cz/

http://www.mfcr.cz/

http://www.cnb.cz/

http://www.cnb.cz/

http://www.cnb.cz/

http://www.cnb.cz/

http://www.tradelinks.cz/






http://www.cnb.cz/

http://www.cnb.cz/

http://www.mfcr.cz/

http://www.mfcr.cz/

http://www.mfcr.cz/

http://www.czso.cz/

http://www.czso.cz/






9.6.5 Estate Agents

Site URL

prague.tv/realestate/ prague.tv/realestate/ Horizon Realty Czech Republic www.eured.com/go.php?id=1086

Czech & International Real Estate Market

www.eured.com/go.php?id=311

9.6.6 Solicitors

Site URLSeddons www.seddons.co.uk/

http://prague.tv/realestate/




http://www.eured.com/go.php?id=1086









http://www.seddons.co.uk/
















10. HUNGARY – FIRST AMONG EQUALS

Hungary is the holder of a number of important firsts among the Eastern Eight:

First country under communism to attempt to create a consumer-orientatedeconomy – described at the time (the 1960s), as ‘Goulash Communism’.

First to join the International Monetary Fund and the World Bank

First of the Eastern Eight to apply for EU membership

First to join NATO (1999)

It is quite clear that this early liberalisation of the market in Hungary meant it wasbetter placed economically and psychologically (if not politically) to fully embraceand adopt the free market after the fall of communism.

It also meant that it was in pole position when it came to attracting foreigninvestment. By the end of 2001 around €26 billion had already poured into thecapital.

Only Poland has exceeded this amount. But in terms of FDI per head of population, only the Czech Republic has a higher level than Hungary.




Perhaps because of its early courtship of the West economically, Hungary ismore dependent than any of the other accession countries on trade with theEU15.

Around 75% of all Hungarian exports go to the EU, and some 65% of imports into

Hungary come from the EU.

And there is no doubt that the population recognises the level of integration andinterdependency with the EU – they showed their enthusiasm for joining with an84% vote in favour in a referendum in April, 2003.

10.1 Hungary - Business & Economic Overview

10.1.1 Hungarian politics in a nutshell

The country became communist following World War 2.

In 1956 the country announced it was leaving the Warsaw Pact amid a revoltagainst Soviet authority. The USSR launched a huge military intervention.

From 1968 onwards, Hungary began the experiment of liberalising under communist rule. With Soviet approval, the country launched what becameknown as ‘Goulash Communism’.

The country became a parliamentary democracy and multi-party elections wereheld in 1990 and a free market followed.

Since April 2002 the country has been governed by a socialist-liberal coalition.

10.1.2 Country profile – key data

Population 10mLandmass

93,030 sq km

Capitalcity

Budapest

BordersAustria, Croatia, Romania, Serbia &Montenegro, Slovakia, Slovenia,Ukraine

ClimateTemperate – cold, cloudy, dampwinters. Warm summers

Notes

Landlocked

The Danube and Tisza rivers divide

the country into three regions.




10.1.3 Key economic data

Currency

The Forint.

2003 €1 = approx 282 ForintUnemployment 5% (2002) (falling)GDP $78.2 billion (2003)GDP growth rate 3.1%GDP per head of population

$7,670 (2003)

Key exports

Machinery and equipmentFood productsRaw materialsFuels and electricity

Key sectors of theeconomy

Mining, metallurgy, constructionmaterials, processed foods, textiles,chemicals (especially pharmaceuticals),motor vehicles

Value of exports $38.4 billionKey export targetcountries

Germany, Austria, Italy, US

Key imports

Machinery & equipmentOther manufacturesFuels and electricityFood products

Raw materials

Value of imports $41.5 billionMain import partners Germany, Italy, Austria, Russia

Government budgetRevenue: $13 billionSpending: $14.4 billion (2000.)

Inflation 5.1%Source: CIA World Factbook

Foreign directinvestment in 2002

$1.5 billion

Main countries of origin

Holland, Germany, US, Sweden, Austria

Main sectors

Production industry (esp. electrical andoptical instruments)Mechanical engineeringReal estateWholesale and retail

Source: Dredsner Bank




Labour costs and spending power within the industry and services sectors,average annual earnings per person are: €6,216 (2003)

The cost of labour is, of course, different to the salaries of those employed.

Here’s a look at the costs:

Hourly labour cost in industry and services €3.83

Pre-2004 EU member states’ average €22.19

Monthly labour cost per employee €566

Pre-2004 EU member states’ average €3,169Source: Eurostat, 2000 data

These figures place Hungary very much on a par with the Czech Republic for salaries and wage costs.

This means that it would take roughly the same 30 years for the average salaryin Hungary to catch up with the equivalent in the 15 Western European countriesthat made up the EU prior to the new joiners coming aboard in 2004, even if salaries in those 15 remained static.


Hungary experimented with a Crawling Peg system of currency control fromMarch 1995. This involves setting an exchange level for the currency andallowing the currency to move up or down around the par value by a set amount.

The basic difference between this system and ERM is that the par value ischanged from time to time. The system was dumped in 2001.

From that time onwards, Hungary linked its currency to the Euro, allowing it tomove with a 15% range up or down against the Euro.

There has been a clear pattern to the Forint’s worth over the last decade or so.

Basically, until 1999 it was in decline, showing quite dramatic devaluationannually. From then on its decline slowed and finally reversed.

In 2001 the Forint appreciated 8.1% against the Euro and by 3.8% in 2002. In2003, it did, however, decline against the Euro by around 11%. This is more todo with the strength of the Euro than the Forint’s weakness.

Clearly, the demands required of the government and the Central Bank to pegthe currency to the Euro, are similar to those that will be required of the country

when it enters ERM.




The range the Forint is allowed to move within (15%) is, of course, the same as itwould be in ERM. This gives Hungary something of an experience advantage.

Fixing a currency to within a narrow range of another currency does, however,leave a country open to attack from speculators.

If there is a fiscal weakness – like the government is running too high a budgetdeficit, which it is unlikely to be able to sustain – the speculators may well movein and start attacking the currency, basically selling it and driving its value down.

Such attacks, which often result in a currency bounce following the oversell thespeculators provoke, can be very destabilising for the economy of any country,and especially the credibility of the policies of the Central Bank.

Such shockwaves in the economy will have a swift and often quite dramaticeffect on property prices.

Certainly, a serious and sustained attack by speculators on any of the EasternEight would be highly damaging for a developing country such as Hungary.

The constraint of keeping a currency within a certain range compared to another currency can also hamper sensible fiscal policy.

This was well-illustrated in Hungary at the beginning of 2003 when, at a timewhen the Central Bank needed to maintain interest rates to tackle inflation, it wasforced to cut them to prevent the Forint from breaking through its 15% upper limitagainst the Euro.


By most estimates, the assessment of the Hungarian economy is that it is ingood shape.

Domestic consumption is still fuelling growth, even while Hungary’s exports havesuffered because of the sluggish economies in Western Europe.

But it is foreign investment that has really fuelled the economy. Of the total ($26billion by 2001), the United States has accounted for some $7 billion-plus.

The largest US investors include GE, General Motors, Coca-Cola, Ford, IBM,and PepsiCo.

Many experts anticipate around 4% annual growth of the economy for themedium term. Inflation is falling and is now dipping under 5%. Theunemployment rate is also coming down as more jobs are created through FDI.

Exports – despite being hit by the slowdown in Western Europe – continue to

grow and make up some 45% of GDP.




Overwhelmingly, Hungary is dependent on the EU for a market for its exports –63% of all its exports go to Western European markets, with Germany thedominant trading partner.

Around 80% of the economy is now privatised – higher than in several EU

member states!

In fact the privatisation process can be considered complete. Almost 90% of small and medium-sized businesses are privately run.

Since 1990, when the state started its mass privatisation process, over 1,500government-run companies have moved into private ownership.

Some $10 billion has been raised – more per head (at around $1,000) than anyother of the emerging markets.

The government published a list along with the 2001/2002 budget listing thosecompanies that are still state-owned. There were some 200, of which some willremain in the hands of the state, or at least the state will maintain a controllingstake.

These include the railways, the mail service and the state forestry companies, aswell as utility companies.

Hungary’s workforce is generally viewed as skilled and well-educated – and, of course, compared to the West (and some Eastern Europe competitors), relativelycheap.

Business sees Hungary, perhaps more than any other of the Eastern Eightcountries, as receptive and open to foreign investors and their ideas and their methods. This accounts for Hungary’s great success in attracting FDI.


Undoubtedly, the big issues for the Hungarian economy are twofold:

Reduction of the public sector deficit

AND

Solving the imbalance between development rates within the country.

10.1.7 Reduction of the public sector deficit

As we see repeatedly with other Eastern European, the levels of governmentspending is a major problem in Hungary.




The fact that the economy is growing at around 3% is obviously a healthy clip.But it is far from earlier postings of 5% plus.

Much of this slowdown in Hungary’s growth has been attributable to the poor state of the economies in Western Europe economies, particularly the world’s

third-biggest economy – Germany.

Perhaps unfortunately, the Hungarian government has, in response to thisdeteriorating economic environment, decided to spend its way out of trouble.

The spending budget deficit was 8% of GDP in 2002!

This is on its way down, but it is still alarmingly high and needs to be below 3% inorder to meet Euro currency demands.

Many also see unsustainable wage rise inflation creeping in Hungary, which

threatens to make it less competitive compared to rivals.

10.1.8 Currency attacks

Unsustainable government spending deficits could lead to the Hungariancurrency coming under pressure, as happened at the beginning of 2003.

The rigid link to the Euro (the same as will be required in ERM), makes theHungarian Forint more vulnerable to attack by speculators.

An inability to keep within the self-imposed 15% band would be extremelydestabilising for the country.

10.1.9 East-west divide

There is a very clear divide between those areas of the country that havebenefited from high levels of FDI and those areas that have received relativelylittle.

More than 75% of FDI has flowed into the area of Budapest and the surroundingregion, as well as west of the capital – basically, the centre and west of thecountry.

The northwest, towards the Austrian border, has also seen significant foreigninvestment – particularly in the Gyor and Sopron areas. Here, big companiessuch as Audi, General Motors and Philips have set up manufacturing bases.

The eastern part of the country, on the other hand, has received relatively little inthe way of FDI. Despite some government efforts to rectify this disparity –incentives to invest in the east – the problem remains and may prove

destabilising in the longer term.





The US Heritage Foundation’s index of economic freedom for 2003 gives

Hungary a score of 2.65, which places it in the middle of the Eastern Eightcountries.

The score, which is defined by the Heritage Foundation as meaning the country’seconomy is ‘mostly free’, places Hungary in 44th position globally out of some155 countries.

Also placed in the same ranking are Armenia, Bolivia, Costa Rica, Panama andSouth Africa.

Hungary’s overall ranking is a little misleading, however.

In most areas of the economy, the country actually scores quite well – 2 for foreign investment (low barriers), banking and finance, 2 (low level of restrictionsand property rights, 2 (high level of protection).

Where the country scores badly is in trade policy (3), where there are too manylicences needed and general impediments to trade – and many of these arebeing removed or scaled back now that Hungary is a member of the EU.

Where Hungary really scores badly is when it comes to the fiscal burden of government (4). This is basically the amount of taxation in the country. (seesection 10.1.2)


Like its fellow accession countries, Hungary does have a problem.

The Transparency International Corruption Perceptions Index places Hungary in40th place out of the 133 countries it surveys.

It scores 4.8 out of 10, with 10 being totally free of corruption.

It’s a poor score, but it is a measure of how much of a problem graft is in thesecountries that Hungary is actually in 3rd place out of the Eastern Eight, just aheadof Lithuania but quite a long way behind 2nd place Estonia.

The Open Society Institute (OSI) - the George Soros-backed foundation -produces reports through its EU Accession Monitoring Program (EUMAP).

A recent report noted that:

"A number of countries with persistent and serious problems of corruption will be admitted to a European Union which lacks




adequate framework for dealing with these problems even incurrent member states”

Corruption in the accession countries has been a major EU concern since theEuropean Commission began producing its annual progress reports on the EU

applicants back in 1997.

Obviously graft at a basic level completely undermines the EU’s Acquis andmakes meaningless any country’s formal adoption of it.

The OSI has noted that the high levels of corruption are, to a great extent,legacies from the Communist era when corruption was pretty muchinstitutionalised.

And the US Chamber of Commerce in Hungary’s magazine has noted that whileHungary is generally perceived from outside as one of the least corrupt states,

perceptions from within are different.

It notes:

“Domestic surveys of perception indicate widespread corruptionwithin the public healthcare system in particular, followed by traffic police, customs and central state administration.”

The Eumap report notes several areas where corruption is apparent in Hungary:

• Political party patronage• Independence of prosecutions in the courts• Public procurement• Media independence

It seems likely that, for the medium term at least, these are all facets of thecountry that the investor will have to live with.

10.1.12 What are the prospects for the economy?

The Hungarian economy, like those of most of its fellow accession countries hassuffered somewhat from the slowdown in growth among EU countries.

This has inevitably had an effect on exports, FDI and therefore growth.

It is unlikely this trend will be turned around rapidly, but recovery depends almostentirely on the world, and more specifically, on the economies of the Western EUcountries and the US.

This is where the investment money predominantly comes from. Beyond this,relatively small and open economies like Hungary’s are highly dependent on their

trading partners, in Hungary’s case this is overwhelmingly Western Europe.




Something more needs to be done to cut government spending. In Hungary’scase this means a radical overhaul of social welfare policies.

Once government spending is reined in, it is likely the investment taps will beturned on again as confidence that the government is prepared to act is restored.

Despite these drawbacks, Hungary’s economy is still posting positive growth, andwas still doing so during the worldwide economic slowdown.

And another plus is that Hungary’s financial system is, without question, one of the strongest in Central and Eastern Europe.

The country was on track to attract around $2 billion in FDI in 2005. Almost 75%of the world’s largest companies have a Hungarian presence or subsidiary.

If evidence of the continued flow of foreign investment is needed, this fact alone

speaks volumes.

The OECD view is that growth will rise to close to 4% in 2005. Exports areexpected to pick up and accelerate.

10.2 Hungary - Property Market Potential

There is plenty to be bullish about the property market in Hungary.

The economy may have slowed a little in the last couple of years, in line withglobal trends, but the fundamentals in Hungary are very strong, perhaps thestrongest of all the Eastern Eight.

Like the Czech Republic, there is a property investor fixation with the capital.

There’s good reason for this – Budapest has shown fantastic gains over the lastfew years. But already there are warning signs that the market is over-inflated insome areas, most notably at the top end.

At this end of the market, prices have actually been falling for the last couple of

years. However, in the mid-market prices have been stable or climbing.

With all Budapest’s attractions as a modern, attractive European centre withgood property laws, a stable government and a long tradition of openness toforeign investment, it is hard to see how property demand will not continue over the medium term and even long term, basically fuelled by two factors:

• A growing aspiring middle class

• An increasing number of medium cap foreign companies attracted toBudapest and its opportunities along with smaller firms – legal practices,

accountancies, PR, management consultancies and so on – who feel theneed of a presence in such a dynamic city






10.2.3 What are the best kinds of properties for rental?

Basically, you can’t go far wrong with smart, thoroughly modernised, and fully

furnished (which just means the essentials) flats in central areas. The standardof renovation is all when it comes to attracting maximum rent.

