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The Warsaw Voice » Real Estate » October 22, 2008
The Real Estate Voice
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A Promising Market
October 22, 2008   
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Arnaud Bricout, vice-president of the Orco Property Group, and Douglas J. Noble, managing director for Poland, talk to Agnieszka Domańska.

Orco is involved in many projects across Central and Eastern Europe. Does the company's mode of operations vary depending on the country? Are you developing your operations in markets that are usually less popular among investors, such as Romania or Bulgaria?
A.B.: Orco has been active in Central and Eastern Europe for many years. We have been on some markets for 17 years and started operations on others three or four years ago. We have ongoing projects in seven European countries: the Czech Republic, Hungary, Slovakia, Poland, Croatia, Germany and Russia, or Moscow more precisely. According to our evaluation based mainly on experience, this is a very promising region in investment terms, for many reasons. The economies of these countries have been developing much faster than Western Europe for many years, which means incomes are growing and so is demand on the construction market or, more broadly, the real estate market-as a "litmus test" reflecting the state of the whole economy. The sector is also driven-especially in the Czech Republic and Hungary recently-by decreasing interest rates and a flourishing range of mortgage loans. Another element stimulating the demand for real estate, especially office and retail space, is the substantial influx of foreign direct investment to Central and Eastern European countries. That's why this region, even despite a periodical correction or slower price growth, displays good prospects for profit for international players like the Orco Property Group. I think that after 40 years of communism, the huge demand for housing reported in the countries of the region is due not only to objective reasons stemming from societies' growing wealth, but to reasons involving psychology as well. People are free to make use of their money. They want to live more comfortably, in good-often luxurious-conditions.

Why don't you take on more risky challenges, such as entering the Romanian or Bulgarian markets, or developing operations in other Balkan countries apart from Croatia?
A.B. With regard to tougher and more challenging undertakings, we can certainly count our investment activity in Russia. Moscow in particular is the tougher market in many respects. Our analysis of the opportunities and prospects for business in individual countries shows that we should now concentrate on projects currently in progress and only start seeking new, perhaps equally attractive, markets in a few months' time. Where we are already present we have developed market analysis methods and set up competent staff teams, who are prepared for carrying out projects in different segments. Entering new countries is not an easy process; it requires many months of preparation, analyses and mastering the local market reality.

Poland has at least several urban centers in which it is worth investing. In the Czech Republic, meanwhile, there's mainly Prague and Brno, and in Slovakia there's Bratislava. Aren't these countries too "cramped" for further investment?
D.J.N.: We don't look at markets in terms of countries, but as specific cities or local markets that, in a way, compete against one another. In terms of attracting Western capital, Warsaw competes against Prague, while Prague competes against Budapest or Berlin. This competition constitutes potential that creates a number of development opportunities, potential that is utilized by investors and developers. I would like to emphasize that, contrary to appearances, not only big cities have large "capacity" and offer prospects for interesting projects. For example in the Czech Republic, we have ongoing projects in the large city of Brno and in Hradec Kralove as well. We have put many new housing units on the market in each of these cities. Residential construction had been developing rapidly, especially over the past five to six years, and the driving force has largely been the quickly expanding range of mortgage loans on offer. This market is still a long way from saturation. Apart from that, Orco as a developer tries to diversify what it offers, constantly adapting it to client expectations and requirements. That's why our new strategic approach to business involves a special focus on sustainable development and environmental protection in our projects. We are also the ones who launched turnkey apartments on the Polish market instead of the usual developer standard.

Has the real estate sector in Central and Eastern Europe suffered from the U.S. subprime mortgage crisis? Will prices drop and investment opportunities be limited, for example in Warsaw?
D.J.N.: What we are observing, especially with regard to residential real estate, shouldn't be associated with the term "crisis." In fact, what we have is weakened demand, decreasing housing prices and a temporary buyer's advantage - this resulting from increased supply and increased prices. From our point of view, however, this is a time of correction or momentary cooling, which is more the effect of the huge, even fantastic price growth up to the end of 2006. It has little in common with the U.S. subprime crisis, whose effects have rather led to changes in mortgage banking. Banks offering mortgage loans are showing a tendency to broaden their spread and increase their margin-this has grown by 10 basis points on average. Requirements concerning the buyer's own contribution to the price of a home have toughened as well-it was around 10 percent before, now banks usually demand 20-30 percent. This has only an indirect impact on the real estate market.

Does Orco's development strategy include redevelopment of existing historical buildings to provide new functions, for example old industrial facilities?
A.B. Redevelopment and brownfield projects-as opposed to greenfield projects which are built from scratch-are elements of the sustainable approach we are promoting in our corporate policy and philosophy. And in fact we are converting and renovating many historical buildings, saving them from ruin. That was the start of our operations on the Czech market and now in Hungary. In Budapest, we are converting the former stock exchange headquarters, while in Berlin we have redeveloped a total of 80,000 square meters. In Warsaw, our projects of this type include a tenement house on Mokotowska Street and the Regina Hotel building. I think, in the future, ŁódĽ and Cracow will offer certain opportunities in this respect, but we must not forget that these are much more difficult and costly projects to complete.
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