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Messages from beyond the grave

Graham Parker looks into the property scene.

Two developments in recent months show that central European property may at last be on the verge of institutional acceptability. In March the US investment bank Lehman Brothers, the French contractor and developer Bouygues and the UK-based adviser JLW Finance joined forces to promote the first institutional fund set up specifically to buy central European investments. Over the past decades, there has been endless talk of vulture funds' targeting the territory east of the former Iron Curtain, looking for high re-turns and a quick exit, but the Central European Retail Property Fund - as the new vehicle is called - claims to be in for a longer ride.

The sponsors are looking to raise $150m of equity capital, which it will gear up and invest in shopping centres in Poland, Hungary and the Czech Republic over the next four years.

According to Jones Lang Wootton's Michael Roskelly, the fund's ideal product will be an enclosed, western-style shopping centre of between 25,000 and 40,000 sqm anchored by a hypermarket and possibly by a multiplex cinema. He says that as many as seven potential schemes are currently being investigated, and the first could be on site before the end of this year.

This new institutional interest in the region was underlined by the an-nouncement that the Chicago-based property investor Sam Zell was launching a regional fund, called the Emerging Europe Property Company. Through his two New York-quoted Real Estate Investment Trusts - Equity Office and Equity Industrial - Zell is the US's biggest single property owner with a massive institutional following. Zell is known as the grave dancer' for his uncanny knack of spotting markets which look moribund which actually are on the verge of rising from the dead. And his decision to target central Europe was given even greater credibility when he hired Richard Powers, who had headed GE Capital's European real estate investments for the past few years, to manage the new fund.

So while institutional investors may be happy to follow the coat tails of players like Martin Bouygues or Sam Zell, what are the prospects for direct institutional investment in the region? For the time being the prospects look slim. Even advisers who have a vested interest in encouraging activity are hard pressed to produce market evidence which would allow purchasers to accurately price any suitable property that came to the market. On the face of it the retail sector, where western retailers like Tesco and Ikea have been looking for suitable outlets, would hold the greatest potential. But on the ground there are problems. Prague, for instance, has as many as 10 out-of-town shopping centres in the pipeline and there are now fears of an oversupply.

However, last year did see Prague's first ever western investment in a completed and let office property: the Austrian investor Euned acquired the 20,000 sqm Kaspol building in Prague 6 for CzK400m. The property is predominantly let to Citibank, but the short lease term would have deterred many potential buyers.

There are also early signs of interest in Czech industrial properties. The French investor CECOPRA and Pro-Invest, part of Austria's Raiffeissen Bank, have jointly financed Logistic Park, a 52,000 sqft warehouse scheme close to Prague airport.

But several years from now the picture could look rather different. Hungary, Poland and the Czech Republic are all waiting impatiently for admission to the EU. If this was followed by early adoption of the euro, then many of the perceived barriers to institutional investment would disappear. For the time being, though, the property markets of Prague, Warsaw and Budapest are still not for the faint hearted.

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