Here are some rough price guides for Budapest:

• Two-bed apartment with one living room in Pest – between €360 and €470per month

• Same apartment in a tree-lined street in Buda – between €1,200 and €2,500 per month

• Small studio flats in desirable areas - €316 per month

• Luxury, top-end properties with swimming pools and extensive grounds - €3,000 to €4,000 per month

10.2.4 What can I expect to pay for a property?

In Budapest, where the overwhelming majority of foreigners buy, expect to paybetween €1,400 and €2,127 per sqm for the most prestigious properties in the

very best locations.

You’ll pay about €1,000 per sqm for good properties in good areas and around €780 for mid-priced properties. Run-down properties in decent locations areobtainable at around €550 per sqm.

10.2.5 Budapest is still best

Unless you have real pioneering spirit, stick to Budapest and areas around it.This, in the short and medium term will be the safest bet.

Certainly, don’t be tempted into the east of the country, which remains relativelyundeveloped and shows no signs of presenting much opportunity for the first-time property investor.

Another reason to stick to the capital (with one exception, see section 10.2.10), isthat solid price information relating to areas outside Budapest is not easy tocome by.

Budapest is likely to grow in economic strength and diversity as more businessesare attracted to it.




The mortgage market is undeveloped in Hungary and it is likely governmentsubsidies will soon go and western banks will move in and transform the market,so unleashing new demand.

It will almost certainly be Budapest that will feel the benefit of this new wave of

demand first.

10.2.6 Be prepared to buy and hold, and avoid the top end of the market

The top end of the market has seen prices stable or falling for a while now.

There has been talk of a property bubble in Budapest and while this may notresult in a burst bubble, and a steep price fall, such talk can be self-fulfilling.

For this reason, it’s a good idea to be prepared, at least, to hold your property

asset for five years, longer if possible, in order to weather any downturn in themarket.

10.2.7 Buy let-able properties

For the best return and the safest investment make sure you concentrate onproperties that will easily rent.

Between €50,000 and €100,000 apartments in central locations surrounded by

transport options and other essentials. This kind of property will realise the sortof yield mentioned in 8.1 and is the most likely to show the best rate of increasein value.

10.2.8 Where to invest in Budapest

To invest best in Budapest you need to know which are the up and coming areasand what kind of property is hot. Things can change pretty quickly.

The best way of doing this is to check out information freely supplied by estate

agents in the city, many of whom send out emailed updates and newsletters.

For example, in Pest, demand has been seen moving away from studioapartments and towards one-bedroom flats, according to estate agents.

I would recommend looking for small apartments either to restore or that havebeen restored already to a high standard of finish.

And while the domestic market will undoubtedly develop over the next few years,for the time being, the best areas to invest in are those places popular withforeigners, or best of all, just being discovered by foreigners.




The 6th, 7th, 8th and 9th districts of the city are recommended by a number of marker watchers, plus the old Jewish quarter by the Great Synagogue.

The 8th and 9th districts are university areas – nearly always good for investmentand rental potential.

As a general rule, estate agents advise that Buda is best for apartments andPest, across the river, is better for buying a plot of land and developing it.

And if you’re buying an apartment, always keep in mind how near it is to themetro line.

10.2.9 Healthy returns – spa centres

Budapest itself has often been referred to as the Spa Capital of the world, and

with good reason. There are said to be more than 30 thermal springs in andaround the city.

But it is not only Budapest that is blessed with abundant spa centres.

The health resort industry is certain to be developed in a big way in Hungary over the coming years and buying a property in a place with great tourist potential isan excellent way of maximising potential returns.

Good places to consider investing in the kind of properties that will make luxury-end accommodation for health tourists are Buk, Balf, Sarvar, Zalakaros andGyula.

10.2.10 Hot tip tourist destination – Lake Balaton

Spa centres is a specific section of the tourist industry in Hungary that is ripe for further investment. However, other tourist centres are also worth considering for property investment.

Balaton, the largest lake in Hungary, probably in Central Europe, and which is

south of Budapest, is one of them. This is one of, if not THE, busiest holidayresorts in the country.

Prices, on average, have moved about 20% up over the last couple of years.

Property prices in the area, which is close to the Yugoslavian border, were badlyaffected by the war in 1999.

Since then things have changed.

While many foreigners – especially from Germany and Holland – have already

bought in the area, they tend to target the north shore and there is huge potentialupside to the property market in the south.




Older properties here are like gold dust close to the shore and newer propertiesare far more common.

The real estate market centres – in terms of price, at least – around Siófok. As

you move away from here, prices fall. But the difference is lessening.

The southern shore of the lake is currently the most popular with foreigninvestors and is likely to retain its prime position for some time.

Here the best properties are close to the beach, around 1000sqm and fetchbetween €70,000 and €90,000. Further away from the beach and from Siófokand the price will be halved.

Older properties in and around Siófok, on or close to the beach will fetch around €39,000, regardless of their condition. Newer houses are priced at around

€56,000 and smaller, semi-detached weekend properties go for around €35,000.

The northern shore of the lake remains the more exclusive area and certainly afavourite with foreign buyers, mainly because they can afford the prices.

Demand is in a much smaller area – in and around two towns, Tihany andBalatonfüred.

But Balatonalmádi is slowly being discovered and is a good investment bet –prices here are up to 40% less than in Balatonfüred.

Foreign buyers focus mainly on Györök or in Vonyarcvashegy as well as villagesa little way away from the lake. Here a three-bedroom house with a large patchof land can be found for around €35,000 and upwards.

Rental yields are not enormous – it’s capital gain that is interesting here. Rentsobviously depend on location and type of property, but a typical modernapartment that may sleep around six people will rent for around €20 per personper night in the summer months.

For a better idea of yields visit www.siofokbella.hu/bella_eng.html

Prices have increased by 400% in eight years, say estate agents in the area.

The Balaton area, with its 100km long lake, which is never deeper than threemetres and has its own Mediterranean micro-climate, is likely to become hugelypopular with foreign visitors in the near future as Hungary is increasingly openedup as a tourist destination.

A great place to invest!

http://www.siofokbella.hu/bella_eng.html






10.3 Hungary - How the Property Market Works

Rather like Prague and the Czech Republic, Hungary is perceived by most

property investors as being simply Budapest.

This is fair enough as it’s a stunning city – often dubbed the Paris of the East –as millions of tourist will attest.

And, according to Forbes magazine’s Best Cities for Business survey, whichlooks at cost of living, culture and economic growth, among other factors,Budapest is the business’s third most favoured city in Europe after London andAmsterdam.

Certainly, that is where the investment money goes and where the best returnshave been up to now.

Data and information about areas outside the capital are quite difficult to comeby, but this will surely change as investors look for basement level opportunitiesin the country.

For now, however, it will be difficult to locate agents specialising in propertiesoutside the capital that are used to international clients.

Foreigners wanting access to the property market in Hungary have a number of

choices – and none of them involve a simple process of just buying a property.

For some private investors wanting to own an apartment in Budapest, theapparent barriers can be off-putting.

There is, though, no need for the seemingly difficult obstacles to be a problem -so long as you choose the right way of doing things.

In fact, buying in Hungary is actually simpler than in many other places and canbe carried out very swiftly.

And there is most definitely a right way and a wrong way.

As with the Czech Republic, foreigners are, in principle, prohibited from owningreal estate.

As with the Czech Republic, the restrictions will remain in force until 2009 – fiveyears after Hungary’s admission to the EU. Prohibitions on agricultural land willremain for longer and are more stringent.

However, even this difficulty can be, and frequently is, overcome by foreigninvestors who are known to have officially ‘leased ‘agricultural land, when in

effect they have bought it from Hungarian farmers, especially near the Austrianborder.




10.3.1 How to buy property in Hungary

There are two ways for a foreigner to approach buying a property in Hungary:

• Apply for a permit to buy as an individual• Buy through a company

The problem with the first way is that it involves legal fees and can be time-consuming, and, most importantly, you have no guarantee of success.

Since a change in policy in 2002, refusal is no longer common, and theauthorities need to show that your purchase would be damaging to the welfare of society.

There also used to be quotas for buyers from each foreign country.

Key Tip

Under no circumstances should you try and apply for a permit to buyor set up a company without taking legal advice first.

If you are attempting to buy a second property in the same area, you may beconsidered a speculator and will almost certainly not be successful.

If a permit is denied you can 1) Re-apply 2) Buy through a friend who will needto apply for a permit or 3) try option b.

The main problem with buying as an individual is that you need to settle on aproperty and sign a contract to buy BEFORE you have obtained the permit.

If you are unsuccessful, the contract becomes void and you have to start again,which involves more time and expense.

To apply for a permit an individual needs to take a copy of the buying agreement,details of a property registered Hungarian lawyer who represents the buyer and acertificate from the tax authorities saying they have no claim on the property inquestion.The process costs the equivalent of around €200.

Option b. usually involves setting up a company and registering it in Hungary,which is a fairly simple process.

It will cost around €700 to get the company off the ground and the necessary

administration to keep it running will cost around €400 a year. You don’t need tobe physically present to set up a company – it can be done through a lawyer.






10.3.5 When buying as an individual is best

Now the authorities have changed their approach to the issuing of permits to buy

to foreigners, it is probably fine to apply for a permit and buy this way. Theexceptions are:

If you’re only planning to buy one propertyIf you intend to hold the property for at least two years

Anything else could be considered speculative and a permit is likely to berefused.

10.3.6 The purchase process

There are some similarities between buying in Hungary and in other countries inEurope – Spain and Italy, for example.

Certain aspects of the process will be strange to the overseas buyer, however.

Paying a deposit, which you will do before you have had all your lawyer’squestions answered, will normally be between 10 and 20% of the purchase price.And it will normally have to be paid in cash.

Cash, not bank drafts or cheques, is what people trust and understand. To aWesterner, this may seem strange.

Another strange part of this process is that the lawyer handling the sale must bepaid for by the buyer, but must act on behalf and for BOTH the buyer and theseller.

If you’re buying as an individual, it is quite possible to complete the wholepurchase process before receiving a permit to buy, so long as one has beenapplied for. But if you’re turned down for any reason, you will lose your deposit.

As mentioned before, the restrictions on foreigners buying property in Hungarydid not end with EU membership.

Key Tip

As with other countries that have set up hurdles to hamper foreignersbuying property, it is logical to assume that some people are put off bythese restrictions. When those restrictions end, therefore, it is likely toprovide a boost to the market.





Tax Details

Corporate income 18%

Personal income20-40 % (increases with higher earnings)The rate was coming down in 2004 toaround 18% to 38%

Value Added (25% standard rate)

Property taxVaries depending on the type of property, itslocation and its use. Maximum of €3 per sqm

Property transfer Varies (see below)

Land tax

Certain kinds of land registered with the landregistry can attract a yearly tax. This variesbut will not exceed €0.7 per sqmAlso, from 2004,VAT (see below)

Capital repatriation No tax

Let’s take a closer look some of the taxes likely to affect the property investor.

Property transfer tax or sales tax

All sales of property are subject to a sales or transfer tax. The standard rate is10%, plus VAT.

But, if the company making the purchase is officially registered as a propertytrading company and declares an intention to sell within two years, the rate is2%, payable by the person or company buying the property.

This rate applies up to the first 4m Ft (approx €14,000), then afterwards the ratebecomes 6%.

If you buy property through a company the sale of the company (along with theproperty) will be treated at the same level of taxation.

The buyer of shares in a company holding property is not liable for any tax.

If you buy as a private person, you pay the same tax as a company establishedto deal in real estate – i.e., the 2% + 6% rate. But this is for a property that will beused more or less constantly.




If it can be described as a weekend home, or secondary residence, or holidayhome, the 10% tax will apply. A good reason to set up a company and buy theproperty that way.

Buying commercial property attracts the full 10% standard rate of transfer tax.

All transfer taxes have to be met within six months of the sale.

Key Tip

Buying land with planning permission that you declare will bedeveloped within four years attracts zero tax on purchase.

Income tax

The top rate of income tax in Hungary is 40%. But income from property istreated separately.

A company pays 18% of its yearly rental profit, plus dividend tax at 20%.However, as mentioned earlier, many items can be set against tax and it is notuncommon to be able to declare no profit.

An individual pays a tax of 20% on rental profits.

Key Tip

A private buyer can get tax breaks on rental income if they buy andsell within four years. Check with an accountant.

Value Added Tax

The VAT rate is 25%, but individuals do not need to charge VAT when they selltheir property and the rate for letting an apartment is zero. A new law, with effectfrom 2004, means that buying a plot of land attracts 25% VAT.

Profits tax on the sale of a property

A company pays 18% of its profits as tax, plus a 20% dividend tax. However,many expenses can be deducted, including interest paid on loans.

An individual pays 20% but has little opportunity to claim against tax.




Land Tax

Apart from the yearly tax that may be due on plots, a new law has been

introduced and came into effect from January 2004. This adds 25% VAT on thepurchase of plots of land.

It is generally felt that this tax will bring about an increase in the purchase price of new builds, perhaps as much as 10%.

Building Tax

If a building is liable for this tax then it will be paid by the owner, whether that isan individual or company. It is due on January 1 each year. It is usually basedon the size of the property. The maximum rate is HUF900 per sqm.

Waste disposal

This is a yearly charge determined by the local authority - expect around €50.

Other costs

Lawyers’ fees for the purchase process – 1.5% of the sale price, plus VAT.

Management fee, if you let through an agent – expect to pay between 10-15% of the monthly rent, plus VAT.

Agency fees, these can be anything from 3% upwards, plus VAT.

Key Tip

Taxes, especially those relating to expenses set against a company’s

tax return are complicated.

Get an accountant that belongs to a reputable professional body and isused to dealing with foreigners.

Members of the International Federation of Accountants in Hungary canbe contacted through www.mkvk.hu.

http://www.mkvk.hu/

http://www.mkvk.hu/

http://www.mkvk.hu/





Hungary was something of a trailblazer – as with so much else – in dealing with

property restitution problems. This was both for private and communalproperties.

For example, a law was introduced as early as 1991 allowing religious groups toapply for compensation for property seized by the state after 1946.

Since 1991, 12 religious groups have applied for no less than 8,000 restitutionclaims. Of these, 1,383 were given property, 2,670 were turned down and 1731were given cash compensation, a total of $271m.

A further 968 cases were settled without government intervention. There are

around 1,000 cases still outstanding and the deadline for settlement is 2011.

The 1991 law allowed successful claimants to receive a voucher up to the valueof $21,000. This could be used to buy shares in privatised companies or land atstate land auctions.

One weakness in the system is that there is no law covering property thatbelonged to Holocaust victims who have no heirs.

These properties, which revert to ownership by the state, theoretically could bethe subject of some legal wrangling.

Make sure that any property you are interested in is checked for ownership in theland registry by a lawyer.

10.4 Hungarian - Property Finance

For almost all foreigners buying property in Hungary, getting a loan in Hungary isnot a sensible idea. The mortgage market is uncompetitive and the lending rateis likely to be in double figures.

A normal market value loan is 14% and lenders will usually only go up to 50% of the value of the property.

However, if you have any Hungarian ancestry, it is possible to be eligible, just asHungarians are, for a government-subsidised mortgage.

