International Property Investment in Central and Eastern Europe
By Katja Huitikka
As published in the Fenton Report
August 6, 2007
2006 saw direct investment into European real estate reach record levels with total transaction volumes of €242 billion – up 39% on 2005. Although the UK, Germany, and France continued to dominate market activity in 2006, accounting for 64% of total volumes, there was significant growth in Central and Eastern Europe (“CEE”) where volumes more than doubled from €5.8 billion to €13.3 billion. Poland alone was the biggest CEE market with transactions exceeding €5.0 billion.
As real estate continues to become an increasingly global asset class with new capital flowing frequently between the US, Europe and Asia, and as new options of entering into the European market are being implemented, such as the introduction of REIT structures, further tremendous growth is expected over the next five years.
The incredible growth of the CEE markets is hardly surprising. Even prior to EU accession, the CEE was viewed as a lucrative market for high-risk investors seeking good returns with yields of 10-12% for properties located in major urban areas being common.
However, following EU accession and the corresponding reduction on restrictions as to foreign ownership of real estate and the perceived reduction of risk in view of harmonized legislation and increased transparency, the attraction of the CEE markets, particularly to conservative investors, grew exponentially, although yields did correspondingly reduce.
Now viewed as safer markets and yet largely untapped, developers began to look aggressively for opportunities. Poland, for example, with a population of nearly 40 million, made it the largest single market in Central Europe and therefore a huge potential for residential development. All of the CEE countries, in view of their physical location in Europe, became extremely attractive to the logistics sector as development and expansion of transport infrastructure became a priority. Each of the markets also provided lucrative opportunities in respect to the construction of Class A office space and upscale retail centers to service Western European retailers seeking to expand their customer bases. Additionally, with the significant migration of manufacturing and R&D ventures into central Europe, the assembly of large tracts of land for industrial purposes became essential and yet another prime investment opportunity. Although the investment opportunities in the CEE are very attractive, potential investors are strongly advised to rely upon local advisors in regards to specific legal, tax, and planning issues which, if not properly resolved prior to acquiring a property, could lead to serious delays and losses.
In regards to legal matters pertaining to a property’s title, conveyancing practices and real estate due diligences are based on the civil law and generally involves the use of both attorneys and notaries in commercial transactions. As between the various jurisdictions in the CEE, the land registration systems and commonly accepted standards of title investigation vary quite dramatically, raising the potential for a number of issues to arise which could affect an investor’s end ownership in the title.
In Poland for example, there is a very solid principle called “the reliability of the perpetual books” which entitles a buyer, if they’re in good faith, to rely upon the most recent entry in the land register to transfer title to them. However, should there be odd annotations against the land register for the property, or references in earlier transfers to outstanding interests, or evidence that the property may be subject to restitution proceedings, that good faith will no longer be applicable and the buyer may be facing litigation and/or administrative proceedings challenging their registered title. Moreover, the likelihood of there being an “adverse” entry against the property is very likely. For example, if the property being bought is within the boundaries of the City of Warsaw, the property would have been nationalized under the Warsaw Decree. Accordingly, it is extremely likely that there were administrative proceedings by the expropriated owners seeking an interest in the nationalized property which, quite frequently, have never been finalized, leading in many cases to ongoing litigation.
In Romania as well, although the returns are very lucrative, restitution is a major issue. Nearly 80% of properties are affected by claims of previous owners whose lands were seized by the Communist government. And considering that Romania is only second to Russia as regards to the number of complaints to the European Court of Human Rights related to the handling of those restitution claims, one can easily imagine the potential costs an investor may sustain in having to defend his title against a restituent.
Even in the Czech Republic where it is possible to investigate titles quickly through an automated system which allows you to query back to the 1930s and earlier, title problems are common. Under the Civil and Commercial Codes, the manner in which a sale transaction is to be documented is specifically set out. Frequently, the actual conveyancing documentation is defective as it may be missing necessary attachments and approvals, contains erroneous legal descriptions, and/or is based on Powers of Attorney which are not in accordance with the requirements of the company’s founding Articles – all of which can lead to the transaction being challenged by an interested party.
In response to these issues, many investors are turning to title insurance policies as a cost effective way of protecting themselves against issues identified during the due diligence phase and unknown title matters which could assert themselves after their acquisition of title. Having recognized this need on the part of investors, Stewart Title Limited entered the CEE market in 2000 as a provider of title insurance and has since underwritten nearly €5 billion of risk in all of the CEE countries.
To discuss title insurance in foreign markets, Stewart’s team based in the company’s corporate head office in London will be happy to help you.
Katja Huitikka is Director of Underwriting for Stewart Title’s European Operations. Ms. Huitikka can be reached at +44 (0)20 7010 7820 or via email firstname.lastname@example.org.