standing its ground in a challenging environment residential property market in cee ebrd annual...
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Standing its ground in a challenging environment
RESIDENTIAL PROPERTY MARKET IN CEE
EBRD Annual Meeting Kiev, 18 May 2008
Erich Hampel, Head of CEE Division
Debora Revoltella, CEE Chief Economist
2
Executive summary
Gap in supply: as a consequence of the transition process, home ownership is quite high in the CEE region, still in the context of a gap in supply. Acceleration in supply of new dwellings in the last years has been unable to fill the gap, which is even enhanced if quality standards are considered.
Household plans: as income and living standards improve, demand for residential real estate is strong. 2 out of 10 households plan to buy an house in the next 10 years, mostly as an house to live in, but with some rising demand also for investment or second home purposes.
House prices: the increases in house prices have been significant in the last years. It emerges clearly that income, access to credit and limited supply are drivers for real estate prices. We still believe that house prices in the region are compatible with an equilibrium level, although there might be out-of-equilibrium trends in some sub-segments.
Affordability: the affordability levels have been reducing and the demand for house purchase is still mostly linked to the emerging middle class segment or to high net worth individuals. This means that on top of the existing demand, there might be a "potential demand" at the moment constrained by affordability issues.
Some risks: there are however a few areas to monitor which might exhibit some oversupply – i.e. the holiday home sector in Bulgaria, or some imbalances in capital cities such as Bucharest. The bursting bubble in Kazakhstan should be the warning signal for the region.
Looking ahead: despite a less supportive macroeconomic scenario, we keep a positive view. We forecast some moderation in growth trends, but no backlash, as gap in supply coupled with persistently lively demand represent a long term driver
3
Residential Real Estate in CEE: supply and demand
Agenda
House price dynamics
Challenges and opportunities ahead
UniCredit Group: an active player on the market
4Notes: 1\ EU: AT, DK, FI, FR, IT, NL and ES; last available Census for EU countries; 2\ Data as of 2001 for BG, CZ, HR, LV, LT and SK; as of 2005 for HU and RUS; as of 2006 for EST, PL and RO; 3\ Calculated as ratio between owner-occupied dwellings over total occupied dwellings measures in physical units, except for Russia (sqm); 4\ As of 2001 for LT, 2006 for BG, HR, EST, LV, PL, RO and UKR and as of 2007 for CZ, HU and SKSources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland), UNECE
The transition process throughout the region resulted in very high home ownership rates, still in the context of a gap in supply
The privatization in the early 1990s led to widespread private ownership, with around 77% of the housing stock being currently owner-occupied vs 64% in the older EU states
Still the CEE region residential market is characterized by a housing gap
Dwelling stock per ‘000 inhabitants1,4
323
338 381
395
408
424
435
441
444
471
486
413 47
2
Slo
vaki
a
Pol
and
Rom
ania
Lith
uani
a
Ukr
aine
Hun
gary
Cze
ch R
ep.
Cro
atia
Latv
ia
Est
onia
Bul
garia
CE
E
EU
47
59 67 68 71 74
87 91 91 92 96
64
77
17
27
Cze
ch R
ep.
Pol
and
Rus
sia
Est
onia
Latv
ia
Slo
vaki
a
Hun
gary
Lith
uani
a
Bul
garia
Cro
atia
Rom
ania
EU
CE
E
Home ownership in CEE and Western Europe1,2,3
Coo-perative
5Notes: 1\ EU proxy including AT, DK, FI, FR, IE, IT, NL and ES; 2\ BG, HR and RUS (no. of apartments): 2000-2006; 3\Census data (last available year)Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)
0.9
3.92.7
1.2
3.2
0.51.4
2.91.3
2.8 2.41.41.6
4.73.4 4.0 3.7
2.8 2.23.2
1.8
3.92.8
1.8
0
5
10
15
20B
ulga
ria
Cro
atia
Cze
ch R
ep.
Est
onia
Hun
gary
Latv
ia
Lith
uani
a
Pol
and
Rom
ania
Rus
sia
Slo
vaki
a
Ukr
aine
Average 2000-2004 Istogramma 2 Average 2005-2007
Dwelling unit completion per ‘000 inhabitants1,2
% of dwellings built after 19903
Construction activity has been strong in the last years, especially in the capital cities and urban areas, but well below western standards
7.2 8.8 8.3 5.3 11.1 n.a. 7.1 12.9 11.5 n.a. 6.9 n.a.