This allows you to borrow at a rate of 3-4% up to a total of around €53,000.

Up to 70% of the registered value of the property can be loaned and this value isusually about 20% short of market value.




Any foreigner, who has Hungarian forbears or strong family ties can apply to theInterior Ministry for the loan subsidy.

10.5 Hungary - Investment Verdict

Hungary has seen huge price rises in property over the last decade – prices havedoubled and even tripled in many parts of Budapest in the last five years or so.

The fear is that this inflation is over-heating and the market will suddenly cool.

Such speculation is the wrong way of looking at the market.

Even if there is a correction in the market in the short term, in the longer term thefundamentals to create a fast-developing, increasingly affluent society are allpresent. And that means that high demand for good quality properties, especiallyin Budapest, will continue.

Budapest remains one of the cheapest cities in Europe, according to theEconomist Intelligence Unit. And, like Prague, it’s also one of the most beautiful.

This, along with the fact that it is highly attractive to business as a place to invest,will ensure that demand for property will grow.

Hungary is ahead of most of the other EU accession countries in attractinginvestment because it came early to the party. It is highly likely to maintain its

favourable position.

It’s also highly likely – despite the difficulties – to be one of the early entrants tothe Eurozone. This will almost certainly boost the real estate market.

The home loan market is highly undeveloped and this is likely to change with thedropping of all restrictions and barriers to buyers from within Europe thatmembership of the EU brings.

It is clear that the government – by easing restrictions on foreign buyersobtaining permits to buy – is intent on freeing the property market completely.

This will be a massive boost to the market.

Budapest, like Prague, is a great place to invest if you’re looking for propertiesthat are easy to rent out and that will steadily gain in value steadily in THEMEDIUM TO LONG TERM.

Outside of the capital, look to spa centres and tourist areas and carefully pickproperties that have strong rental potential and great location for capital growth.




10.6 Hungary - Links

10.6.1 EU-related

Site Name URL

Statistical Office of Hungary www.ksh.hu/pls/ksh/docs/indexeng.html

Referendum on EU Membership www.valasztas.hu/en/index.html

Commission Delegation inBudapest

www.eudelegation.hu/

EU Information Team www.magyarorszag.hu/

Hungarian EU CommunicationPublic Foundation

www.eukk.hu/

10.6.2 Country specific

Site URL

Prime Minister's Office www.meh.hu/

eGovernment portal site www.ekormanyzat.hu/

"Eufórium" Website on the

National Development Plan

www.euforium.hu/euintegra-

main.php Central Finance and ContractingUnit (CFCU)

www.cfcu.hu/

Ministry of Foreign Affaires www.mfa.gov.hu/

Ministry of Foreign Affaires.Hungary's EU integration website

www.kum.hu/euint/index.html

Ministry of the Interior www.b-m.hu/

Ministry of Economics andTransport

www.gm.hu/

Ministry of Agriculture and

Regional Development

www.fvm.hu/euint/euint.html

Hungarian EnterpriseDevelopment Foundation

www.mva.hu/

Budapest Chamber of Commerce and Industry

www.bkik.hu/

Office for Ethnic and NationalMinorities

www.meh.hu/nekk/defhu.htm

Prime Minister's Office.Department for Civil Affairs

www.civil.info.hu/

http://www.ksh.hu/pls/ksh/docs/index%20eng.html





http://www.valasztas.hu/en/index.html




http://www.eudelegation.hu/





http://www.magyarorszag.hu/




http://www.eukk.hu/

http://www.eukk.hu/

http://www.eukk.hu/

http://www.eukk.hu/

http://www.eukk.hu/

http://www.meh.hu/

http://www.meh.hu/

http://www.meh.hu/

http://www.meh.hu/

http://www.ekormanyzat.hu/




http://www.euforium.hu/euintegra-main.php






http://www.cfcu.hu/

http://www.cfcu.hu/

http://www.cfcu.hu/

http://www.cfcu.hu/

http://www.cfcu.hu/

http://www.mfa.gov.hu/




http://www.kum.hu/euint/index.html




http://www.b-m.hu/

http://www.b-m.hu/

http://www.b-m.hu/

http://www.b-m.hu/

http://www.gm.hu/

http://www.gm.hu/

http://www.gm.hu/

http://www.gm.hu/

http://www.gm.hu/

http://www.fvm.hu/euint/euint.html





http://www.mva.hu/

http://www.mva.hu/

http://www.mva.hu/

http://www.mva.hu/

http://www.mva.hu/

http://www.bkik.hu/

http://www.bkik.hu/

http://www.bkik.hu/

http://www.bkik.hu/

http://www.bkik.hu/

http://www.meh.hu/nekk/defhu.htm





http://www.civil.info.hu/











http://www.bkik.hu/

http://www.bkik.hu/

http://www.bkik.hu/

http://www.mva.hu/

http://www.mva.hu/

http://www.mva.hu/




http://www.gm.hu/

http://www.gm.hu/

http://www.gm.hu/

http://www.b-m.hu/

http://www.b-m.hu/






http://www.cfcu.hu/

http://www.cfcu.hu/

http://www.cfcu.hu/







http://www.meh.hu/

http://www.meh.hu/

http://www.eukk.hu/

http://www.eukk.hu/

http://www.eukk.hu/














10.6.3 Regions of Hungary

Site URL

South-Plain Region www.del-alfold.hu/ North-Plain Region www.eszakalfold.hu/

North Hungary Region www.norda.hu/

Central Region www.kozpontiregio.hu/

West-Transdanubia Region www.westpa.hu/

South-Transdanubia Region www.ddrft.hu/

10.6.4 Real estate

Site URL

Lake Balaton property www.balaton.net/

Lake Balaton property irec.hu/avidek.htm

Budapest Property www.investbudapest.com/

Budapest property www.casalux.hu/eindex.htm

http://www.del-alfold.hu/




http://www.eszakalfold.hu/




http://www.norda.hu/




http://www.kozpontiregio.hu/




http://www.westpa.hu/




http://www.ddrft.hu/




http://www.balaton.net/




http://irec.hu/avidek.htm




http://www.investbudapest.com/




http://www.casalux.hu/eindex.htm



























11. POLAND – THE SLEEPING GIANT

Poland stands out among the Eastern Eight simply because it dwarfs the other countries, in size, population and, some argue, long-term investor potential.

And in terms of attracting foreign investment it stands out once again as theundisputed leader of the pack (see above). In total it is estimated to haveattracted $62 billion.

Poland chalked up a truly impressive rate of growth during the later part of the1990s, but it was hit harder than other accession countries by the economicslowdown in the three years before joining the EU.

This is perhaps because its biggest trading partner, Germany, was so badly hit

by the economic slowdown.




Even so, in the longer term there is no doubt that the Polish government iscommitted to attracting more investment, to fulfilling its undertakings as an EUmember and of liberalising its economy.

All this adds up to a very attractive prospect for the business investor and, of

course, therefore, for the property investor.

11.1 Poland - Business & Economic Overview

11.1.1 Polish politics in a nutshell

Poland overrun by Germany and then Soviet Union in WW2

Country becomes a Soviet satellite after WW2 and communist

Labour unrest in 1980 led to the formation of the union Solidarity, which over thenext decade became a strong political force and led to direct Presidentialelections.

Drastic and painful economic reforms undertaken in the 1990s to transform thecountry into a predominantly market driven economy.

Solidarity suffered a devastating political blow in the 2001 elections andsubsequently the role of trade unions in Polish politics has shrunk considerably.

In June 2003, 77% of the voters approved of EU membership.


Population 39 million

Land mass 304,465 sq km

Capital city Warsaw

BordersBelarus, Czech Rep, Germany, Lithuania, Russia,

Slovakia, UkraineClimate

Temperate with cold, severe winters with heavyrain. Mild summers with lots of thunderstorms.

Notes

Serious air and water pollution remains a problemin parts

Mostly flat with mountains in southern area

Many areas liable to flooding





CurrencyZloty (PLN) exchange rate, 2003, approx €1 =4.665 PLN.

Unemployment 17.5% (end 2003)

GDP $197.5 billion (2003 estimated)

GDP growth rate 3% (2003 est.)GDP per head of population

$5,104 (2003 est)

Key exports

Natural gas, machinery and transportequipment, intermediate manufactured goods,other manufactured goods, food and liveanimals

Key sectors of the

economy

Machine building, iron and steel, coal mining,chemicals, shipbuilding, food processing, glass,drinks, textiles

Value of exports $32.4 billion (2002)Key export targetcountries

Germany 33%, Italy 5.7%, France 5%, UK4.8%, Czech Republic 4.3% (2002)

Key importsMachinery and transport equipment 38.2%,intermediate manufactured goods 20.8%,chemicals 14.3%, miscellaneous manufacturedgoods 9.5%

Value of imports $43.4 billion (2002)

Main importpartners

Germany 29.9%, Italy 8.1%, Russia 7.4%,France 7.2%, Netherlands 5.3% (2002)

Governmentbudget

-6.8 billion $ and rising (2002) estimate for 2003, -7.7 billion $. 3.9% of GDP

Inflation 1.6% (2003 est)Source: CIA World Factbook; Dresdner Bank

Foreign directinvestment in

$4 billion (2003)


United Kingdom (22.5 %), Netherlands (17.6 %),USA (14.6 %), France (12.2 %), Germany (9.4%).

Main sectorsManufacturing industry (34.3 %), trade and

services (17.4 %) and financial sector (15.7 %).Source: CIA World Factbook; Dresdner Bank





The average monthly gross wages in 2003 –

• Poland €578• Germany €2,808• Pre-2004 EU average €2,335

Source: Eurostat



Monthly labour cost per employee €672Pre-2004 EU member states’ average €3,169

Source: Eurostat (2000)


From late 1991 until April 2000, Poland adopted a crawling peg currency system.

Under this system the Zloty was linked to a basket of other currencies with the

US Dollar carrying a 45% weighting. Other currencies were the German Mark(35%), the British pound (10%), the French franc (5%) and the Swiss franc (5%).

At the end of 1998 the plus or minus band within which the currency was allowedto ‘crawl’ was 12.5%.

From the start of 1999 until April 2000 the basket of currencies was narrowed to just the Euro (55%) and the US Dollar (45%) and the variation allowed was 15%before the Central Bank would intervene – buying and selling currencies or changing interest rates.

From April 2000, the Zloty has been allowed to float freely on the open market.This can make for a larger degree of volatility.

Since being allowed to float freely the Zloty appreciated by 8% in 2000 and by10% in 2001 against the Euro. This trend was turned on its head in 2002 whenthe currency plummeted against the Euro by 13%.

This trend continued in 2003 – with the Zloty losing around 10% during the firstsix months and the pattern of a gradual, although slowing decline, seems to bethe way forward.





Poland has been hit badly by the global economic downturn from 2000. While

other accession countries maintained reasonable (although less dramatic rates of growth), Poland was the exception.

However, there is reason to believe that it is now in full recovery mode and thatits performance will pick up once again.

Certainly its longer term prospects are excellent. Its sheer scale makes it highlyattractive to business investors.

GDP growth has been firm since 2003, and the OECD expects GDP growth of 4.5% being achieved in 2005, helped in large part by rising domestic consumer

demand.

Poland’s very high level of unemployment is also expected to come down soon,as more jobs are created.

Political uncertainty has had a downward effect on Poland’s currency while other accession countries’ currencies have for the most part appreciated against theEuro. This has, however, made the country’s exports more attractive.

On the plus side – aside from more encouraging economic numbers – Polandhas displayed since its emancipation from communism a deep determination tocreate a free market economy. And in this it has undoubtedly led the way amongthe accession countries.

It has a proud heritage of driving economic and political reform in the region,leading the way with its tough economic measures in the early 90s to bring aboutan economic transformation.

This appetite to tackle economic woes is what has made it the most attractivedestination for foreign investors’ money. That and the size of its market of 39million people!


Even so, Poland does have a lot of problems. Many of them are caused by itssheer size relative to the other Eastern Eight.

Despite making great strides since reform began in the 90s, the country’s legacyof heavy industry and the part unions have played in politics, its reform task isharder than for most of the other accession countries.

It urgently needs to:




• bring down its levels of unemployment

• vastly reduce the state sector

• reduce the imbalance between government income and expenditure

• reduce bureaucracy hampering business

Some reforms are relatively easy – for example reducing the unnecessarybureaucracy that holds up business development.

In the past many small businesses were required to submit tax returns on amonthly basis. They will now be able to send in returns annually.

Other changes will be more difficult and will only come at a price.

The government has set itself the target of reducing state ownership of industry,from around 30% two years ago to 15% in 2005. Target areas are the coal, oil,gas and steel industries.

Such privatisation, inevitably, will not come about without a strong political willand many observers believe such transition may lead to serious civil disruption. Ataste of this occurred in the first part of 2002 when reforms to loosen employeeprotection caused large-scale demonstrations on the streets of Warsaw.

The country also suffers from very poor infrastructure and needs more and better

roads. The government has vowed to build 500kms of motorway by the end of 2005. Even so, much of the funding for this construction will come from the state.

The IMF has warned that Poland’s apparent recovery will only be sustained inthe longer term if the government tackles the big fiscal shortfall – i.e., cuts itsspending in relation to its income.

It recommends that privatisation is speeded up and that interest rate policyremain tight – in other words high interest rates – to contain inflation.

Economy Minister Jerzy Hausner's reform plan aims to cut the government’s

deficit, and involves spending cuts of around $8.3 billion by 2007.

Workers in the sectors most affected – mostly heavy industries and health – areopposed and demonstrations have resulted.

Whether the package goes ahead or not, it is clear that the government has anappetite to attack the budget deficit and that it is highly likely this will put it on acollision course with workers.

There is then a risk of a certain amount of political and economic uncertaintyahead, which could have an adverse effect on investment and business

sentiment. Property prices would also suffer.




However, if measures are successful, Poland will have once again proved that itis more than capable of swallowing bitter pills to achieve necessary reforms.This would be highly popular with business investors.


The Heritage Foundation ranks Poland in 66th position globally for the level of openness of its market – just below the Philippines and Uganda.

Only Slovakia has a lower ranking than Poland out of the Eastern Eight. Polandscores a 2.9 overall, which equates to a ‘mostly free’ economy.

While there is a great deal of praise for the efforts made since the fall of communism, especially in the banking sector, which is now almost completelyprivatised and with around 75% of the sector owned by foreign companies.

Where Poland does less well is for its high level of government spending relativeto GDP.

Private property is well protected in the country though, and the risk of expropriation is low.

However, the US Department of State has noted that

‘Many investors, foreign and domestic, complain about theslowness of the judicial system…. investors often voice concernabout frequent or unexpected issuance of or changes in laws and regulations.’

In short, red tape can be a problem.

The other big problem in Poland is fairly blatant corruption.


In fact, according to rankings compiled by Nationmaster.com, Poland is placed inthe number one position globally when it comes to reports of people victimised bybribery or corruption. Incidentally it also tops the list for reports of robberyvictims.

The black market thrives in Poland, of that there is no doubt. And corruption is away of life.

Any unwary foreign investor is wise to keep his eyes open and take sound advicefrom reputable sources.

