East European Property

East European Property
Secrets
How to exploit the new East European property
Investment Opportunity
By Robin Bowman
Copyright JoJaffa Ltd 2005
Part of the Property Secrets Series

www.PropertySecrets.net
East European Property Secrets, Copyright JoJaffa Limited 2005, by Robin Bowman Page 1
Copyright JoJaffa Limited
Edition 1.0, First Published 2004, Updated 2005
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As with all investment advice, you are advised to take proper financial and legal
advice at all stages. Investment values can decrease as well as increase!
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Table of Contents
1. Welcome to East European Property Secrets 14
1.1 How to use this book .................................................... 17
1.1.1 Section 2 -The Opportunity.............................................................. 18
1.1.2 Sections 3 and 4: Strategies to maximise returns and how to locate the
best investment areas...................................................................... 20
1.1.3 Section 5 - Finance.......................................................................... 20
1.1.4 Section 6 – Twelve-Step Plan to Success ....................................... 21
1.1.5 Section 7 - Using the East European Returns Spreadsheet ............ 21
1.1.6 Section 8 - Country by Country comparisons. ................................. 21
1.1.7 Section 9 - 16: East European investment verdicts ......................... 22
2. Why is East Europe such an exciting investment?

24
2.1 Do you know……. ........................................................... 25
2.2 Seven key reasons for investment now ....................... 26
2.3 What is so EXCITING about investing in this region? .. 26
2.3.1 Maximising the East European investment opportunity ................... 28
2.4 What EU membership tells us about these eight countries
30
2.5 Foreign and EU money is already pouring into Eastern
Europe ........................................................................... 31
2.6 Huge cash injections are being made to stimulate
economic growth .......................................................... 31
2.6.1 How to follow the money.................................................................. 32
2.7 Investment peaks later – take advantage now ............ 33
2.7.1 Excellent economic performance prior to joining the EU ................. 35
2.7.2 Size does matter – and small can be beautiful ................................ 35
2.7.3 Investment tends to follow the most successful traders................... 36
2.8 The drivers of the new East European property market36
2.8.1 Pent-up aspiration is a key driving force .......................................... 37
2.8.2 Big potential returns also carry a certain amount of risk and uncertainty
37
2.8.3 But change for the better is occurring .............................................. 38
2.9 Making your investment at the right time in the economic
cycle will create the quickest returns ......................... 39
2.10 The Irish experience – to be repeated across Eastern
Europe? ......................................................................... 39
2.10.1 Inward Investment ........................................................................... 41
2.11 Government spending – will it spoil the party? ............ 42
2.11.1 The currency risk ............................................................................. 43
2.12 Years of growth potential remain................................. 44
2.12.1 Average monthly salaries ................................................................ 45
2.12.2 Massive property price growth potential from within these countries46
2.13 The Euro factor ............................................................. 48
2.13.1 Euro membership – don’t bank on it short term ............................... 48
2.13.2 Why you should be wary of countries that race to adopt the Euro... 50
2.13.3 Why the Euro doesn’t count in the short term.................................. 50
2.14 Pluses and Minuses of investing in the East European Eight
51
2.14.1 What is good about investing in the eight? ...................................... 51
2.14.2 What is risky about investing in the eight?....................................... 52
2.14.3 How the Eastern Eight might actually lose out by joining the EU..... 52
2.14.4 Predictions of annual foreign investment 2003-2007....................... 53
2.14.5 Why the pessimists will be wrong…. ............................................... 53
2.15 The Eastern Eight vs established property investment
countries ....................................................................... 54
3. The Secret of Success – Choosing the Right

Location 56
3.1 Choosing an investment location based on the risk factor
57
3.2 Country by country risk and stability rankings ............ 58
3.3 Choosing the right Country or Sector? ......................... 59
3.3.1 Perhaps not so much which country as which sector? .................... 59
3.3.2 Sector-based investment ................................................................. 60
3.4 Where to target your investment.................................. 60
3.4.1 Tourism............................................................................................ 61
3.4.2 Follow the budget airlines ................................................................ 62
3.4.3 Hi-tech industry and technology parks............................................. 62
3.4.4 Superstores and shopping mall developments ................................ 62
3.4.5 Big infrastructure projects ................................................................ 63
3.4.6 Business investment........................................................................ 63
3.4.7 Universities ...................................................................................... 64
3.4.8 Main and secondary cities ............................................................... 64
3.5 Where NOT to put your money...................................... 64
3.5.1 Countries and areas with old thinking.............................................. 65
3.5.2 Areas dependent on a single industry ............................................. 66
3.5.3 Stay well clear of anything nuclear or chemical or polluted ............. 67
3.5.4 Unsettled issues .............................................................................. 67
4. Investment Strategy 69
4.1 Securing your investment ............................................. 69
4.2 Your investment aims ................................................... 70
4.2.1 If you want capital growth from a holiday or primary home.............. 70
4.2.2 If you want rental income and a holiday home................................. 70
4.2.3 If you want to buy purely as an investment...................................... 71
4.2.4 Buy New .......................................................................................... 71
4.2.5 Buy, renovate and rent out .............................................................. 71
4.2.6 Buy to renovate and sell on ............................................................. 72
4.2.7 Do any of the above, but outside the capital city ............................. 72
4.3 Invest Direct? Or through a fund? ................................ 72
4.4 The ABC secret of successful investment in the Eastern
Eight .............................................................................. 73
4.5 How to ensure your property is cash positive.............. 74
5. Financing your Property Investment in East