EU=Ø 7.4
SPAIN= 12.6
IRELAND= 19.0
6Notes:1\ EU proxy including AT, DK, FI, FR, IT, NL and ES; 2\ EU: Census data (last available year). As of 2001 for BG, CZ, HR, LV, LT and SK; as of 2005 for RUS and UKR, as of 2006 for EST, HU, PL and ROSources: UniCredit Group CEE Research Network, Department of the Heritage and Local Government (Ireland)
The housing gap is enhanced when quality standards are considered
The communist regime left the CEE region with a unique housing stock of relatively recent, but often rundown homes
Quality and maintenance issues are particularly relevant in some CIS countries
In Central European countries, like Hungary and the Czech Republic, quality standards are much more similar to western ones
Average number of rooms per dwelling1,2
2.3 2.4 2.5 2.6 2.6 2.7 2.8 2.83.2
3.6 3.7
2.8
4.2
Ukr
aine
Latv
ia
Lith
uani
a
Hun
gary
Rom
ania
Cze
ch R
ep.
Bul
garia
Cro
atia
Slo
vaki
a
Est
onia
Pol
and
CE
E
EU
5055 55 56 59 61 62 64
7074 76 77
63
87
Rus
sia
Ukr
aine
Latv
ia
Slo
vaki
a
Est
onia
Lith
uani
a
Rom
ania
Bul
garia
Pol
and
Cro
atia
Cze
ch R
ep.
Hun
gary
CE
E
EU
Average usable area per dwelling1,2
7
Income convergence and improving living standards as drivers for demand for new residential real estate properties
28
46
69
4556
37 3948
26
504038
58
8172
6457 60 55
41
68
43
Bu
lga
ria
Cro
atia
Cze
chR
ep
.
Est
on
ia
Hu
ng
ary
La
tvia
Lith
ua
nia
Po
lan
d
Ro
ma
nia
Slo
vaki
a
Tu
rke
y
2000 2007
GDP per capita (EU27=100 in PPS)
Net financial and real wealth in CE1,2
(Index 2004=100)
Notes: 1\ CE: CZ, HU, PL and SK; SEE: BG, HR and RO; BE: RUS andTK; 2\ Net financial wealth is defined as the difference between households’ financial assets and liabilities; proxy for the overall accumulation of both financial and real wealth using the difference between households’ financial assets and the non-mortgage component of debtSource: UniCredit Group CEE Research Network, Eurostat
Net financial and real wealth in SEE1,2
(Index 2004=100)
Net financial and real wealth in BE1,2
(Index 2004=100)
90
95
100
105
110
2004 2005 2006 2007
Net financial wealth
Net financial and real wealth
90
95
100
105
110
2004 2005 2006 2007
Net financial wealth
Net financial and real wealth
90
95
100
105
110
2004 2005 2006 2007
Net financial wealth
Net financial and real wealth
8
88 86 91 90 9481
96 9182 87 86 88 88
5 45 4
4
8
2 46
9 7 3 44 6 1 5 2 8 1 5
43 6 6 72 4 2 1 0 3 1 0 7 0 1 3 1
Main place to live Investment (to rent) Secondary house Other
Survey data show strong potential demand, mostly as primary house
6 5 5 4 7 7 4 511
6 4 72
7 9 87
8 10
7 7
9
8
45
3
69
65
67
68
5
5
74
5
Yes in next 3 yrs Yes in next 10 yrs Maybe after 10 yrs
RO BGSKSI SRB BIHCZ HR RUSPLHU UKR
Notes:1\ Survey involving 1,000 individuals (more than 2,000 in RUS) aged >15 and living in the largest cities of the country; all interviews were conducted as personal face-to-face interviews by Bank Austria’s long term partner agencies (GfK, RmPlus, TNS); 2\Countries are ranked by level of per capita GDP; 3\ Sample represented only by those willing to buy new house/flatSources: UniCredit Group CEE Research Network, Bank Austria Market Research
General likelihood to buy new house/flat (%)1,2
RO BGSKSI SRB BIHCZ HR RUSPLHU
General likelihood to buy new house/flat, by purposes1,2,3
Avg
2 out of 10 households intend to buy real estate property
9 out of 10 potential buyers are seeking for a house to live in
Some rising demand associated to investment or vacation purposes, particularly in Croatia, Bulgaria and Romania
Avg UKR
9
Demand mostly associated to higher income classes …
Notes:1\Countries are ranked by level of per capita GDP Sources: UniCredit Group CEE Research Network, Bank Austria Market Research
2624
28 28
13
34
26 27
34
27
23
27
1518 19
21
9
17
30
15
2326
1917
10
14
25
10 10
27
1311
1517
14
7 8
1213
Ave
rage
Slo
veni
a
Cze
ch R
ep.