The Transparency International Corruption Perceptions Index 2003 placesPoland at the bottom of all the Eastern Eight countries and in 64th position




globally of 133 countries. Poland scores 3.6 out of a possible totally corruption-free score of 10.

To put this in perspective, Poland ranks alongside Mexico and only one place upfrom China.

Whether the average property investor will actually find Poland noticeably morecorrupt than many of the other Eastern Eight countries is debatable.

However, it is as well to be aware not only of the country’s reputation, but alsowhat amounts to a way of life for many people – removing unexpected barriers tobusiness with a backhander is often what makes the place tick.

11.1.10 What are the prospects for the economy?

Basically, it appears as though the economy may well be on the mend. That’sgood news for property investors.

Nevertheless, the difficulties facing the government as it continues the reformprocess are formidable.

These difficulties, which have certainly had an effect on foreign investment in thecountry, are likely to hold back property prices in the short term.

What is more important, however, is the state of the economies in WesternEurope, especially Germany, the main trading partner.

If these economies pick up then the tough decisions and adjustments ahead for Poland will be made easier as trade will pick up and so will inward investment.

11.2 Poland - Property Market Potential

One of the first things to note about the property market is that it is centredaround Warsaw. Krakow has become increasingly interesting to investors in thelast few years, but there is still a heavy concentration of interest around the

capital.

Domestically, while Poles have relatively high earnings compared to other citizens of the Eastern Eight countries, they have not yet embraced the idea of taking on debt.

For this reason, they tend to have high disposable incomes and low creditcommitments – meaning the mortgage market in Poland is not especiallydeveloped.

This will undoubtedly change as European banks and other lenders seek to tap

the massive potential of the biggest new joiners in the EU.




Like several other accession countries, there are restrictions for foreignerslooking to own property in the country. In reality, however, these restrictions arenot especially daunting (see section 11.3)

Yet there is little doubt that while they don’t seriously impede a purchase, they do

act as a psychological barrier for many buyers.

And this is basically the idea – to stop foreign money flooding into the domesticmarket and pricing Poles out of the market before their purchasing power issufficient to join in.

Their eventual removal - five years after EU membership for EU citizens - willundoubtedly act as a boost to the market.

11.2.1 Traps for the unwary in the Polish property market

There are a number of considerations that should be made before jumping intothe property market – many of them unique to Poland.

Land and mortgage books

These are the Bibles of real estate in Poland. What is entered here goes.

They are kept by regional courts and record the legal interests in all real estate.

More than this, however, under the law these books can grant certain powerfullegal rights and no property should be bought without having a notary or lawyer check the book entry for the property.

Even if it appears that a seller has a legal title to a property, where there is nobook entry it is very unwise to consider buying the property.

This is especially the case where state owned property is concerned because itis possible that this was confiscated without any due legal process. This couldlead to restitution claims.

Perpetual Usufruct

A bit of a mouthful, but this is pretty much the same as a 99-year lease, but itgives its owner more rights than a regular long lease.

Usually, a Perpetual Usufruct starts off life as an agreement between the state(the owner of a property) and the buyer.

This agreement states the allowed uses of the property, annual ‘ground rent’

payments, the time frame in which any property may be built and so on.




This agreement can be transferred and any buyer is bound by its restrictions.Even if any building work has already been done, restrictions may be in force asto the use of the building.

This is why the original Perpetual Usufruct should be inspected carefully by a

professional. Any breach can result in court action to nullify the originalagreement.

An owner or bearer of a Perpetual Usufruct is responsible for any pollution withinthe property, even if it is the fault of the previous owner.

Zoning

Zoning laws are in effect the local master plan for an area. They set downrestrictions and development plans. They should always be studied by a

professional before making any decision to buy real estate or land to develop.

11.2.2 Why Warsaw?

Here you will avoid the high levels of unemployment found elsewhere in thecountry and which are likely to persist and to depress property prices.

Warsaw is seeing increased migration following EU accession as moreinvestment money enters the capital and better-paid jobs are created.

Overcrowding – Warsaw has one of the highest levels of density per property inEurope.

Slowdown in the economy in the last two/three years has led to fewer new builds,so reducing supply.

Emerging middle class will gravitate to the capital first for jobs and lifestyle.

Young population – large number of Poles now in the 20-something age bracketwill soon be looking for accommodation – again the capital is likely to be the first

choice for young people.

Better access to lawyers, accountants and other professionals connected withthe complex field of property buying in Poland.

11.2.3 Where and what to buy in Warsaw

Choose the smartest locations that will appeal to aspiring professional Poles andex-pats – these will be the easiest places to rent.

These include: the centre of Warsaw, Upper Mokotów, Ochota, Old Zoliborz,Saska Kêpa, Wilanow, Sródmiescie, Ursynów-Kabaty.




The average rental price for the centre of Warsaw is around €12 per sqm.

Buy modern, well-appointed apartments around 50 sq m in quiet and greenresidential areas, with two and three bedrooms

11.2.4 Avoid the top end…unless you can find a real bargain

There is a glut of top-end apartments on the market and prices have been staticor falling for a couple of years.

So, avoid the luxury end of the market unless you are prepared to make vastlyreduced offers on asking prices and walk away if you’re turned down.

In the longer term demand for luxury apartments is likely to revive, however, as

more professionals and especially ex-pats relocate to the city.

Here is an approximate price guide for new or newly renovated apartments inWarsaw –

Prices are in € per sqm

Two rooms Three rooms Four rooms

Warsawcentre

1,000 -2,300 1,100- 2,200 1,100- 2,400

Suburbs 620-890 595-850 600-800

11.2.5 How to know if you are paying the right price

Here’s the kind of formula you should apply to check you’re paying the right pricebearing in mind that expected 10%+ yield.

Check that your prospective purchase property will provide the right yield on your investment

Buy a 70 sq m, two-bedroom apartment for €1,500 per sqm

€1500 x 70 sq m = €105,000

10% yield = €10,500 per annum

10,500 / 12 = €875 per month

So, if your prospective property will not achieve a MINIMUM rent of €875 per month, then the chances are that the purchase price is too high.






The application process will need to be completed with assistance – thedocuments must be completed in Polish and translated. Most estate agents canmake the arrangements and the total cost should be under €500.

Other barriers to buying

Anyone considering buying real estate in Poland should also be aware of thesmall, but vocal and very real opposition in the country to the idea of foreignersbuying property and especially land.

A lot of this probably dates back to Poland’s long history of being invaded andtreated with disdain by its neighbours.

The political group Samoobrona as well as Polish farmers and many on the rightwing of Polish politics have been especially strident in their predictions that EU

membership will lead to a vast sell-off of Poland’s assets to foreign capital.

Foreign investment in business is one thing, but it is simply not true that foreignbuyers of real estate will find themselves welcome everywhere.

Certainly, on the whole, the welcome is not as warm as in the Czech Republicand Hungary.

Another negative factor is crime. While, say Prague and Hungary are no moredangerous than any other big city, Warsaw is in quite a different league.

We’ve already mentioned corruption, but organised crime has also taken holdand is part of the scene. Warsaw has one of the highest crime rates in EasternEurope and car-jacking and street robberies are commonplace.

What about taxes?

The general principle is that foreigners pay the same taxes as Poles, with someexceptions.

Here’s a breakdown of the most common taxes. The most appealing, to aforeign investor, is probably Capital Gains.

Tax Details

Corporate income 27% 19% in 2004

Personal incomeProgressive scale of 19%, 30% and thetop rate is 40% on earnings over approximately $14,500.

Value AddedVaries between 3, 7 and 22%. The toprate is the most common.




Tax Details

Property tax

Rates vary according to the communeRates also differ depending on type,location and use of the property.

As a guide -• Residential building €0.08 psm• Commercial building €2.89 psm• Plot for commercial purposes

€0.09 psm• (Some local authorities allow a

reduction of up to 50%)Property transfer 5% of the market value of the property

Land tax See property taxCapital gains on realestate

Treated as income and taxed on thesame scale

Capital repatriation none

Private owners have to declare rent earned on a property as income and pay atax rate according to the amount. In practice, this will almost always put them inthe 40% tax bracket.

Both loan interest and improvements are tax deductible for both corporate andindividual owners.

Note: Poland has tax treaties with over 60 nations, including the UK and the US,to prevent double taxation.

Other costs

Expect to pay around 8% of the purchase price to buy a property – this willinclude the agent’s fee, between 2.5 and 3%, plus the fee for the notary, stampduty and so forth.

Obtaining a permit to buy, if necessary, will be liable to stamp duty of approximately €300 in the case of an individual and €450 in the case of acompany.

Taxes

The buyer of a property is liable to any back taxes remaining unpaid by the seller that came about through business conducted at the premises, up to the value of the property.




To prevent this, it is possible to demand from the seller a certificate from thegovernment stating that no taxes are due, in which case the seller will be exemptfrom any liability.


This is a problem in Poland and one that the investor should be wary of.

There is no legislation governing the restitution of private property.

Anyone claiming restitution of a property seized during the communists’ rule inPoland has to go to court throwing the status of a property into a kind of no-man’s land. It is vital, then, to have property titles thoroughly checked.

11.4 Poland - Property Finance

It is possible to obtain a loan in Poland for properties that are considered readilysaleable.

The loan to value ratio will vary according to the type of property, but willgenerally be between 70 and 80%. Borrowing in most major currencies is alsopossible – PLN, Sterling, US Dollars, Swiss Francs and Euros.

The loan rate will generally be similar to rates in the UK, probably around 6% and

up. USD rates are even lower.

Key Tip

As a rule, borrow money in the same currency you’re expecting therent to be paid in.

11.5 Poland - Investment Verdict

There are off-putting aspects to investing in Poland, of that there is no doubt.

Warsaw is not a city with the welcome for foreign investors that Prague or Budapest have. It is also some way behind these two cities when it comes toaesthetic appeal.

The economy undoubtedly has need of further restructuring and this may bepainful and disruptive in the short, even medium term. It is also likely to meet

some political resistance.




And yet, Poland offers the largest potential of all the accession countries. It issimply the biggest market.

While the property market grew hugely in the 90s – some estimates say by 500%both in terms of price rises and number of transactions – many analysts believe

that the real growth is yet to come.

Much of the boom is thought to have been fuelled by Polish émigrés returning totheir homeland either to invest or settle – the Polish population in the US alone isestimated to be some 6 million people.

Dozens of multinationals already have a presence in Warsaw and more willcertainly follow.

The population is young and the domestic mortgage market has still to develop.When it does, and the emerging middle class becomes more established – it is

certain to bring about strong upward pressure on property prices.

The number of mortgage loans is already on the increase, but remain along waybehind the potential size of the market.

Mortgage loans outstanding total less than 2% of the country’s GDP, a tinyamount when compared with the average in Western Europe of 48%.

As such, Warsaw to a great extent and a handful of smaller cities such asPoznañ, Gdañsk, Kraków, Wrocaw, Katowice/Silesia must be great long-terminvestment bets.

But for the time being it is Warsaw where the best investments will be made.

11.6 Poland - Property Links

11.6.1 Real Estate Agents

Site URL

Adam Nowaczyk, Anna Real

Estate, Poznan

www.anna.com.pl/

Bioropiotra republika.pl/biuropiotra/

Chemind, Wroclaw www.mikrozet.wroc.pl/~chemind/

Extra Invest Real Estate,Szczecin

www.extra.com.pl/

Interpromo Real Estate Lower Silesia, Gdansk and Poznan

www.wroclaw.com/wrocreal.htm

Krzysztof Sapielak, Poltegor-engineering Ltd., Wroclaw

www.poltegor-eng.com.pl/eng/

Pawel Sztejter, REAS

Konsulting, Warszawa

www.reas.pl/

http://www.anna.com.pl/





http://republika.pl/biuropiotra/



http://www.mikrozet.wroc.pl/~chemind/




http://www.extra.com.pl/





http://www.wroclaw.com/wrocreal.htm





http://www.poltegor-eng.com.pl/eng/





http://www.reas.pl/

http://www.reas.pl/

http://www.reas.pl/

http://www.reas.pl/

http://www.reas.pl/

http://www.reas.pl/

http://www.reas.pl/

http://www.reas.pl/




















Site URL

Puche and Partner GmbH,Zielona Gora

www.puche.com/

Realnosc, Cracow www.kki.krakow.pl/realnosc/realang.htm

Szmidt Real Estate, Gdynia,Poland www.szmidt.pl/30000000.html

11.6.2 Others

Site URL

Ministry of Economy www.mg.gov.pl/

Ministry of Finance www.mofnet.gov.pl/

Ministry of Foreign Affairs www.msz.gov.pl/

Polish Official Statistics www.stat.gov.pl/

http://www.puche.com/





http://www.kki.krakow.pl/realnosc/realang.htm



http://www.szmidt.pl/30000000.html





http://www.mg.gov.pl/




http://www.mofnet.gov.pl/




http://www.msz.gov.pl/




http://www.stat.gov.pl/























12. ESTONIA – THE HONG KONG OF EAST EUROPE?

There are a number of factors that make tiny Estonia stand out among theEastern Eight.

But what is truly astounding is the extent to which it has managed to turn around

its economy from a Soviet, centrally run monolith into a vibrant, free market inlittle more than a decade.

In a school report assessment of each of the accession countries, Estonia woulddefinitely be at the top of the class, pretty much with straight A’s in all subjects.

It continually won the highest accolades from the EU during its regular inspections of the accession countries prior to its joining.

And the IMF has called Estonia ‘an outstanding performer among the transitioneconomies’ and has singled out its commitment to creating a market-driven




economy with minimal government interference as well as building institutionsand a legal framework of high quality.

In many ways, the country's small size and population is both a plus and a minus – it makes change management easier to effect, but it also makes the country

wholly dependent on its neighbours and trading partners for its success.

It is because of this that the Estonian government has opened up its economyand turned with whole-hearted commitment to its place in the European Union.

12.1 Estonia - Business & Economic Overview

12.1.1 Estonian politics in a nutshell

• After centuries of domination by foreign powers, Estonia becameindependent in 1918;

• It was subsumed by its giant Soviet Union neighbour during WW2 and hadto wait until 1991 to become independent again;

• Invited to join Nato in 2002;

• Parliamentary elections in the spring of 2003 created a conservativecoalition committed to continued reform.


Population 1.4 m

Land mass45,226 sq km, which includes more than 1,500off-shore islands

Capital city Tallinn

Borders Latvia and Russia

Climate Coastal influences – wet, moderately cold wintersand cool summers

Notes

The air in parts of the north east of the country isbadly polluted with sulphur dioxide from power plants.

Stretches of seawater are badly polluted.

All levels of pollutants have fallen dramatically inthe last few years.








• Estonia €443• Germany €2,808• EU average €2,335

Source: Eurostat




Pre-2004 EU member states’ average €3.169Source: Eurostat, Statistical Office of Estonia

It is worth noting that the average salary in Estonia is on a steep upward trend –rising by 8.8% in 2003.


The Estonian Kroon is pegged to the Euro – but in a rather interesting manner.The Central Bank uses a currency board to maintain control over the exchangerate – in exactly the same way as Hong Kong’s monetary authority does.Lithuania uses the same mechanism.

A currency board policy fixes the exchange rate and it only allows a very smallmovement from this fixed rate.

