Eastern Europe becoming prime investment location

The Warsaw skyline, once dominated by a huge Soviet-style palace, today resembles a fast-growing metropolis. More foreign investors have realised that it is Poland, the Czech Republic and Hungary where the return on investment is substantial, say exp
The Warsaw skyline, once dominated by a huge Soviet-style palace, today resembles a fast-growing metropolis. More foreign investors have realised that it is Poland, the Czech Republic and Hungary where the return on investment is substantial, say experts.ST PHOTO: MARKUS ZIENER

Asian investors, led by South Korea, seeing substantial returns from fast-growing region

Property executive Simon Mallinson cannot conceal his enthusiasm: "When we think about investing in office space, the momentum is clearly with eastern European markets."

Mr Mallinson, executive managing director of London-based real estate firm Capital Analytics, added: "But one has to move quite quickly." He noted that more and more foreign investors have realised that it is in Poland, the Czech Republic or Hungary where the return on investment is substantial.

This seems particularly true for Poland. "The domestic market is significant, liquidity is better than in other places and office space is generating good income," he said.

Mr Mallinson was one of the participants of a high-ranking investment summit organised by the media company Poland Today in the capital Warsaw late last month.

In the morning, he took a tour through the city of almost 1.8 million people that not too long ago was a rather uncharming place that had been battered heavily in World War II.

Now it is going through a fundamental change, with skyscrapers, office towers and new hotels. The skyline, once dominated by a huge Soviet-style palace, today resembles a fast-growing metropolis.

The noise of new construction is prevalent, as is the buzz of businessmen on the streets working their smartphones.

The newly developed appeal of eastern Europe has not gone unnoticed even in far away Asia.

A recent report by Swedish developer Skanska, real estate consultant Colliers International and the global law firm Dentons noted that around €7.7 billion (S$11.6 billion) of Asian capital has been invested in eastern Europe since 2013. This is just €1 billion shy of the investment that has poured in from European powerhouse Germany.

One of the big advantages of places like Poland is the unbroken history of economic growth. Even the financial crisis 10 years ago put only a minor dent in regional economies.

With annual growth rates between 3 and 4 per cent, the major countries in central and eastern Europe outpace their western European neighbours. Notably, investors from South Korea are very active in the region.

"As the biggest office developer in Europe, (for the past) few years we've been observing with great interest an inflow of Asian-rooted investors. They are searching for core commercial assets with long leases and strong tenants," said Mr Adrian Karczewicz, head of divestments at Skanska's commercial development business unit in central and eastern Europe.

"What's crucial is, with the same quality product, our region offers more attractive yields - and that's what investors are looking for."

One of the big advantages of places like Poland is the unbroken history of economic growth. Even the financial crisis 10 years ago put only a minor dent in regional economies.

With annual growth rates between 3 and 4 per cent, the major countries in central and eastern Europe outpace their western European neighbours.

Notably, investors from South Korea are very active in the region. Supported largely by the South Korean pension fund, the country is looking for opportunities on many fronts.

While capital from Hong Kong is almost solely focused on central London offices, South Korean investors are much more flexible.

So far this year, for example, €670 million has been spent in Vienna, €544 million in Prague offices and almost €400 million in Poland. South Korean investors also snapped up assets in Slovakia and Hungary.

"Core eastern European cities such as Warsaw, Budapest and Prague are strongly growing to become serious competition to traditional western European cities," said Mr Hyon Suk Jan, executive managing director of JR AMC, Korea.

Mr Matt Bin, Korean desk manager with JP Weber, an agency supporting foreign investors, is upbeat about the whole Polish market - not just real estate.

Recently Mr Bin has been involved in setting up a battery component factory for SK Innovation, part of one of the largest conglomerates in South Korea. He also had a hand in the establishment of an LG Chem plant to build batteries for electric vehicles in southern Poland.

This is particularly promising since the European car market is facing a dramatic transition from combustion engines powered by fossil fuels to electric vehicles. The demand for batteries and components will almost surely increase.

About a year ago, LG Chem's board approved an additional investment of US$571 million (S$779 million) in LG Chem Wroclaw Energy. The project will triple the unit's output capacity in Poland to 300,000 batteries annually from the current 100,00 for shipment across Europe.

"Poland has a great location, a great domestic market and it is easy to find good employees," Mr Bin noted.

Although LG Chem and others could have set up shop in Germany, in the centre of the European market, they decided against it.

"The German labour market is strict and there are many regulations," he said. "That's why Poland is the better place."

A survey of 67 countries in The CEO Magazine found Poland to be the second-best country in the world to invest or do business in this year, surpassed only by Malaysia.

While South Korea is clearly topping the list of Asian investors, Singapore, with Mapletree Investments leading the charge, is in second place, followed by the Philippines, India and Japan.

Foreign investors in Poland enjoy another advantage: Since domestic pension funds are mainly absent from the Polish market due to legislation, foreigners with cash to spend are very welcome.

"The prospect of Brexit is driving money away from the UK into continental Europe," said Mr Carsten Loll, partner with law firm Linklaters.

"Much of this money will go to eastern European markets."

All this is happening with the backdrop of a global sea change, Mr Loll said. "Not only (South) Korea, also Singapore and China have created an incredible wealth in Asia. And this money now is globalised."

A version of this article appeared in the print edition of The Straits Times on November 25, 2019, with the headline 'Eastern Europe becoming prime investment location'. Print Edition | Subscribe