Balkan Tiger Goes on the Prowl

For the Record: 3 May 2005, Tuesday.

By Ambrose Evans-Pritchard
The Telegraph

The Romanian and Bulgarian stock markets have both tripled over the past two years in anticipation of imminent EU membership, but analysts insist there is still plenty of money to be made in the 'tiger' economies of the forgotten Balkans.

With per capita incomes less than 30pc of the EU average, these two ex-Communist basket cases have turned their countries inside out in a frantic effort to comply with the Acquis Communautaire, the 90,000-page EU rule book.

Both have now been granted the EU's coveted status of "free market economy" able to withstand the full rigours of Europe's single market. Barring an upset veto by Euro-MPs, they have a guaranteed entry date of January 1, 2007.

Geoffrey Van Orden, a Tory MEP and the European Parliament's spokesman on Bulgaria, said it has been the prospect of EU entry - and the strategic imperative of a safe berth beyond Russia's clutches - that helped former Communist regimes stay the course on radical reforms.

He said: "One of the few good things about the EU is that it serves as a pole of attraction for failed states. These people suffered terribly under Communism. It is the lure of joining the club of democracies that has given them the impetus to see through some very tough decisions."

Romania's economy grew at 8.3pc in 2004. More than 96pc of the land is now in private hands under newly issued property deeds. The total private sector accounts for almost 70pc of GDP, arguably making the country more "free market" than Britain, where the private sector only accounts for about 60pc of GDP. A new flat tax of 16pc is being introduced.

The pro-American government of Calin Popescu Tariceanu, a wealthy entrepreneur, is privatising the state behemoth left by the Ceausescu regime at breakneck speed. Some 550 nationalised industries are on the auction block, following the sale - or outright closure - of 486 state firms between 2001 and 2004. The country's biggest employer, the state oil company Petrom, was sold to Austrian investors last year.

The biggest steel plant, Galati, is now in the hands of the Anglo-Indian steel baron Laksi Mittal, after Downing Street intervened directly to help smooth the takeover. Renault has bought the state Dacia car production plant, now a profitable business.

Last year, the credit rating agency Fitch upgraded Romania to "investment grade", and Standard & Poor's is expected to follow suit this year. The country has a population of 22 million.

Plamen Monovski, manager of Merrill Lynch's Emerging Europe Fund, said Bulgaria was in better shape than Romania after a genuine "supply side" revolution pushed through by ultra-liberal governments. The current prime minister is the former child-king Simeon Saxe-Coburg, who returned triumphant after half a century in exile.

"The banks went bust in the hyperinflation at the end of the 1990s, but now they have all been sold to foreigners and are incredibly stable," said Mr Movovski.

"The vision of EU accession has been a very powerful anchor. The Maastricht criteria for joining the euro have forced the government to bring its budget under control," he said.

He said the Balkan bond market was "played out", with spreads over core eurozone debt already very narrow.

Last year, car sales rose 46pc and property prices by 31pc, one of the highest rates in the world, with 5.7pc GDP growth forecast this year. However, the IMF has warned against overheating.

Even so, Mr Monovski said the equity and property markets still had potential. "Property prices are still very low compared to areas of similar beauty and geography. Bulgaria is a country where you can ski six months of the year, yet there are lovely beaches not far away," he said.

Merrill Lynch warns that Romania needs to tackle its unreformed banking system, still dominated by two dinosaur state banks.

Mr Monovski's best tip: Romanian and Bulgarian farm land. He said: "There are huge opportunities in agricultural land. This is a very fertile area with a good climate, going cheap."

But buyers should tread cautiously. Mr van Orden said Bulgaria and Romania were still hampered by the legacy of communism: dodgy courts, crooked police, corrupt civil servants, and a crime network with a deep reach into the state apparatus.

Mindful of the warning, Romania has sacked 40 police commissioners, frozen the bank accounts of 42,000 companies, and launched a blizzard of anti-graft inquiries.

The prime minister has sought to soothe sceptical French and German Euro-MPs, saying: "Major changes won't happen overnight, but corruption and the arbitrary will of bureaucrats are no longer the law. The next ten years shall make Romania reborn into a modern European country."