The significant fact about a currency board is that for it to be effective the CentralBank must have sufficient reserves of foreign currency to match its own currency – or very nearly so.

In Estonia’s case, it has foreign reserves to match 90% of Kroons in circulation.

The board works by automatically selling or buying currency as the local currencycomes under pressure or becomes too strong.

By being able to match like for like, it is almost impossible for speculators tobreak the peg because as they attack the money by selling the local currency, sothe bank will buy.

There are, however, two disadvantages to the currency board:




It means that a country is dependent on another’s fiscal policy. In this case,Estonia’s own fiscal policy must reflect that of the Eurozone, regardless of localneed.

It also means that a country must maintain vast levels of foreign reserves.

Because a currency board means that a country basically gives up any fiscalindependence, it makes it highly dependent on the performance of the economyof the currency it is linked with – in this case the Eurozone.

However, a currency board does in theory make for a very sound exchangesystem and shows a willingness to practice highly disciplined fiscal policy.

It completely prevents the government from simply printing money and thereforeacts as an effective brake on inflation.

As an investor, you know exactly what your Kroons will be worth when you wantto exchange them.


Estonia’s GDP growth rate has maintained a healthy rate of growth despite therecent sluggish to standstill performance within the EU.

This has been mainly attributed to domestic demand, as exports have beenobstinately sluggish.

Particularly noteworthy is the decline in unemployment from highs of doublefigures as recently as three years ago.

The government remains committed to creating an open economy, possibly themost open in the region, as well as creating an environment that is conduciveand attractive to business.

A strong banking and finance sector has developed, in parallel with, and becauseof, an attractive tax regime for business.

Estonia is well poised to become the conduit between Eastern and WesternEurope, the same role Hong Kong has performed for so long between the Westand China’s mainland. Like Hong Kong, it is essentially a duty-free country.

Tiny Estonia, with its liberal business environment, borders the huge market of Russia, the market of enormous potential within the EU, Poland, with theeconomically sophisticated Scandinavian countries to the north.

The effects of FDI and EU money will undoubtedly fuel the growth of anaspirational Estonian middle class, eager to catch up with its Western

counterparts.




Surveys indicate that 39% of Estonians say they are Internet users and 25% of Estonians conduct their everyday banking via Internet.

Salaries and GDP are advancing rapidly and there is a strong sense that Estoniais racing to take its place alongside richer fellow members of the EU.

Estonia is likely to be among the first wave of countries to join the Eurozone.The government and the EU have agreed that the currency board system isacceptable as a transition between the Kroon and the Euro.

12.1.7 Problem areas for the economy

The northeast of the country remains a black spot for investment andunemployment and will take some time to make the transition from heavyindustry to the service and finance centre Estonia seems determined to become.

A growing economic divide is rapidly developing also between the capital and therest of the country.


This is the area in which Estonia really shines. It has, without any doubt, thefreest and most open economy of all the Eastern Eight. This makes it a veryexciting investment prospect both for business, particularly finance and banking

organisations, as well as the smaller, private investor.The Estonian administration realised early on that the tiny country would onlythrive with massive inflow of foreign investments, so it went about creating anenvironment conducive to this.

The Heritage Foundation places Estonia in 6th position globally, right up therewith such famously open economies as Hong Kong, New Zealand andLuxembourg. This places it above both the UK and the United States.

The 2004 report says: ‘Today, Estonia has the most advanced information

infrastructure among the formerly communist Eastern European states…..

‘One of Eastern Europe’s most free-market–oriented economies. Tight budgetarypolicies, foreign trade liberalisation, and extensive privatisation are the core of structural reform.’

On property rights and the law, the report says,

‘Estonia has made significant progress toward establishing anindependent judiciary and protecting private property rights.

‘The US Department of State reports that “Estonia’s efforts tocreate a modern, western legal system from the remnants of the




Soviet system is a work in progress.… Estonia’s judiciary isindependent and insulated from government influence.’


Estonia has an open society, but nevertheless still has some problems withcorruption.

Of the eight countries, the Transparency International Corruption PerceptionsIndex places Estonia in second place with a score of 5.5, just below Slovenia.

The EU has found corruption to be a problem in the country in terms of:

• Weak law enforcement• Ineffective anti-corruption institutions• Corruption in local government• Corruption in public procurement• Petty corruption has also been identified within the police and customs

officials

12.2 Estonia - Property Market Potential

The market of interest to investors is that in Tallinn, the capital. In previous yearsthe city and suburbs have experienced spectacular gains of up to around 30%.

Supply to a certain extent has now moved closer to demand and those kind of gains are not expected to be repeated in the near future.

Capital growth of between 10% and 15%, perhaps up to 20% is the scenariomost widely predicted. Still very attractive.

New apartments, centrally located rose around 12% in 2003. By the summer of 2003 they reached a level of €900 and €1,900 per sqm, according to Ober-HausReal Estate Company.

Prices of older flats in the centre of the Tallinn rose by around 8% to between €600 and €1,100 per sqm.

Rental yields are also quite attractive – around 8% for new apartments in the citycentre.

But it is widely predicted that rents will come down as the popularity of owning aproperty rather than renting one continues to grow in Estonia.

Interest rates have come down dramatically in Estonia and the mortgage market

is continuing to grow. Rates are now down under 5% with maximum credit




periods of 30 years. Loans on offer will now cover up to 90% of a property’svaluation.

Even so, there is a lot of growth to come in the domestic mortgage market.Outstanding mortgages in the country total around 6% of GDP, which is around

three times the level in Poland, but still tiny when compared to the average of 48% in Western Europe.

The combination of low interest rates and high salary inflation is likely to fueldemand for mortgages even further in the next few years. This in turn seemscertain to drive up prices.

Ober-Haus real estate records that developers built 1,100 new units in 2002, andsold 1,020 in the same period. Another 1,400 units were completed in 2003 andthe same number in 2004.

The agency estimates that Tallinn can absorb up to 2,000 units per year and thatdemand for the next two years at least will exceed supply.

12.3 Estonia - How the Property Market Works

As you might expect from the freest economy among the Eastern Eight there arefew restrictions on foreigners buying property in Estonia.

This is a country that seems entirely unfazed by foreign ownership of pretty much

any kind – 75% of banks are now foreign-owned.

Foreigners can buy and sell residential property freely in Estonia. Land can alsobe bought, but permission must first be obtained from the local authority. This isnot usually a problem.

There are also restrictions affecting property and land on Estonia’s 1,500 off-shore islands.

12.3.1 What about taxes and other costs?

The tax system, as you might expect from such an open economy, is quite liberaland straightforward.

The law allows companies to escape all taxation on profits that are not distributed – this is to encourage reinvesting. But the no-tax rule applies even if the profitsare simply retained.

There’s no capital gains tax on property, any profit is treated as though it wereincome. You therefore pay 26%, although the government is committed tobringing down this figure to 20%.




Tax Details

Corporate income26% on distributed profits. Reinvestedprofits are tax free until 2009

Personal income A flat rate of 26%

Value Added 18% standard rate

Property taxEstonia has a property tax only on land,which is from 1 to 2%, depending on thearea of the rateable value of the land.

Property transfer A fee of 0.075% of sale price to register theproperty in the registry.

Capital gains on realestate

Treated as income and taxed at 26%.Loan payments are deductible.

Capital repatriation No restrictions after tax

Double taxation treaties with many countries including the UK and US.

12.3.2 Other costs

You can expect to pay estate agents around 6%, even up to 8% of the purchaseprice of a property, and they’ll be charging the seller as well.

Generally, it is well worthwhile driving a hard bargain over this fee.

A notary fee of 0.1% of the sale price of the property.

Lawyer’s fees (a necessary extra), are on top.

12.3.3 The best way to buy - how to set up a company in Estonia

As we can see from the above categories, corporate taxation is the mostappealing as there is no profit tax until profits are distributed. In other wordsreinvested profits are not taxable if the company is registered in Estonia.

Basically, if you own a property and rent it out it is far more efficient to do so

through the formation of a company, which will allow many deductions againsttax. Company taxation is the flat 26%.

12.3.4 How to establish a new company

Firstly, a foundation agreement must be established. The government advisesthe following:

That a bank account in Estonia is opened and a foundation agreement is set up -which is simply a statement of the company’s name and other details such as thenames and personal details of the founders and the amount of share capital, etc.




There are different types of company but a plc – private limited company has tooffer share capital of at least (approx) €2,700.

The company must be registered in the Commercial Register within six months of the foundation agreement being established. This normally takes only around

two weeks.

Different fees will apply depending on the type of company, but a plc involves0.2% of the nominal share value, with the minimum being €192.

The golden rule is – hire an accountant and a lawyer.


This is a non-issue in Estonia. There are no pending disputes or restitution

cases. Communal property has been returned to religious organisations, allprivate claimants before the deadline have been able to reclaim their property.

Heirless property passes to the local authority which is entitled to sell it.

12.4 Estonia - Property Finance

Generally speaking, it is not possible to get finance for property purchase inEstonia unless you are officially resident. This situation is highly likely to change,

however.

Some banks do give a guardedly positive response to inquiries from foreigners,but it is clearly not a market that is developed.

This has a severe dampening effect on the appeal of the market, and yet, it mightwell be worth buying now through re-mortgaging an existing property and thenmortgaging in Estonia when loans are more readily available.

On the whole it appears that many Estonian banks are unprepared for inquiriesand respond that every case will be decided on its merits.

In other words it is possible to get a loan and be non-resident…sometimes.

Either way, in general, you will not be able to borrow more than 75% of the valueof the property if it is under five years old and not more than 70% if it is older.

The law does not allow lending above an 80% loan to value ratio.

If you’re a non-resident, you will have to work quite hard to persuade the bank of your impeccable financial credentials.




Things are starting to change, however, and as most Estonian banks are nowowned by big Swedish financial organisations the pace of change can beexpected to increase.

12.5 Estonia - Investment Verdict

Most of the above paints a pretty positive picture of Estonia. It isn’t all so.

Bear in mind that between the spring of 1998 and spring 1999, real estate priceswent down by up to 20%, except in one or two isolated pockets.

This was mainly due to economic factors outside the country having a profoundeffect – in this case it was the Russian currency crisis.

Even though Estonia has turned its trade direction around and relies far less onRussia and far more on the EU, it was still severely affected.

This is the price Estonia can pay by being so small and so open an economy thatrelies on trade and creating attractive conditions for inward investment. If aneconomic storm blows up around it, it can get badly buffeted.

By the spring of 2001, the economy – and the real estate market – had recoveredand prices stabilised at their pre-fall level.

In the long term, Estonia is a country that seems to know where it is headed. Its

economy has a clear character – open, low taxes, business-friendly – and assuch it is likely to be a winner in attracting increasing amounts of investmentcapital. This will drive up property prices.

But what else makes Estonia stand out?

Its currency policy makes wild fluctuations virtually impossible, it has a well-educated (but still relatively cheap) workforce, English is widely spoken and mostbusiness dealings are in English, it has a simple and relatively low tax system.

As a member of the EU, Estonia – along with other Baltic states such as Latvia –

is well-placed to take up the role of conduit between Eastern and WesternEurope. Estonia borders the three markets of Scandinavia, Poland and Russia.

Estonia has become and will continue to develop as an international transitcentre – the eastern-most EU state bordering Russia.

As with other Eastern Eight countries, the strong emergence of a young,relatively affluent and aspirational middle class in the country will drive updemand for good quality yet affordable housing.

To this end the availability of domestic credit – mortgages – will be vital.




And in Estonia the availability of mortgage credit has grown rapidly. Interestrates have plunged from 13% in 1997 to under 4% in 2003.

Just as vital is the willingness of lenders to increase loan to value ratios. InEstonia it is now possible to borrow up to 95% of a property’s value.

These two changes – a lowering of interest rates and a rise in loan to value ratios – mean that the Estonian real estate market increasingly resembles that inWestern Europe.

Steady price growth can be expected over the next few years, especially inTallinn – double digits, certainly, but probably not the growth seen post-communism when lack of supply sent prices soaring by up to 30%.

This all adds up to a very attractive target for the property investor.

Key Tip

Parnu, known as the summer capital of Estonia, is worth looking at for an investment. This vacation area has always been popular, butincreasing affluence is likely to put a premium on leisure and theaccommodation that goes with it.

12.6 Estonia – Links

12.6.1 Legal

Site URL

Baltic Legal Updates – SorainenLaw Offices

www.sorainen.ee/

12.6.2 Tax

Site URL

TaxUp.com www.TaxUp.com

12.6.3 Others

Site URL

Tourist Board www.visitestonia.com/

Estonia search portal www.ee/www/welcome.html

http://www.sorainen.ee/





http://taxup.com/

http://taxup.com/

http://www.taxup.com/


http://www.visitestonia.com/




http://www.ee/www/welcome.html









http://taxup.com/







Site URL

Baltic Sea States SMEInformation Site

www.balticmarket.org/

Estonia at a Glance www.vm.ee/eng/estoday/1999/01brief.html

Estonian Economy www.vm.ee/eng/kat_198/ Economy Reviews www.fin.ee/pages.php/011808

Ministry of Economic Affairsand Communications

www.mkm.ee/eng/

Ministry of Finance www.fin.ee/?lang=en

Ministry of Foreign Affairs www.vm.ee/eng

Statistical Office of Estonia www.stat.ee/index.aw/set_lang_id=2

Enterprise Estonia www.investinestonia.com/

Estonian Trade PromotionAgency

www.export.ee/index_eng.php

Estonian Trade Council www.etc.ee/en/

Estonian Chamber of Commerce and Industry

www.koda.ee/e_index_en.html

12.6.4 Property agents

Site URL

Arco vara www.arcovara.ee/

FKSM Real estate development www.fksm.ee/ Kinnisvaraepert www.kve.ee/

M.S.I. Group www.msigrupp.ee/

Ober-haus www.ober-haus.com/

Tolaram Group (real estatedevelopment)

www.tolaram.ee/realestate/

UusMaa www.uusmaa.ee/english_index.html

12.6.5 Loan providers

Site URL

Hansabank www.hansa.ee/en/

Eesti Ühispank www.eyp.ee

Sampo Bank www.sampo.ee/eng/

Nordea Bank www.nordea.ee/eng

Krediidipank www.krediidipank.ee

Balti-American Enterprise Fund www.balaef.ee

http://www.balticmarket.org/





http://www.vm.ee/eng/estoday/1999/01brief.html



http://www.vm.ee/eng/kat_198/




http://www.fin.ee/pages.php/011808




http://www.mkm.ee/eng/





http://www.fin.ee/?lang=en




http://www.vm.ee/eng




http://www.stat.ee/index.aw/set_lang_id=2




http://www.investinestonia.com/




http://www.export.ee/index_eng.php





http://www.etc.ee/en/




http://www.koda.ee/e_index_en.html





http://www.arcovara.ee/




http://www.fksm.ee/

http://www.fksm.ee/

http://www.fksm.ee/

http://www.fksm.ee/

http://www.kve.ee/

http://www.kve.ee/

http://www.kve.ee/

http://www.kve.ee/

http://www.msigrupp.ee/


http://www.ober-haus.com/




http://www.tolaram.ee/realestate/





http://www.uusmaa.ee/english_index.html




http://www.hansa.ee/en/


http://www.eyp.ee/index_eng.php3


http://www.sampo.ee/eng/


http://www.nordea.ee/eng/val-index.asp?navi=frontpage&lang=eng


http://www.krediidipank.ee/index-eng.html


http://www.balaef.ee/?setlang=eng

















http://www.kve.ee/

http://www.kve.ee/

http://www.fksm.ee/

http://www.fksm.ee/


































13. LITHUANIA – THE HIDDEN GEM

So far the countries we’ve looked at are reasonably familiar to an averagelyinformed person. For most people things generally become a little hazier whenwe reach Estonia. By the time Lithuania comes along, they’re lost.