Hun
gary
Slo
vaki
a
Cro
atia
Pol
and
Rus
sia
Rom
ania
Ser
bia
Bul
garia
Bos
nia
Ukr
aine
Propension top 30% Propension 30-51% Propension 51% and less
General likelihood to buy house/flat, by income1
10
… and younger generations
Notes:1\ Countries are ranked by level of per capita GDP; 2\ CEE: BG, CZ, EST, HU, LV, LT, RO and SKSources: UniCredit Group CEE Research Network, Bank Austria Market Research, Eurostat
-3.0
-2.0
-1.0
0.0
1.0
2.0
1981 1986 1991 1996 2001 2006 2011 2016 2021
Tot pop 15-39Y
Evolution of CEE population aged 15-39Y in 1981-2025F2
(% yoy growth)
50
32
40 42
55
29 34
42
29 26 20 20
31 30
23 22
31 27 27 31
25 24 26
1215 11 13 14
23
10
17
28
18 16 15 95 5 4 4 4 4 6 7 8
4
7
4
Slovenia Czech R. Hungary Slovakia Croatia Poland Russia Romania Serbia Bulgaria Bosnia Ukraine
<29 30-39 40-49 >50
General likelihood to buy house/flat, by age (%)1
11
Residential Real Estate in CEE: supply and demand
Agenda
House price dynamics
Challenges and opportunities ahead
UniCredit Group: an active player on the market
12
Growth in house prices has been persistently high …
Residential property prices in the enlarged Europe
(yearly average increases 2002-2007)1,2
Notes:1\ Growth rates calculated in local currency (nominal terms). All data used are from NCBs and local Statistical Offices and refer to non-harmonised national sources, thus any comparison on the dynamic of house prices across countries should be taken with care; 2\ B, DE, IT: 2002-2005; NL, PT, LV, LT: 2002-2006. House prices for Latvia and Ukraine refer to capital citiesSources: UniCredit Group CEE Research Network based on National Statistical Offices, NCBs, Department of the Environment Heritage and local Government (Ireland)
13
… but mostly compatible with the convergence story …
Notes: 1\ CZ: 2001; EST, LT, PL, RO, SK: 2002; RUS: 2003; 2\ EST, PL, RO, SK: 2003-2007; LV: 2001-2006; LT: 2003-2006; RUS: 2004-2006; prices for Latvia refer to Riga suburbs, while for Romania to Bucharest; 3\ Equilibrium house prices are calculated based on out-of-sample estimation by regressing house prices (expressed in real terms) on GDP per capita in PPS and mortgage rates using Eurozone countries as a benchmarkSource: UniCredit Group CEE Economic Research
Bulgaria
Croatia
Czech R.
EstoniaHungary
LatviaLithuania
Poland
Romania
Russia
Slovakia
0.0
20.0
40.0
60.0
80.0
100.0
0.0 10.0 20.0 30.0 40.0
Growth rates 2001-2007 (real terms, local currency)2
Act
ua
l pri
ces
vs e
qu
ilib
riu
m (
20
00
)1
Actual vs equilibrium prices in 2000 and growth rates of actual prices3
Improving household financial conditions and limited supply remain key drivers of strong demand (1% increase in income and supply result in 1.1% and -2.8% change in prices, respectively)
The large inflows of immigrant workers toward EU contributed to higher demand for housing through substantial inflows of remittances (1% increase in the ratio of remittances over GDP results in 0.6% increase in prices)
Fast development in the mortgage market and greater availability of credit at better conditions might have spurred the growth of house prices (1% increase in the ratio of mortgages over GDP and interest rates results in 0.2% and -0.01% change in prices, respectively)
14
… and with no major deviations from equilibrium trends
Notes: 1\ LV, LT: 2006; 2\ LV, LT, RUS: 2006; 3\ Prices for Latvia refer to Riga suburbs, while for Romania to Bucharest; 4\ Equilibrium house prices are calculated based on out-of-sample estimation by regressing house prices (expressed in real terms) on GDP per capita in PPS and mortgage rates using Eurozone countries as a benchmarkSource: UniCredit Group CEE Economic Research
0 20 40 60 80 100 120
Bulgaria
Croatia
Czech R.