Bratislava A Great Place To Buy - Once You Find It

Bratislava is the new Prague, and Irish people would love it if they knew where it was, says Derek Scally. Many who do are investing in apartments costing from around €35,000 that offer decent returns.

Bratislava is everything Prague isn't. While the Czech capital's city centre is a noisy, dynamic and dirty place, the Slovak capital is a quiet, clean, pleasant city.

The 1993 dissolution of Czechoslovakia left Bratislava somewhat in the shadow of its larger brother to the north. But in hindsight, that may not have been a bad thing, considering present-day Prague's souvenir shop scars of mass tourism.

The flourishing city on the Danube, long an insider tip, is finally emerging on the radar of tourists and investors alike. The property market here is smaller than in other central European cities like Budapest or Warsaw, but rising prices and a decent supply of new developments mean it's a good time to get on board.

The Irish are the largest foreign investors in Bratislava, mostly due to the presence of Ballymore Properties, Sean Mulryan's development company. which is the driving force behind Eurovea, which it calls central Europe's largest mixed-use riverside development. The ambitious scheme will essentially give Bratislava an entirely new urban district - and a main shopping street the city lacks - with over 200,000 sq m (2.15m sq ft) of office, retail and apartment space.

However the interest from Irish private investors in the residential market has been modest though agents say things have picked up significantly since the start of the year.

"A lot of that is down to Irish ignorance. Lots of people don't know where Bratislava or even Slovakia is. They confuse it with Slovenia," says Billy Norton, founder of the Norco property agency. "But a lot of interest has moved down from Prague because property prices there have risen so much."

Slovakia has a population of five million and is sandwiched in central Europe with five borders to the Czech Republic, Austria, Hungary and Ukraine. Bratislava, once the capital of the Ottoman Empire, has a population of 450,000 and is 30 miles, or an hour on the train, from Vienna - closer than Navan to Dublin. By the time the long-awaited intercity motorway opens in 2007, the commuting time for motorists will drop to just 40 minutes.

There are no direct flights from Dublin but the city is served by low-cost airlines Easyjet and Slovakia's own SkyEurope.

Slovakia spent much of the 1990s in political isolation thanks to the despotic prime minister Vladimir Meciar, whose openly corrupt privatisation drive and regular nationalistic outbursts alienated EU, NATO and the US. But the present centre-right government of Prime Minister Mikulá Dzurinda has pushed through necessary, if unpopular reforms, and last year lead the country into NATO and the EU.

Slovakia has had a strong economic performance of late, with 5.5 per cent growth last year and forecast 5.8 per cent growth this year.

Slovaks are among the lowest paid people in Europe with an average monthly income of around €500 a month. But the arrival of large multinationals in Bratislava has brought with it a growing expat community.

"The rental market is very strong. All the properties we manage are fully rented and we deal with a circle of businesses which are looking to rent all the time," says Norton. "At the moment we are getting investors 8 per cent yield, sometimes 9 per cent." Properties sell within days of coming on the market in Bratislava.

Apartments on Norco's books at the moment include a 34 sq m (365 sq ft) apartment for SKK1,300,000 (€35,000) up to a 100 sq m (1m sq ft) apartment for SKK 4 million (€104,000).

Norco concentrates on apartments in the so-called "golden triangle" of the old town, saying that newer developments further out are less attractive.

But Mayoman Pat Loftus, founder of the Slovak Real Estate Agency, is of another opinion.

"Everyone wants to buy in the old town and there is a premium already. It's not impossible but it's a lot of work to find something reasonable at a reasonable price," he says. "Of course it's a trophy, but it's like Ireland where people didn't make less money by investing in the suburbs rather than in Temple Bar."

Until recently Bratislava suffered from a shortage of apartments and developers were selling apartments from the plans by word of mouth. New developments have changed the market so that it's easier to find an apartment; however the days of 20 per cent annual property appreciation are also in the past.

There's no stamp duty in Slovakia and apart from lawyer's fee of around €500, there are no hidden charges, says Loftus. Still, he says Bratislava is not necessarily the best place for first-time investors or investors looking for a quick return.