And yet Lithuania has a great deal to offer investors, both private and corporate.Certainly, it is one of the post-Soviet success story countries.It’s the biggest by some way of the Baltic three (Estonia, Latvia and Lithuania),but it is selling itself as an investment location in the same way as Estonia –emphasising its role as a link between Europe and the CIS.

While stressing how cheap it is to do business in the country, it wants the worldto know that it is looking towards the future by developing e-commerce and aknowledge-based economy.

While it may feel less secure to make an investment in Lithuania than in, say, the

Czech Republic, it is arguable that it really is no less safe. Lithuania is nowadaysa very stable country, politically and economically.






GDP per headof population

$8,400 (2002)

Key sectors of

the economy

Machine tools, electric motors, white goods, oilrefining, shipbuilding (small ships), furniture making,textiles, food processing, fertilisers, agricultural

machinery, optical equipment, electroniccomponents, computers, amber

Key exportsMineral products 23%, textiles and clothing 16%,machinery and equipment 11%, chemicals 6%,wood and wood products 5%, foodstuffs 5% (2001)

Value of exports

$7.2 billion

Key exporttargetcountries

UK 13.5%, Russia 12.1%, Germany 10.3%, Latvia9.6%, Denmark 5%, Sweden 4.2%, France 4.1%,Estonia 3.8%

Key importsMineral products 21%, machinery and equipment17%, transport equipment 11%, chemicals 9%,textiles and clothing 9%, metals 5% (2001)

Value of imports

$6.8 billion f.o.b. (2002 est.)

Main importpartners

Russia 24.1%, Germany 20.3%, Italy 5.9%, Poland4.3% (2002)

Governmentbudget

-1.2% of GDP in 2002, small surplus possible in2003

Inflation 0.8%Foreign direct

investment $700 million 2003 (est.)Main countriesof origin

Denmark (18 %), Sweden (16.1 %), Estonia (10 %),Germany (9.2 %), USA (8.3 %).

Main sectorsManufacturing industry, financial sector,telecommunications and IT-sector.

Source: CIA World Factbook; Dresdner Bank, Bank of Estonia



• Lithuania €332• Germany €2,808• EU average in Western Europe €2,335

Source: Eurostat




Hourly labour cost in industryand services

€2.71

Pre-2004 EU member states’average

€22.70

Monthly labour cost per employee

€402

Pre-2004 EU member states’average

€3.169

Source: Eurostat

Labour costs in Lithuania are the second-cheapest among the Eastern Eight,second only to Latvia.


Like the currency policy in Estonia, Lithuania also operates a currency board – aharsh regime that dictates a high degree of fiscal discipline on the governmentand Central Bank.

The board works by automatically selling or buying currency as the local currencycomes under pressure or becomes too strong.

Lithuania’s currency, the Litas is currently pegged to the Euro at a rate of 3.4528to €1.

By being able to match like for like, it is almost impossible for speculators tobreak the peg because as they attack the money by selling the local currency, sothe bank will buy.

There are, however, two disadvantages to the currency board:

It means that a country is dependent on another’s fiscal policy. In this case,Lithuania’s own fiscal policy must reflect that of the Eurozone, regardless of localneed.

It also means that a country must maintain levels of foreign reserves to matchnote for note the amount of domestic currency in circulation.

Because a currency board means that a country basically gives up any fiscalindependence it makes it highly dependent on the performance of the economyof the currency it is linked with – in this case the Eurozone.

In Lithuania’s case (and Estonia’s for that matter), this is hardly relevant, as bothcountries want to adopt the Euro in 2007 anyway.

A currency board does in theory make for a very sound exchange system and

shows a willingness to practice highly disciplined fiscal policy.




It completely prevents the government from simply printing money and thereforeacts as an effective brake on inflation – note Lithuania’s very low rate of inflation.

As an investor, you know exactly what your Litas will be worth when you want toexchange them.


Lithuania’s prime minister has confidently predicted Lithuania can maintain itstitle as the fastest-growing economy in Europe.

This may or may not turn out to be accurate when all the calculations are in. Butit hardly matters. The fact is that Lithuania has a very impressive economicperformance.

It has almost completely shed the vestiges of a centrally controlled economy andmore than 80% of GDP is now produced by the private sector.

As with Estonia, the economy remains vulnerable to the strengths andweaknesses of its big neighbour, Russia.

The 1998 Russian currency crisis had a profound effect on the economy, sendingit into a downturn. The biggest effect was on the jobs market – unemploymentrapidly increased to 14% and kept going. In 2001, the rate reached its highestpoint - 17.4%. It is now around 10%.

Trade with Russia has revived somewhat in the last couple of years.

The government’s current account deficit has been brought down dramaticallytoo, from 11% just four years ago to a deficit of 1.2% of GDP in 2002.

13.1.7 Economic problems ahead?

All in all, it has to be said that once-sleepy and largely unnoticed, little Lithuaniais something of a star performer.

It is, of course, as an open and relatively small economy, very susceptible toexternal shocks, particularly slowdowns in the EU and in Russia.

In the future, however, the economy is likely to rely less on export-driven growthand more on domestic demand as salaries grow and a more consumer-orientedsociety develops. This is excellent news for the property market.


Second to Estonia in the Heritage Foundation’s rankings, Lithuania has anoverall placement of 22nd globally.




Its scores are dragged down by criticism of a weak judiciary and, while it isrelatively easy to set up a business, there is too much red tape governing itsoperation.


The Transparency International Corruption Perceptions Index 2003 ranksLithuania in 4th place behind Slovenia, Estonia and Hungary out of the EasternEight and 41st place globally.

Public administration is one area singled out for concern by the Open Society.

As with all the Eastern Eight, it seems that a level of corruption can be expected – at least until society becomes affluent enough to decide such practices are not

economically necessary.

13.2 Lithuania - Property Market Potential

The property market really began in Lithuania in 1991 when the governmentpassed a law allowing people to buy their state-owned flats.

Since then, apart from the black spots in the economy’s growth mentionedabove, property prices have risen fairly relentlessly – by about 100% in the last

decade.

There was a blip in the market by what we might call an exceptional item – thatwas when the Soviet army left the country in 1993 and left behind many vacantapartments.

For the foreign investor, Vilnius, the capital is probably the best focus. Hereagents are more likely to speak English and may have dealt with foreigninvestors previously.

Like Estonia and Latvia, Lithuania has a well-established property system with

efficient registration of ownership of property and land.

Most predictions are that the residential market in Lithuania will assume far greater importance to developers in the next few years – as it will in the two other Baltic States.

The main reason for this is increasing demand and a lack of good quality housingstock.

Renovation is likely to become big business.

Mortgages, as a percentage of GDP are the lower in Lithuania than in any of theother Baltic States - about 1.4% of GDP, which works out to be under €100 per




capita. The mortgage market has very large potential and is likely to grow withincreasing affluence.

13.3 Lithuania - How the Property Market Works

There are no restrictions on foreigners buying property in Lithuania, only landpurchase.

But a new law introduced in 2002 allows EU citizens who are establishing abusiness in the country to also buy land. Land can also be bought by anindividual but only with permission from the local authority.

Agricultural land will be excluded for seven years after Lithuania joins the EU.



Most property that can be returned to valid claimants has been returned.Approximately $500m worth of restitution claims remain, however, and will haveto be settled either by compensation or by handing over alternative premises.

The government has set itself the target of settling all claims by 2011.

The deadline for restitution claims passed at the end of 2001.

Tax Details

Corporateincome/profits tax

15%

Personal income 15% for non-residents on property income.

Value Added 18%

Property tax 1% of book value

Property transfer 1-3% depending on the value of the property

Land tax 1.5% of book valueCapital gains on realestate

15%

Capital repatriation none




13.4 Lithuania - Finance Availability

Obtaining finance from lending sources in Lithuania is non-existent for foreigners

unless they have first obtained residency.

It is hard to see how this state of affairs can continue for long. Increasedcompetition in the domestic mortgage market will likely result in availability of more flexible loans.

As things stand, however, finance for property purchase must come from your home country – extremely difficult – or from the re-mortgage of a main residence.

Either that or a property can be bought with capital in the expectation that withina few years a mortgage will be obtainable.

This lack of available finance both within the country and outside is undoubtedlya severe disincentive for the private investor, at least in the short term.

13.5 Lithuania - Investment Verdict

Despite the lack of available finance for an investment in Lithuania, there aregood reasons to see the market in an extremely positive light.

It is undoubtedly at a lower base than most of the other accession countries, andyet the country’s economy is growing fastest.

As yet, the aspirational middle-class has yet to emerge in a way that has aprofound effect on the property market. But, if current trends continue, aprofound effect will be felt within just a few years.

Property prices then will soar.

Lithuania also looks set to be one of the first countries into the Eurozone. This

will have a marked effect on lenders’ attitudes to the residential property market,as well as encouraging interest from more buyers.

For those prepared to take a slightly longer view of their property investment,Lithuania could well be a terrific choice.

You will certainly find willing and English-speaking estate agents to help youenter the market – just not many of them.

Prices

In 2002, sales of land parcels for family houses in Vilnius went up by 9.5%.




The average price was €19.48 per sqm. Compared to 2001, that’s an increase of 23%.

According to leading estate agents Ober-Haus, prices of new apartments havemore recently been rising by 5 - 10% a year .

New units in the city centre cost from €650 to €1000 per sqm. New units in thesuburbs cost €600 to €800 per sqm.

Yields have generally been falling for the last few years as rents have not keptpace with real estate price rises, but yields of between 8 and 14% are stillachievable with new, central apartments.

The monthly rent for a nicely furnished, 60-75 sqm flat in the centre of the city willachieve between €500 and €700 per month.

The most popular area for new modern apartments remains the Zimunai suburbof Vilnius.

Most experts agree that conditions are in place to drive prices considerablyhigher. The per capita living area in Lithuania is 22 sqm – half the average of Western Europe.

In the family home area of the market the biggest demand, say Ober-haus, is for 120-200 sq m properties. Within the city, such properties cost from €110,000 to €140,000. In the suburbs prices fall quite dramatically - €55,000 to €110,000.

The areas most in demand are Antakalnis, Turniðkës, Valakampiai, Gudeliai,Baltupiai and Jeruzalë. The prices there start from €300,000 for 200-300 sqmhouses.

The market is being fuelled by growing mortgage lending. But, as mentionedearlier, the mortgage market is still in its infancy in Lithuania, representing only1.5% of GDP compared to the Western European average of around 48%.

With interest rates down to 4.5%, Ober-Haus predicts some €940 of increasedlending coming into the market in the next few years.

The bottom line is that Lithuania has all the right ingredients for excellent growth.Prices still lag a long way behind the Czech Republic and Hungary, and evensome way behind Estonia.

And yet Lithuania is a bit of an unknown quantity to many people and it stillrepresents risk to many investors. This is really a false perception. The economyis well-managed, business likes the conditions and the workforce is young andwell educated.

An even stronger, more demanding middle class is certain to emerge in the next

few years.




If you get in now, you will be getting in early.

13.6 Lithuania - Links

Site URL

Central Mortgage Office www.lhr.lt/LimoE/e_main.htm

General Information www.online.lt/

Laws and regulations www.lrs.lt/

Doing Business in Lithuania www.lpvp.lt/book

Investing in Lithuania www.lda.lt/

Travel Info www.travel.lt/

Video views of Vilnius www.onvideo.lt/

State Land Cadastre www.kada.lt/

13.6.1 Agents

Site URL

Oberhaus oberhaus.lv.halo.ee/en/first Regional listings of sales www.alytusregion.com/property.phtml

http://www.lhr.lt/LimoE/e_main.htm




http://www.online.lt/




http://www.lrs.lt/

http://www.lrs.lt/

http://www.lrs.lt/

http://www.lrs.lt/

http://www.lpvp.lt/book




http://www.lda.lt/

http://www.lda.lt/

http://www.lda.lt/

http://www.travel.lt/




http://www.onvideo.lt/




http://www.kada.lt/

http://www.kada.lt/

http://www.kada.lt/

http://www.kada.lt/

http://oberhaus.lv.halo.ee/en/first




http://www.alytusregion.com/property.phtml








http://www.kada.lt/

http://www.kada.lt/





http://www.lda.lt/

http://www.lda.lt/



http://www.lrs.lt/

http://www.lrs.lt/








14. LATVIA – THE JEWEL IN THE BALTIC CROWN

Does Latvia – sandwiched between Estonia to the north and Lithuania to thesouth – really merit the jewel in the crown title?

Well, for property investors, the answer is unhesitatingly, YES!In fact, it’s quite possibly the outstanding Baltic country from an investmentviewpoint.

In a short while we’ll look at why this is so. But first let’s learn something aboutthe country and take a look at its economic and political state of health.




14.1 Latvia - Business & Economic Overview

14.1.1 Latvian politics in a nutshell

The Republic of Latvia was established as a parliamentary democracy in 1918,and elected four Saeimas (parliaments) before the onset of World War II.

At that time it had a standard of living comparable at that time to Finland andDenmark.

The Soviet Union occupied Latvia in 1940.

In 1990, while still under Soviet rule, Latvians elected a majority of pro-independence deputies to the Soviet parliamentary body.

The Soviet government in Moscow refused to recognise a declaration of independence and in 1991 attempted to overthrow the elected parliament.

Massive peaceful demonstrations halted Moscow’s attempts to bring Latvia toheel.

On March 3 1991, 87% of all residents took part in a referendum onindependence. 73% voted in favour, even though ethnic Latvians made up onlysome 53% of the population.

In 1991 Latvia declared full independence following the collapse of the SovietUnion. Elections were held the following year.

67% of Latvians voted for EU membership in 2003 – one point higher thanEstonia but still one of the least enthusiastic votes in favour of joining the EU.


Population 2,348,784Land mass 64,589 sq km

Capital city Riga

Borders Belarus, Estonia, Lithuania, Russia

Climate Maritime with wet and cool winters

Notes

Main environmental problem is improvement of quality of drinking water and treatment of sewerage.

Latvia has committed to implementing all EUenvironment directives by 2010.








• Latvia €266• Germany €2,808• Western European average €2,335

Source: Eurostat

Hourly labour cost in industryand services

€2.42

Member states’ average €22.70


Member states’ average €3.169Source: Eurostat

Labour costs are the cheapest of all the Eastern Eight countries.


Since 1994 Latvia has practised an exchange rate policy based on special

drawing rights (SDR). This is in effect a lump sum of money provided to Latviaby the International Monetary Fund to supplement its own reserves of foreigncurrency.

This bank of money enables the Latvian Central Bank to intervene on worldmarkets and buy its own currency in order to maintain a stable exchange rate.