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Russia
Slovakia
Ratio of real estate prices over equilibrium prices in 20072,3,4
167
1,129
393
433
527
461
366
766
407
430
418
558
1,693
787
1,404
1,009
1,372
952
1,968
2,177
1,605
1,104
0 500 1,000 1,500 2,000 2,500 3,000
Bulgaria
Croatia
Czech Rep.
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Russia
Slovakia
2002 2007
Real estate prices, country average (EUR per sqm)1,3
15
Housing investment affordability has significantly decreased over the last years
2.5
1.9
0.6
0.5
7.0
4.8
4.1
3.2
2.8
2.6
2.5
2.1
1.9
1.9
1.8
1.4
1.0
Ital
y
Fra
nce
Fin
land
Aus
tria
Rom
ania
Ukr
aine
Rus
sia
Latv
ia
Pol
and
Bul
garia
Kaz
akhs
tan
Lith
uani
a
Est
onia
Slo
vaki
a
Cro
atia
Hun
gary
Cze
ch R
.Affordability Index (2007)1,2
Notes: 1\ The affordability index is calculated as house prices (€ per sqm)/ average gross monthly wages; 2\ As of 2006 for Latvia and Lithuania; 2005 for Italy, Finland and Austria and as of 2003 for France. Prices for old EU Countries (except Finland), Latvia and Romania refer to the capital cities; 3\ Share estimated using an affordability index benchmark of 2 (measured as house prices per sqm over gross monthly wages) and official statistics on households’ income distributionSources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)
Over the last years, growth in real estate property prices was much higher than in wages. This results in a sharp deterioration in housing affordability
Low affordability implies that in many countries demand for house purchases remains mostly related to the emerging middle class segment or to high net worth individuals
Affordability of housing investment3
(percentage of households over total)
50.6 48.0
16.3 14.5 13.0 10.03.3
Slo
vaki
a
Cro
atia
Hun
gary
Pol
and
Cze
ch R
.
Rom
ania
Bul
garia
16
Residential Real Estate in CEE: supply and demand
Agenda
House price dynamics
Challenges and opportunities ahead
UniCredit Group: an active player on the market
17
The current macroeconomic scenario might be less supportive for the residential real estate market …
9.3
12.513.6
4.6 5.05.8
Wages Real GDP
CE SEE&B Broader Europe
28
95
3919
65
111126
157139
60
96
190
PL HU CZ SK HR BG RO LV UKR RUS TK
∆ CDS spread vs USD (June ’07- April ’08)
bps
Real GDP and gross monthly wages
% growth p.a. 2008-2010
Central
Europe
SEE &
Baltics Broader Europe
Some deceleration in growth, as the economic cycle peaked in 2006-2007, but still very high rates…
… with international repricing of risk to lead to some credit tightening and possible lowering of capital inflows
(1)
Note:1\ Including Estonia and LithuaniaSource: UniCredit Group CEE Research Network, Bloomberg
KZ
18
… but the mortgage market will continue to expand
26.2
70.5
113.339%
2004 2007 2010F
Housing loans volume1 (EUR bn)
17%
% growth p.a.x
6.925.4
45.554%
2004 2007 2010F
21%
12.943.7
164.7
84%
2005 2007 2010F
56%
CE
SEE&B
TK+RUS+UKR
Housing loans (% of GDP, 2007)
70
62
56
35
33
23
17
34
18
17
14
12
10
10
8
8
6
4
4
2
Netherlands
Portugal
Spain
France
Germany
Austria
Italy
Latvia
Croatia
Lithuania
Czech R.
Hungary
Bulgaria
Poland
Slovenia
Slovakia
Ukraine
Turkey
Romania
Russia
Note:1\ CE: PL, CZ, SK, HU, SI; SEE&B: BG, HR, RM, LV, LTSources: UniCredit Group CEE Research Network, ECB
19
19
13
26
14 14
32
11
21
17
Bu
lgar
ia
Cro
atia
Cze
ch R
.