"The people buying at the moment are more educated investors; 80-90 per cent are accountants or bank managers. For someone without a second property in Ireland it's too much of a jump," he says. "I wouldn't pay too much attention to talk of yields either. Capital appreciation would make me more excited than the rental returns. If the rent comes close to meeting interest you should be happy."

Loftus is currently selling apartments in Axton, a new development due for completion in October in the Ruzinov area close to the old town.

The development offers one- and two-bedroom apartments from 60-80 sq m (645-861 sq ft), with prices starting at €93,000 and €105,000 respectively. The apartments have a good quality finish including a tiled bathroom and video security phones but no fitted kitchen.

The company website offers an excellent interface allowing browsers to explore the development floor by floor, apartment by apartment.

The development is located next to a new business park with a large number of foreign companies.

"I would be aiming to rent these apartments out to expats, as well as Slovak bank managers and company directors for anything from €400 to €600 a month," says Loftus, who is currently negotiating exclusive deals on other new developments.

Irish agents say that when it comes to investing, cash is king in Bratislava, but special foreign investor mortgages with 4.5 per cent interest rates are available from banks such as Bank Austria-owned HVB.

© The Irish Times

The Estonian Property Express

The Estonian Property Express, published in The Times 29th April 2005
By Sarah Marks
Investors are packing their bags for Tallinn to try to beat the rush

ASK DARREN GOODSON to speculate on the next big thing in overseas property investment and he will put his money on Tallinn. So certain is the London businessman of a long-term property boom that he is liquidating a substantial part of his UK buy-to-let portfolio to invest in the Estonian capital. And he has convinced his brother, business partner and two other friends to buy there too.

They are not alone: when Ryanair and easyJet added the Baltic states to their schedules canny investors took note. Fly-to-let investors have already made their presence felt in Prague, and budget airlines, whether serving the tourist or business market, now routinely feature in lists of key economic indicators drawn up by property investors evaluating distant lands.

Estonia's medieval capital is regularly promoted by the travel industry as the new Prague, but whether this tiny city of just 411,000 is the new property hot spot remains to be seen. Darren, who runs a printing and publishing business in the East End, has no doubts: he has bought three new one-bed flats just outside Tallinn's Old Town and plans to sell three of his eight London properties to buy another ten flats in the city in the next 12 to 18 months.

An amateur property investor even before he left home in Redbridge, Essex, at 21, Darren, now 32, spotted Tallinn's potential when he visited an old schoolfriend working in the country's telecommunications industry three years ago. His friend had fallen for an Estonian girl, but Darren was in the mood for finance, not romance. "At the time Estonia was on the verge of joining the EU, and by speaking to locals I found out prices were going up by 10 to 15 per cent."

Over the next 12 months he did his homework and he liked what he saw. Estonia's GDP grew by 4.7 per cent last year, and the country is attracting large amounts of foreign investment, including substantial European Union grants for infrastructure projects. More than 250 subsidiaries of international companies have been established here since 2003, many from Sweden and Finland (Helsinki is just 1½ hours away by hydrofoil).

Much of the housing stock is poor, Soviet-era concrete blocks. With wages and living standards rising, the pan-Baltic estate agent Ober-Haus predicts that demand will easily outstrip the supply of new-build properties.

A key indicator for Darren was the construction index, which rose by 6.2 per cent last year. "That's a good indication of a rising property market," he says. "Those building costs have to be passed on to the consumer, which means the price of new houses will increase, at least in line with the construction index. This in turn should push up second-hand prices."

Darren also discovered that Estonian banks are willing to lend up to 95 per cent of a property's value, provided that monthly payments are not more than 40 per cent of take-home pay.

Darren, who lives in London Docklands, says his investment decisions are not emotional, but he is an avowed fan of Tallinn. "I liked it from the very first time I went there," he admits. "It's a beautiful place. They're very nice, friendly people, and they've got a good service culture. I like the village atmosphere of a small city - you get a feeling of importance there, whereas in London you can feel like a lost soul."