The SDR is made up of a basket of currencies determined by the IMF. It reviewsthe weighting of each currency every few years. At the moment, the weighting isUS$ (44%), € (31%), Yen (14%) and £ (11%).

Latvia’s Central Bank then fixes the Lat against this basket of currencies andallows a deviation of just 1% either way before it intervenes to bring the currencyback in line.

The Lat rose by 13% against the Euro and in 2000 and 2001 it rose in valueagainst the Euro by 2% and 3.6%.

More recently, however, it has entered a decline against the Euro, which hasbeen largely due to the falling value of the dollar and sterling against the Euro(both currencies are in Latvia’s exchange basket).




The big advantage of the SDP system of currency fixing is that it very effectivelyprevents excessive government spending – and excessive government spendingis a problem for many of the Eastern Eight countries.

In fact, unless it is brought under control in some countries it will inhibit FDI and

delay entry into the Eurozone.

14.1.6 Economic overview and prospects

Like its Baltic state neighbours, Latvia was badly hit by the Russian financialcrisis in 1998. Since then the economy has recovered strongly, mainly (like bothEstonia and Lithuania), by re-orientating its economy towards the EU rather thanRussia.

Privatisation is almost complete in the country, but the government still controls

or holds large stakes in a number of companies.

Nevertheless, Latvia has the dubious distinction of being, by most measures, thepoorest country in the Eastern Eight, after Lithuania.

The Irish model of stupendous growth following EU membership has perhapsbeen overdone in recent years – nevertheless it is worth pointing out that whenIreland joined the EU it was the poorest member. Even a decade ago it was itsfourth-poorest. Now it is one of the richest.

This is Latvia’s challenge. And, of course, the fact that prices are at basementlevel indicates a potential golden opportunity for the investor. The question is:are the right ingredients present to signal a boom in economic growth?

One excellent positive indicator of how well the economy will develop can beseen if the pattern of FDI in Latvia is examined.

According to Alf Vanags, director of the Baltic International Centre for EconomicPolicy Studies (BICEPS), most of the existing FDI is what he calls the horizontaltype. This means ‘multi-plant foreign enterprises seeking to reproduce another plant for the Latvian market.’

Examples are financial services, telecoms, retailing and hotels.

This kind of investment differs greatly – and shows a commitment to the growthpotential of a country – to what Mr Vanags calls ‘vertical’ investment.

This is simply where companies have invested in the cheapest production centre.

And, as we said before, the countries that will grow and continue to see anincrease in wealth long term, will be those that most rapidly and effectively moveaway from selling themselves simply as cheap sources of labour and cheapplaces to do business.




Cultural and language links make Latvia an ideal place for Russia to use as anentry point to the EU, which means targeting investments in the country.

The challenge for Latvia will be to continue to create an economy geared towardsmaking business and investment easy, and tax and red-tape friendly.


According to the Heritage Foundation rankings, Latvia comes third amongst theEastern Eight behind Estonia and Lithuania.

Red tape, a weak judiciary and a thriving grey market are where Latvia is letdown most.

Nevertheless, there are few restrictions on foreigners doing business in Latvia –

with notable exceptions such as banks, airlines, broadcasting and insurance.

Restrictions on the ownership of real estate were pretty comprehensively doneaway with in 1996.


The Transparency International Corruption Perceptions Index 2003 ranks Latviain 57th place globally, just below the Czech Republic and on a par with Jamaica.

That puts it in 6

th

place out of the Eastern Eight.Globally this is modestly better than just a couple of years earlier and is evidencethat attempts to combat graft are having an effect. In 2001 Latvia was ranked in59th place.

Even so, the problem appears to be considerably worse than in, say, Estonia andLithuania.

Public administration has been picked up by various reports and by the EU as anarea of concern for petty corruption.

Cronyism and the taking of outright bribes in business transactions have alsobeen noted.

14.2 Latvia - Property Market Potential

For many investors, the idea of buying property in Latvia as an individual,perhaps like the idea of investing in Lithuania, is the equivalent of skiing off-piste:a bit of a leap into the unknown, a little dangerous, but with a potentially thrillingpayback.

The facts are really rather different.




The payback is potentially accurate, but the risks are less than might beimagined.

Latvia is actually a pretty stable investment country with laws designed to open

the real estate market to foreigners.

The most common complaint heard is that there is a lack of information about theproperty market.

This is changing with a considerable increase in the number of active real estateagents on the scene.

The property market still centres on Riga, Riga district and Jumala. This is whereprice rises have been most dramatic.

Restrictions on foreigners buying land remain, but they are few and involve, for the most part, obscure circumstances or specific areas.

The main restriction involves agricultural land and forestry.

The big advantage of the market is actually the lack of restrictions on foreignersbuying, the availability of finance and the fact that Latvia still represents greatvalue for money.

The suburbs of Riga showed spectacular growth during 2003 – Ober-Hausreports gains of 30-40%!

Prices in the centre of Riga grew at a respectable 7-15%.

Ober-Haus reports that prices of older apartments in the suburbs vary between €350-€600 per sqm. Sellers of old apartments tend to stick to the old habit of quoting prices in US$, while sellers of new apartments now quote in LVL.

Outstanding mortgage loans in Latvia total only some 2.6% of annual GDP,which means the market has huge room to grow.

Ober-haus property agency – one of the most active in the region - predictsover €650 million of increased lending coming to the Latvian housing market over the next couple of years.

There are essentially three areas to the rental market, all of which are mainlyaimed at expatriates.

The Old Town (€8-€10 per sqm monthly), the Silent Centre (€7-€9 per sqmmonthly), and the City centre for €6-€8 per sqm monthly.

The average residential investment yield is around 10% to 12%.




And the strongest demand, according to Ober-Haus, is for one and two-bedroomapartments, of between 60-75 sqm, costing between €800 and €1,000 per monthto rent.

14.3 Latvia - How the Property Market Works

Like Estonia, Latvia has one of the most open property markets. All foreignersare free to acquire real estate and even land if permission is obtained first.

Unlike many of the other Eastern Eight countries, there is actually adisadvantage to buying through a company, and that disadvantage comes in theshape of a 25% capital gains tax on property when you sell as a company. If youhold your property as an individual for 12 months then there is no capital gainstax (see 12.3.1)

Furthermore a company is obliged to charge VAT on rental income over €15,000per year.


Individual investors declare rent as ordinary income and are taxed accordingly atthe standard rate of 25% a year.

Loan interest and improvements are tax deductible.

There is no capital gains tax for private investors if they hold their property for more than one year , otherwise they pay 25% of any capital gain.

Latvia also has a tax of 25% of any payment to a territory designated a taxhaven.

Investing in real estate through the establishment of a private company is of course possible – but direct investment has the huge advantage of being exemptfrom capital gains if the property in question is held for a year.

Tax Details

Corporate rents on real estate 15%

Personal income 25%

Value Added 18%

Property tax 1% of value of land and buildings

Property transfer Stamp duty varies between 0.5%and 3% of the value of the propertyand is capped at LVL 50,000.

Land tax See property tax




Tax Details

Capital gains on real estateNone for individuals if property isheld for more than a year

Capital repatriationNone, subject to condition about taxhavens mentioned above.

14.3.2 Other costs

A notary fee will be a flat rate, usually around €400 and, of course, the standardpercentage fee to the estate agent, paid by both buyer and seller – probablyaround 5%. Always try and bargain over this.

If the agent boasts that there is ‘no fee’ you can be assured it’s included in the

price of the property!


Virtually all private and communal property restitution problems in Latvia havebeen resolved.

Latvian law allows property and land illegally confiscated from original owners tobe returned and this is regardless of the nationality of the claimant.

In cases where it’s impractical to return a property, compensation can be paid.

But this is not a problem the real estate investor is now likely to encounter inLatvia.

14.4 Latvia - Finance Availability

The Rietumu Bank (mortgage.rietumu.com) for example, will provide mortgageloans to non-residents at rates of around 5%.

The actual rate depends, as the bank states:

‘The rate depends on the quality of the mortgaged property, its price, location, term of the loan and sources of income of theapplicant.’

The maximum loan period on offer is 20 years and the loan to value ratio can beup to 85% of the market value.

http://mortgage.rietumu.com/






14.5 Latvia - Investment Verdict

OK, so it doesn’t have the familiarity of Prague or Budapest. It hasn’t yet been

sold as a super-open, potentially booming economy like Estonia. And, along withLithuania, it might be the poorest new kid on the block.

But, if you put aside these facts for a moment and look at the key elements, howcan anyone overlook Latvia?

Let’s summarise those element in the different categories:

Economy

•

5%- 6% GDP growth• Stable currency• Government spending under control• Super low wages means basement level opportunities• Relatively low unemployment

Property market

• Excellent prospects for capital growth - some suburbs of Riga, thecapital, prices have gone up by 30-40% in a single year

• Prices up by 15% a year in the city centre.• 10-12% yield on 60-75 sqm two bed apartments• Finance available at reasonable rates and with good LVR for reasonable

payback periods.

Tax

• Simple system• Low rate of 25% on rental returns• No capital gains

It’s the Latvian government’s avowed intent to raise the population’s standard of living and Latvia is likely to see massive injections of EU cash to make thishappen.

Economic growth in 2004 was around 7% - phenomenal growth!

Latvian real estate – retail, offices and industrial – remains the most popular target of FDI (over 20%).

In just about every way the market is at basement level. If you believe theevidence adds up to an administration that can maintain fiscal discipline and




devotion to a free market, it can only be a matter of time until Latvia starts tocatch up.

14.6 Latvia – Links

14.6.1 Finance and economy

Site URL

Bank of Latvia www.bank.lv/

Parex Bank www.parex.lv/1/

Paritate Bank www.paritate.lv/

Rietumu Bank www.rietumu.lv/lvl.nsf

Rigas Komercbamka PLC www.rkb.lv/ Trust Commercial Bank www.tkb.lv/

14.6.2 Estate Agents

Site URL

Apartments/Land www.ltn.lv/~ilmarsm/apartm.htm

Bizzz.com Global RealEstate

www.bizzz.com/photoads7/viewads.html

Latvia: Real EstateMarket

www.mac.doc.gov/eebic/countryr/latvia/market/estate.htm

Magda Ltd. - RealEstate Agency

www.magda.biz.lv/english/index.htm

Real Estate Database inLatvia

www.jums.lv/

Real Estate in Kurzeme,Latvia

www.kurland.lv/index.php?lang=eng

Real Estate In Latvia www.binet.lv/english/estate/realest.htm

Real Estate

Opportunities in Latvia

www.pimps.com/latvia/

Realty.lv www.realty.lv/eng/

Sirta, SIA www.sirta.lv/

Domuss www.domuss.lv/index.html

http://www.bank.lv/

http://www.bank.lv/

http://www.bank.lv/

http://www.bank.lv/

http://www.parex.lv/1/




http://www.paritate.lv/




http://www.rietumu.lv/lvl.nsf




http://www.rkb.lv/

http://www.rkb.lv/

http://www.rkb.lv/

http://www.rkb.lv/

http://www.tkb.lv/

http://www.tkb.lv/

http://www.tkb.lv/

http://www.tkb.lv/

http://www.ltn.lv/~ilmarsm/apartm.htm




http://www.bizzz.com/photoads7/viewads.html





http://www.mac.doc.gov/eebic/countryr/latvia/market/estate.htm






http://www.magda.biz.lv/english/index.htm





http://www.jums.lv/

http://www.jums.lv/

http://www.jums.lv/

http://www.jums.lv/

http://www.kurland.lv/index.php?lang=eng





http://www.binet.lv/english/estate/realest.htm




http://www.pimps.com/latvia/





http://www.realty.lv/eng/




http://www.sirta.lv/




http://www.domuss.lv/index.html


















http://www.jums.lv/

http://www.jums.lv/

http://www.jums.lv/













http://www.tkb.lv/

http://www.tkb.lv/

http://www.rkb.lv/

http://www.rkb.lv/







http://www.bank.lv/

http://www.bank.lv/




14.6.3 Other Links

Site URL

The Latvian Institute www.latinst.lv/li_eng_facts.htm President of the Republic of Latvia

www.president.lv/index.php

Parliament (Saeima) of the Republic of Latvia

www.saeima.lv

Cabinet of Ministers of theRepublic of Latvia

www.mk.gov.lv/index.php/en

Ministry of Finance www.fm.gov.lv/page.php?id=8

Ministry of Economics www.lem.gov.lv/En/

Ministry of Foreign Affairs www.am.gov.lv/en/

Financial and Capital MarketCommission

www.fktk.lv/en/

Central Statistical Bureau of Latvia

www.csb.lv

Latvian Development Agency www.lda.gov.lv/

Riga Stock Exchange www.rfb.lv

Latvian Privatization Agency www.lpa.bkc.lv/

Credit Institutions in the Republic of Latvia

www.fktk.lv/market/credit/banks/

http://www.latinst.lv/li_eng_facts.htm




http://www.president.lv/index.php?pid=210





http://www.saeima.lv/index_eng.html





http://www.mk.gov.lv/index.php/en





http://www.fm.gov.lv/page.php?id=8




http://www.lem.gov.lv/En/




http://www.am.gov.lv/en/




http://www.fktk.lv/en/





http://www.csb.lv/avidus.cfm





http://www.lda.gov.lv/




http://www.rfb.lv/public/index.html?language=2




http://www.lpa.bkc.lv/




http://www.fktk.lv/market/credit/banks/







































15. SLOVAKIA – OUT FROM THE SHADOWS

Long overshadowed by its more affluent neighbour and erstwhile nationalpartner, The Czech Republic, Slovakia is finally emerging as an attractiveinvestment and tourist destination.

With Slovakian airline Sky Europe, the first low cost airline in Central and EasternEurope, now flying to Bratislava from many European destinations, the country’stourist trade seems certain to grow.

Slovakia, which peacefully separated from the Czech Republic in 1993, wassaddled with many Soviet-style heavy industrial plants and transforming itseconomy into a market-driven, modern, forward-looking EU candidate has notbeen without cost.

The most notable burden is extremely high unemployment.

Now, however, Slovakia is starting to bring about changes to attract more foreigninvestment, tourism and, specifically, investment in car manufacturing – some

10% of Europe’s cars are now manufactured within 180 km of Bratislava.




Volkswagen is one of the biggest investors and has switched production of theSeat Ibiza from Spain to Slovakia – cheaper production costs and less-unionisedlabour are believed to have been key factors.

VW has actually become the country’s largest single private employer – some

9,300 people work at the company’s Bratislava plant, which makes the Golf, Poloand Touareg. Porsche also makes parts in Slovakia.

15.1 Slovakia - Business & Economic Overview

15.1.1 Slovakian politics in a nutshell

• In 1918 the Slovaks joined the closely related Czechs to formCzechoslovakia

• After WW2 Czechoslovakia became a communist state under the rule of the Soviets

• Soviet rule collapsed in the 1989

• The country was invited to join NATO in 2002

• In May 2003 Slovakians took part in a dramatic referendum to join the EU – there was a turnout of only 52%, 2% more than the minimum. But 96%voted yes.


