According to Stephen Mallen, head of global research at property consultants Knight Frank, "any serious US investor in real estate has central and eastern Europe on their shopping list." But while there is growing interest in at least three countries - Poland, Hungary and the Czech Republic - the rest of the region, particularly the Former Soviet Union (FSU), lags far behind. "Many clients have been there [the FSU] and have had a serious look," he says. "Then they get on a plane and go home."
This growing gap between foreign direct investment in central Europe and that of eastern Europe has not escaped the attentions of world bodies such as the United Nations, which takes the view that economic growth is a key building block in achieving political stability.
The UN's Intergovernmental Conference has decided to take a close look at what is driving the new emerging markets in central Europe and the impediments to similar investment in eastern Europe. In a paper prepared for the UN's Eastern and Central Europe Real Estate Advisory Group by the Royal Institution for Chartered Surveyors Research Foundation, it becomes clear that new markets require far more than investment capital for proper growth and functioning. What the report makes clear is that the financial and legal framework in which investment operates is by far the single most important factor in determining which markets will attract real estate investment and which will not. "Most economic activity requires land," the paper notes. "If a country's economy is to grow and prosper in a sustainable manner, there needs to be a mechanism whereby land resources are allocated to satisfy the demands of the productive sector." In other words, there must be some mechanism to re-allocate land to productive activities from unproductive uses. The achievements of much of central Europe are dazzling considering that just 10 years ago its legal systems barely acknowledged private property rights and had little infrastructure to facilitate sales and purchases. But, as the UN report makes clear, central Europe has some way to go before its markets are fully viable and the FSU and central Asian states have a long journey ahead. In its analysis of the constraints that prevent the emergence of a real estate market, it notes that in these latter states, governments are opposed to reform and have set prohibitions on the creation of such a market. The constraints posed by the legal system are even greater; most states have no workable mortgage law, no workable bankruptcy law, no workable leasing law, inadequate provision for the enforcement of real estate contracts and have been slow to move to adopt international accounting and valuation standards. Meanwhile, each state has to confront the fact that title to much real estate has been muddied; most recently by the nationalisation of private wealth by the communists and before then, often by occupying Nazi forces or by pro-Nazi governments who seized Jewish assets.
Mr Mallen notes that the existing land registration system in Poland has appeared to work effectively. "But when the contested land is located in the middle of the central business district, its prominence means clear title is still an issue."
These constraints are made worse by poorly paid and badly trained civil servants with little interest in making land markets work and by local authorities who exercise a high degree of control over development permits in towns and cities. The system, the report notes, is open to abuse.
The UN report includes quotes from active advisors and commentators on the real estate market in the Ukraine making precisely this point. One world trade executive, in a 1997 interview, is quoted as saying: "Fraudulent transactions in Kiev are becoming increasingly common. "Government notaries can delay sale and purchase agreements in an attempt to extract bribes and it has been known for businessmen to make substantial prepayments to `landlords' who did not actually own apartments and subsequently disappeared." This last point is one that has already become apparent to the investment community generally and, sadly, is not limited to the FSU. Eric Rosedale, co-chairman of the European property and finance group at the law firm of Weil, Gotshal and Manges in Warsaw, points to the laborious permit process required for development in Poland, regarded as one of the more progressive central European states. "There are opportunities for corruption which creep into the system," he says. Roger Orf, head of UK-based Pelham Partners, an opportunity fund which was among the earlier investors in central and eastern Europe, is more blunt, particularly about Russia. "I never like to say never," he says, "but I don't think I will ever invest in Russia again. It's so corrupt."