Wisely, Darren's choice of property reflects his experience in London. He reserved a one-bed apartment in a new building in the fast- growing commercial and residential ring just outside the old city walls. Darren paid £45,000 for his initial 50 sq m flat in 2003 and £50,000 for a further two. His brother Gary paid £61,000 for a similar-sized apartment a few months ago.

Darren put down a 25 per cent deposit and took out an interest-only mortgage with an Estonian bank for the balance. He spent £6,000 kitting out and furnishing each flat, which he hopes to let for £350 a month. After deducting bills of £500, mortgage repayments of £1,200 and agency fees, he believes he will be left with an annual profit of £1,700 on the two flats he hopes to let; he is keeping the first for his own use.

Including capital growth of 10 per cent a year, Darren estimates that he will see a 35 per cent a year return on his investment, but he admits that there is some risk: his figures depend on letting the flats for at least 11 months of the year and his main rental market will be foreign workers or Estonians working for foreign companies. Agents suggest that this is achievable. He says:

"I've been through ten years of property growth in the UK and I see exactly the same thing happening in Estonia. When I bought my first buy-to-let in the UK, friends said, 'You're mad, what if you can't rent it out?' But if you want to be successful, you've got to take risks."

To read Darren's book go to TallinnProperty.com

To read the full article click here



Gang of four: from left, Gary Goodson, Darren Goodson, Mack Patel and Mario Onoufriou have all invested in property in Tallinn (RICHARD CANNON) 


Comments: TALLINN TIPS

DARREN GOODSON is not a man to miss an opportunity: he has set up a company advising UK investors in Tallinn and has written a book on buying there that he hopes to publish. Here are his top tips:

Research properties on the web before even booking your plane ticket. Contact estate agents and book viewing appointments before leaving. Once in Tallinn, use taxis, which are cheap.

Tap in to the estate agents' network to find plumbers, electricians and locksmiths and get builders/kitchen fitters lined up about two months in advance. All flats are sold as shells (common throughout Eastern Europe) but do not wait until completion to look for installers.

Get an English-speaking lawyer (try www.sorainen.ee or www.hedman.ee), and use professional translators: as well as translating documents they can also attend meetings with you.

Make sure that you get advice on which taxes you will be liable to pay.

Check all transactions with care. In Estonia the client, not the solicitor, organises the transfer of monies to the seller and the payment of the notary.

Get every quote in writing. It is quite common for extra prices to appear on the final invoice. Check that prices include delivery and installation.


TallinnProperty.com

Eastern Europe offers Cheap Stocks and Fast Growth

Eastern European markets look unstoppable, says FAZ.net. The Czech and Polish benchmark indices have gained about 35% and 26% respectively this year. And fund manager Odeniyaz Japarov - whose Nestor Osteuropa fund is the second-best German eastern European fund over the past three years with a gain of 126% - believes the region should have little trouble outperforming its Western counterparts over the next two years.

Reforms in the new EU entrants' economies to bring them into line with the EU have underpinned rapid growth, and the convergence process is set to continue, spurring further growth and stockmarket gains. The best bet is Poland, where GDP growth - set to outstrip most of its neighbours' growth this year - is giving profits a 'significant lift'. The Polish market offers 'a broad range' of attractive stocks, including Telekom Polska and Bank Pekao. Andreas Schiller of the Raiffeisen Zentralbank is also a Poland fan, citing the comparatively cheap p/e of 12.5 and the impending privatisation of a state-owned bank as further positive signs.

Japarov's favourite market is Russia, which looks 'very attractive', with rocketing GDP growth fuelled by high energy prices and domestic consumption. He is sanguine about property rights: 'If you believe, as I do, that the government is unlikely to attack another company as it did Yukos… then the market is too good to ignore.' Especially on a p/e of 7.6, says Austria Boersenbrief - which is cheap, even allowing for the risk to property rights. Also encouraging for Russia bulls are foreign investments in oil and gas firms - ConocoPhillips and Total are linking up with Lukoil and Novatek - and eased restrictions on foreign purchases of Gazprom shares. Beyond the oil and gas sector, mobile stocks MTS and Vimplecom are worth a look.

Published 01 October 2004 in MoneyWeek Magazine