Population 5.4 millionLandmass

48,845 sq km

Capitalcity

Bratislava

Borders Austria 91 km, Czech Republic 215 km, Hungary 677km, Poland 444 km, Ukraine 97 kmClimate Continental - cool summers, cold, cloudy, humid winters

Notes

Air pollution from metallurgical plants presents humanhealth risks

Acid rain damaging forests





Currency

Slovak koruna (SKK)

$1 = 32.78 skk Unemployment Around 20%

GDP $67.3 billion (2002)

GDP growth rate 4.4% (2002)GDP per head of population

$5,689

Key industries

Metal and metal products; food and beverages;electricity, gas, coke, oil, nuclear fuel; chemicalsand manmade fibres; machinery; paper andprinting; transport vehicles; textiles; electrical

and optical apparatus; rubber products

Key commodityexports

Machinery and transport equipment,intermediate manufactured goods,miscellaneous manufactured goods, chemicals

Value of exports $12.9 billion

Key export targetcountries

Germany 30.1%, Czech Republic 16.4%,Austria 10.7%, Italy 7.2%, Poland 5.7%,Hungary 4.6% (2002)

Key importsmachinery and transport equipment,intermediate manufactured goods, fuels,

chemicals, miscellaneous manufactured goodsValue of imports $19.1 billion

Main importpartners

Germany 24.8%, Czech Republic 16%, Russia13.5%, Austria 7%, Italy 6.4%, France 4%(2002

Governmentbudget

-1.9 billion $

Inflation 8.7 (2003)Foreign directinvestment

$3.8 billion (2002)$2 billion (2003) est.

Main countries of origin Germany (47.4 %), France (37.6 %), Austria (5%), United Kingdom (4.1 %).

Main sectorsEnergy sector, especially electricity utilities(82.5 %), financial sector (10.7 %), wholesaleand retail trade (3.8 %).

Source: CIA World Factbook; Dresdner Bank






Cutting government spending remains a priority along with bringing downunemployment.

Up to now, FDI has been relatively low. But the current government seemsaware that FDI is the key to raising the standard of living for Slovakians and is

intent on bringing about conditions to encourage investors – low tax andsimplified bureaucracy.

This and attacking high government spending and unacceptably high levels of unemployment are the priorities.

To this end, 2004 marked the start of a gamble for Slovakia – a completeoverhaul of the tax system in order to turn the country into something of a taxhaven.

The problem with its new 19%-suits-all tax rate is that, although it will appeal to

business and individuals very well, it will also hit many products that werepreviously VAT-exempt, or at least subject to less than 19%.

Anecdotally, however, it seems that the experiment may well pay off - it isreported that some firms in neighbouring Austria and the Czech Republic arealready considering relocating their headquarters to Slovakia in order to takeadvantage of the favourable tax regime.


According to the Heritage Foundation rankings, Slovakia’s economy is in 34 th place for 2004 and classified as ‘mostly free’. It praises the current governmentfor liberalising prices, reducing taxes, accelerating privatisation, and beginning torestructure the banking sector.


The Transparency International Corruption Perceptions Index 2003 ranksSlovakia in 59th place globally and 7th out of eight of the Eastern Eight countries.

59th place puts Slovakia on a par with Colombia and El Salvador.

Various reports have noted problems with the judiciary, a lack of an effective anti-corruption strategy, a prevalence of tolerance of corrupt practices.

15.2 Slovakia - Property Market Potential

Interest in the Slovak market for investors, centres around Bratislava, the capita.And it is here that a combination of a lack of supply and imminent EU entry havedriven up prices by some 10 to 15% in the last couple of years.






15.2.1 How to buy and finance

EU citizens can purchase real estate freely as individuals.

Non-EU citizens still need to buy through a company. The company-purchasingprocess is actually quite simple and estate agents will complete the exercise for buyers with minimal fuss.

15.3 Slovakia - How the Property Market works

EU citizens can now buy real estate directly as individuals, unlike the

situation in many of the other Eastern Eight countries, where restrictionsstill exist despite membership of the EU.

For anyone without EU citizenship, the process of buying is still quitestraightforward. You form a Slovak company.

The two most common options are a limited liability company ("s.r.o.") and a jointstock company ("a.s.").

Individual investors almost always go for the s.r.o. because it can exist with asingle shareholder and it is very simple to operate.


There is a clear determination on the part of the government to simplify the taxsystem – and to lower the rate of taxation.

The Ministry of Finance in 2004 made the highest level of income tax andcorporate tax 19%.

Some are starting to ask whether Slovakia is on its way to becoming the tax

haven of Central Europe.






15.5 Slovakia - Investment Verdict

Slovakia might be known as the great experiment!

If the tax measures launched by the government in 2004, on the eve of EUmembership, pay off, then Slovakia could well prove to be one of the bestinvestment targets out of the eight countries making up the accession countries.Possibly.

The country has a great many economic and social problems, not least of whichis unemployment, well in excess of 20% in some areas.

The government certainly seems aware that FDI is the key to addressing theseproblems.

But because of these problems the only real area of interest to the propertyinvestor is Bratislava – here prices continue to grow mainly because of poor housing stock and the capital’s inability to meet demand.

For the time being, Slovakia is making a great deal of making itself cheap – as atax regime and as a place to do business. Building itself up as a car-manufacturing centre is an interesting development.

The government plays on the fact that wages are up to 50% less than in the

Czech Republic or Poland and Hungary.

But this kind of approach is not sustainable longer term because there will alwaysbe cheaper alternatives on the horizon.

However, a combination of low taxes, a very highly educated workforce – whichis also cheap due to high unemployment – could pay off for Slovakia. But the jury is still out.

15.6 Slovakia - Links

Site URL

Slovak Government site www.government.gov.sk/

Slovak Spectator www.slovakspectator.sk/

Business Journal Slovakia www.bjs.sk/real_est.html

National Assoc of estate Agentsin Slovakia

www.narks-real.sk/default_en.htm

ING bank Slovakia www.ingfn.sk/

http://www.government.gov.sk/




http://www.slovakspectator.sk/




http://www.bjs.sk/real_est.html




http://www.narks-real.sk/default_en.htm





http://www.ingfn.sk/

























Currency

Tolar (SIT)

Jan 2003 €1 = 237.2 tolar Unemployment 6.6% (2003)

GDP $26.9 billion (2002) est.

GDP growth rate 3.3% est.GDP per head of population

€16,990 (2002)

Key exportsManufactured goods, machinery andtransport equipment, chemicals, food

Key industries

Iron and aluminium products, lead and zincsmelting, electronics (including military

electronics), trucks, electric power equipment, wood products, textiles,chemicals, machine tools

Value of exports $10.3 billion (2002)

Key export targetcountries

Germany 23.9%, Italy 12.7%, Austria 9.5%,Croatia 8%, France 7.4%, Bosnia andHerzegovina 4.4% (2002)

Key importsMachinery and transport equipment,manufactured goods, chemicals, fuels andlubricants, food

Value of imports $11.1 billion (2002)Main import partners

Germany 20%, Italy 19%, Austria 11.3%,France 10.5% (2002)

Government budget $0.1 billion (2003) est.

Inflation 7.5% (2002) 6.5% (2003) est.Foreign directinvestment

$1.9 billion (2002) $0.9 billion (2003) est.


Belgium, UK, Austria, Germany, Italy,France.

Main sectorsFinancial sector, telecommunications, food

processing and textile industry.Source: CIA World Factbook; Dresdner Bank, Eurostat



• Slovenia €1,060• Germany €2,808• Western European average €2,335

Source: Eurostat




Hourly labour cost in industry and services €9

Member states’ average €22.70

Monthly labour cost per employee €1,291

Member states’ average €3.169Source: Eurostat

It is worth noting that the monthly cost of an employee in Slovenia is higher thanin Portugal and nearly twice that of Poland, the next most expensive accessioncountry.


Slovenia operates a managed float regime in which the Central Bank intervenes

by buying or selling if it thinks the exchange rate is not as it would like.

Since the mid 90s up until the end of 2002, the Tolar depreciated by 32% againstthe Ecu/€. However, since this time the Tolar rate has been more stable.


Relatively affluent Slovenia is likely to be one of the first countries into theEurozone in 2007.

Its GDP purchasing power is actually higher than Greece’s and close toPortugal’s.

The country’s unemployment rate is lower than that of Germany, and it is unlikelyto be on the receiving end of EU funds.

The economy has grown solidly since independence, averaging annual growth of 4.3%. Its GDP per head – just under €17,000 per annum – is approximately 70%of the Western European average.

Public debt stands at just 25.8% of GDP and unemployment is in decline,currently at around 6.4%.

Higher-than-desirable inflation remains a problem (7.5% in 2002).

The slowness of the banking and finance sectors to privatise did attract somecriticism from the EU, but new legislation in 2002 allows for more competition inthe insurance and banking sectors.

Initially Slovenia lagged behind in attracting foreign investment. FDI totalled onlyabout 1% of GDP. But, more recently, more foreign investments have taken

place and the level has risen to 2% of GDP.




Some 59% of Slovenia’s exports are to countries that were in the EU prior to2004, and 68% of its imports come from those countries.

Slovenia is something of an entrepot between the West and South-EasternEurope and it is well on the way to catching up with some of the more

economically advanced countries within the EU.

In some cases and in some respects it has already overtaken some countries.


Slovenia is ranked in 6th position out of the Eastern Eight countries by theHeritage Foundation. Its report states that for a long time successive Slovenianadministrations have not seen the need for radical reform because of thecountry’s relatively high standard of living.

And it adds that ‘For a number of years, the sale of key assets to foreigners hasencountered widespread hostility.’

It points out that foreign investment has been modest due to the smallness of themarket and the amount of red tape encountered.

The report also highlights the country’s high rate of tax - 50%. The averagetaxpayer is charged 35%.


The Transparency International Corruption Perceptions Index 2003 placesSlovenia in 29th position globally, ahead of Estonia (33rd) and way ahead of thenext country on the list, Hungary in 40th place.

Areas of concern that have been highlighted in the past are a lack of a clear anti-corruption strategy, too much conflict of interest in business and weak lawenforcement.

Relatively speaking, however, Slovenia is a clean country and certainly deservesits ranking ahead of the other seven eastern accession countries.

16.2 Slovenia - Property Market Potential

Previous restrictions of foreigners buying real estate in Slovenia have beenscrapped. Anyone from an EU country can buy real estate with very fewrestrictions.

The only restriction is the principle of reciprocity between the buyer’s country andSlovenia. But even this restriction no longer applies to EU citizens, now that thecountry is part of the EU.




16.2.1 State of the market

Property prices in the country as a whole are static or falling.

But in Ljubljana, Bled and along the Adriatic coast, prices are still on the increaseat around a steady 10% per year for the last three/four years.

In Ljubljana prices vary from around €1,600 per sqm for old houses, possibly inneed of some restoration, to €5,000 per sqm for the best properties near thecentre of the city.

Rents are around €8 per sqm per month for a house and €10 per sqm for anapartment near the centre.

Yields are around 6-8% per annum.

16.3 Slovenia - How the Property Market Works

The market, while it began opening up to foreign investment prior to EUaccession, is not especially foreigner-friendly.

Processes are slow and taxation is high – at least for individuals buying direct.

The best way of buying is still through a Slovenian registered company – this iseasily the most tax-efficient way of buying.

16.3.1 Taxes and other costs?

Tax Details

Corporate income 25%

Personal income

17 to 50% depending on levelof income. Paid monthly on

estimated basis and thedifference paid or owed at theend of the tax year.

Value Added 20%

Property taxOnly payable on properties of over 160 sqm

Property transfer 5%, but full VAT on newproperties

Capital gains on real estate 30%

Capital repatriationFree profit and capital transfer

after taxes.




Double taxation treaties with many countries including the UK and US.


Generally speaking, restitution is a non-issue in Slovenia. The country passedand began implementing a law on the restitution of property of soon after independence.

Around 70% of claims filed have been resolved.

Almost all Jewish private property claims are resolved and Jewish communalproperty claims are complete

16.4 Slovenia - Finance Availability

If you are a foreign non-resident it is difficult to obtain mortgages in Slovenia. Inany case, the loan rates are not acceptable – 8-12%!

The most tax-efficient way of buying real estate in Slovenia is to establish acompany or buy shares in a company holding real estate. Nearly all estateagents can advise on this relatively simple process.

Buying through a company avoids the hefty tax applicable to new properties, andexpenses can be set against profits.

16.5 Slovenia - Investment Verdict

There seems to be little in this market to be attractive to foreign investors – thetax system is unfriendly, finance is expensive and capital returns and yieldscompare poorly with other Eastern Eight countries.

However, longer term, Slovenia probably does represent an excellent buyingopportunity. Prices in lots of parts of the country are on the slide, which mayrepresent a good buying opportunity.

Estate agents in the capital suggest the most profit can be made by buying oldhouses and renovating.

Ljubljana is unquestionably one of Europe’s most stunning cities with chocolate-box views around every corner. Tourism is growing, but the country is still notyet a mainstream destination.

The country is stable, relatively affluent, has modern infrastructure and a skilledand educated workforce. English is widely spoken by the young and by a vastnumber of people in Ljubljana.




In the long term, investment in a property that is easily rentable here could wellbe a sound one.

16.6 Slovenia - Links

Site URL

Agency PROPERTY RealEstate Ljubljana Slovenia

www.property.si/index_slo.htm

Bizzz.com Global RealEstate

www.bizzz.com/photoads7/viewads.html

Bonita - Real Estate inSlovenia

www.bonita-z.si/

Cupola, Ljubljana www.cupola.si/

Mega-net-Real Estate,Slovenia

nepremicnine.net/

Real Estate Ljubljana -Slovenia

www.property.si/

Telestan, Real Estate,Slovenia

www.telestan.com/

16.6.1 Banks

Site URLAbanka d.d. Ljubljana www.abanka.si/

Banka Koper d.d. www.banka-koper.si/

Banka Zasavje d.d. Trbovlje www.banka-zasavje.si/

Factor Banka d.d. www.factorb.si/

Gorenjska Banka, d.d., Kranj www.gbkr.si/

Hypo-Alpe-Adria Bank d.d.,Ljubljana

www.hypobanka.com/

Kaerntner Sparkasse Ag,KLAGENFURT/Celovec

www.kaerntnersparkasse.si/

Krekova Banka d.d. www.krekova-banka.si/

Nova Kreditna Banka Maribor d.d. www.nkbm.si/

Nova Ljubljanska Banka d.d.,Ljubljana

www.nlb.si/

http://www.property.si/index_slo.htm










http://www.bonita-z.si/





http://www.cupola.si/




http://nepremicnine.net/





http://www.property.si/





http://www.telestan.com/





http://www.abanka.si/




http://www.banka-koper.si/




http://www.banka-zasavje.si/




http://www.factorb.si/




http://www.gbkr.si/

http://www.gbkr.si/

http://www.gbkr.si/

http://www.gbkr.si/

http://www.hypobanka.com/





http://www.kaerntnersparkasse.si/





http://www.krekova-banka.si/




http://www.nkbm.si/

http://www.nkbm.si/

http://www.nkbm.si/

http://www.nkbm.si/

http://www.nlb.si/

http://www.nlb.si/

http://www.nlb.si/

http://www.nlb.si/

http://www.nlb.si/

http://www.nlb.si/

http://www.nlb.si/

http://www.nlb.si/

http://www.nkbm.si/

http://www.nkbm.si/









http://www.gbkr.si/

http://www.gbkr.si/































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