HUNGARY-Hungary has the best potential for commercial real estate investment among 13 countries likely to join the European Union over the next few years, according to “Emerging Europe,” a new report by Cushman & Wakefield. Just behind Hungary are the Czech Republic and Poland.

“These Central European countries have performed well, given their early moves to carry out economic reform, their recent good growth and growing appeal to investors and international business,” said David Hutchings, Cushman & Wakefield’s Head of European Research. “Investors seeking high-risk returns are likely to be more attracted by countries further down the ranking, such as Russia and Turkey.”

The country ranking in the Emerging Europe report takes into consideration some 50 different political, economic and real estate related factors. Regarding real estate factors, the report states: “The availability of modern real estate, whether for offices, retail or industrial, is a catalyst to attract businesses to these emerging countries. Where space of the right quality is not available, economic development will be slowed.”

The 13 countries are: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia, all due to join the EU in 2004; Bulgaria, Romania, and possibly Croatia, due to join the EU in 2007; Turkey, a candidate country that has not yet started membership talks; and Russia, the region’s biggest country with a population of 143 million, which has a partnership and co-operation agreement with the EU.

“The eastward expansion of the EU will potentially benefit all of Europe, not just the faster-growing emerging markets,” said Hutchings. “The winners, however, may be at a regional or city level, rather than a country level. Areas with no comparative advantage will need to compete on cost. But set them against global competition for low-cost production, such as China, and this is unlikely to be sustainable in the longer term.”

The upcoming additions to the EU will be the fifth and biggest expansion of the EU, according to the report. The last was in 1995, with the joining of Austria, Finland and Sweden. The 12 new members joining the existing 15 will push EU’s population by more than 25% to 484 million, 70% more than the population of the United States. However, these countries will add only 5-6 percent to the EU’s gross domestic product, making the total EU economy about the same size as that of the US.

The report finds that a total 36 million sf of new shopping center space is due to be finished in Emerging Europe over the next two years, and that future growth in the demand for office space is likely to be gradual as many companies have already set themselves up in their preferred markets. With regard to the industrial market, the report states: “The removal of trade barriers post accession will encourage more distribution and freight companies to relocate into the region and establish pan-European networks.”

Interest from institutional investors in emerging European countries is expected to grow over the next two years as accession reduces the risks associated with emerging markets, states the report. Yield levels are expected to edge down further, however, particularly as some countries get closer to adopting the Euro, and activity will be restricted by the lack of suitable product to buy.

At present, German funds are the dominant buyers, according to the report, but investors are set to become more diversified by nationality, with local investors likely to be increasingly important. “Most of these markets have potential to absorb more modern real estate and will grow substantially over the next five to 10 years,” said Hutchings. “This will create a larger and more liquid property market which in itself will act as a further catalyst for investment and economic expansion.”

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