Hu
ng
ary
Po
lan
d
Ro
man
ia
Ru
ssia
Slo
vaki
a
Ukr
ain
e
Years to saturation1
Note: 1\The number of years before saturation in the residential property market is calculated as the ratio between the estimated market potential (total number of households willing to buy a new house/flat) and the current level of construction activity (based on last available data) under the extreme assumption that all potential buyers will look for new housingSources: UniCredit Group CEE Economic Research, Eurostat
Gap in supply matched to continuously lively demand will remain a clear driver for long term sustainability
Bulgaria: more selection to come on the holiday home segment
Croatia: monetary tightening is expected to slow otherwise solid growth
Czech Republic: no housing bubble on the horizon (yet)
Hungary: some oversupply, but no evidence of price bubble
Kazakhstan: bubbles do burst
Poland: first signs of stabilization, but housing gap remains
Romania: some cooling but still with high potential in the mid term
Slovakia: still healthy growth potential on the horizon
Turkey: still a market for few people
Ukraine: untapped potential in the medium-high segment, with some cooling on the luxury one
20
Residential Real Estate in CEE: supply and demand
Agenda
House price dynamics
Challenges and opportunities ahead
UniCredit Group: an active player on the market
21
Number 1 Network for Mortgage and Real Estate Financing
Mortgage and Real Estate Market in CEE shows great potential for future growth.
With a presence in 20 CEE countries UCG can boast the most extensive network in the region.
Each bank is able to provide a complete range of real estate products and services for mortgage loans as well as commercial real estate projects.
The financing solutions are tailor made, combining local market knowledge with international financing expertise.
22
Mortgage Market: Position of the Group‘s banks in CEE
UniCredit Group Mortgage Market Share in CEE
0
5
10
15
20
25
30
35
40
POLAND CROATIA BiH TURKEY CZ SK BULGARIA RUSSIA ROMANIA HUNGARY SLOVENiA
Ma
rke
t S
ha
re b
y E
nd
20
07
1 1 1 14 54 38 5 5
= market position
23
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0% 10% 20% 30% 40% 50% 60% 70% 80%
Latvia
Mortgage Market: UniCredit Group is a leading regional player
Positioning Market share in Q4 2007
Market potential LC CAGR ’08-’10
New volumes 2008-2010 (EUR bn)
Source: UniCredit Group CEE Research Network
=
Croatia
Poland
Bulgaria
Slovenia
Russia
TurkeyRomania
Czech R.
Hungary
Slovakia
Ukraine
Lithuania
All UCG countries of presence in CEE are of strategic importance for the mortgage business
Russia, Ukraine, Poland and Turkey key markets for future growth
24
Real Estate: a fast moving business segment
Commercial Real Estate in Central Eastern Europe is one of the most active business segments, with double digit growth rates in countries such as Russia, Romania and Bulgaria
UniCredit Group is supporting such important growth, with total financings in the region expected to be in excess of € 10 bln at the end of 2008 (ca +60% yoy)
A substantial growth is foreseen for all the segments (residential, office, retail and industrial/logistic) in the development markets, while for the mature ones the driving forces will be mostly the residential (ca +70%) and industrial (more than doubling yoy) segments.
Office34%
Industrial11%
Residential18%
Retail37%
Financing Volumes of UniCredit Group by Segment in CEE
25
Real Estate: some examples of what we do
Odessa Logistic Park
Built in a joint venture programme withAkron Group and GLD Invest Group.
Phase 1: 54.900 m² area for offices andwarehouses
Project Size: 3 phases, finished in 2010with a total area of 170.000 m²
26
Conclusions
Supply gap: the CEE residential real estate market is still characterized by a quantitative and qualitative supply gap, despite the strong growth in new buildings recorded in the last years
Dwelling demand: the demand for residential real estate is strong and on top of the existing demand, there might be a "potential demand" at the moment constrained by affordability issues
House prices: Increases in house prices have been significant in the last years. We still believe that house prices in the region are compatible with an equilibrium level.
Outlook: Looking ahead, despite a less supportive macroeconomic scenario, we keep a positive view. We forecast some moderation in growth trends, but no backlash, as gap in supply coupled with persistently lively demand represent a long term driver
There are however a few areas to monitor which might exhibit some oversupply
Supportive: As UniCredit Group we recognize the residential real estate market potential in CEE. We are actively supporting the development of the market, both at the retail level, being a major player in the mortgage market, and at the developers level, with a dedicated structure