Europe 76
5.1 How finance leverages your investment ...................... 76
5.2 Can you Borrow Against an Eastern Eight Property?... 77
5.3 Re-mortgage your existing property ............................. 78
5.4 Pay in cash now – refinance later?............................... 79
5.5 How much money do I need to invest? ........................ 80
6. A Twelve-Step Plan For Successful Property

Investing in the Eastern Eight 81
6.1 One - Legal advice ........................................................ 81
6.2 Two - Selecting an estate agent................................... 81
6.3 Three - Beware of what seems too good to be true..... 83
6.4 Four - Be clear about your investment goals ............... 83
6.5 Five - Restoration opportunities ................................... 84
6.6 Six - Rental potential .................................................... 84
6.7 Seven - Check before buying ........................................ 85
6.8 Eight - Understand the tax implications of selling....... 85
6.9 Nine - Avoid being the first in an area .......................... 85
6.10 Ten – Can you fund it?................................................... 85
6.11 Eleven - Use the power of cash to get a better price .. 86
6.12 But use finance to get a better return.......................... 87
6.13 Twelve – Cut currency risk by ensuring that your loan and
the income are in the same currency........................... 87
7. Using the Snap Shot Return Analysis

Spreadsheets 88
7.1.1 Evaluating potential currency devaluation ....................................... 89
7.1.2 Evaluating mortgage interest rate risk ............................................. 90
7.2 Opening and using the Snap Shot Returns Calculator . 91
7.2.1 Opening the Spreadsheets on an Apple Mac .................................. 91
7.2.2 Sourcing rental yields and property price growth figures ................. 92
8. In Which Country Should You Invest? 93

8.1 Country by country comparison - Tax, Finance and Legal
94
8.2 Country by country comparison - Property buying costs and
potential ........................................................................ 95
8.3 Country by country comparison - Country risk and
economics ..................................................................... 96
8.4 Why you are as good a judge as anyone ...................... 97
8.5 Meet the Eastern Eight countries................................. 97
8.5.1 The top-tier countries....................................................................... 97
8.5.2 The second-tier countries ................................................................ 98
8.5.3 The third-tier countries..................................................................... 98
9. The Czech Republic – an Established Investment

Target 99
9.1 Czech - Business & Economic Overview .................... 100
9.1.1 Country profile - Key data .............................................................. 100
9.1.2 Key economic data ........................................................................ 101
9.1.3 Labour costs and spending power................................................. 102
9.1.4 Currency policy.............................................................................. 102
9.1.5 Economic overview........................................................................ 103
9.1.6 Problem areas for the economy – what to look out for .................. 104
9.1.7 How open is the economy? ........................................................... 105
9.1.8 Does corruption affect the country?............................................... 105
9.1.9 What are the prospects for the economy? ..................................... 106
9.2 Czech - Property Market Potential.............................. 106
9.2.1 Drawbacks to buying property in the Czech Republic ................... 107
9.2.2 Domestic driving force ................................................................... 108
9.2.3 Converted office spaces ................................................................ 109
9.2.4 Czech investment verdict and tips ................................................. 110
9.2.5 Over-supply presents a buyer’s opportunity .................................. 110
9.2.6 Prestige properties in prestige areas away from the centre........... 111
9.2.7 Falling yields for offices – more residential property...................... 112
9.2.8 Target property that Czechs will buy or rent .................................. 112
9.2.9 Dismiss the EU factor at your peril ................................................ 114
9.2.10 Here’s a potted investment guide for Prague:................................ 115
9.2.11 The spill-over effect – look outside Prague.................................... 116
9.2.12 …and beyond ................................................................................ 117
9.2.13 The peace dividend ....................................................................... 118
9.3 Czech - How the Property Market Works.................... 120
9.3.1 How to buy property in the Czech Republic................................... 120
9.3.2 What about taxes?......................................................................... 121
9.3.3 Restitution status ........................................................................... 124
9.4 Czech - Property Finance ............................................ 125
9.5 Czech - Investment Verdict ........................................ 125
9.6 Czech - Links: .............................................................. 125
9.6.1 Government links........................................................................... 125
9.6.2 Trade and Information ................................................................... 126
9.6.3 Professional Associations.............................................................. 126
9.6.4 Misc links ....................................................................................... 126
9.6.5 Estate Agents ................................................................................ 127
9.6.6 Solicitors ........................................................................................ 127
10. Hungary – First Among Equals 128

10.1 Hungary - Business & Economic Overview ................ 129
10.1.1 Hungarian politics in a nutshell ...................................................... 129
10.1.2 Country profile – key data.............................................................. 129
10.1.4 Currency policy.............................................................................. 131
10.1.7 Reduction of the public sector deficit ............................................. 133
10.1.8 Currency attacks............................................................................ 134
10.1.9 East-west divide ............................................................................ 134
10.1.10 How open is the economy?......................................................... 135
10.1.11 Does corruption affect the country? ............................................ 135
10.1.12 What are the prospects for the economy? .................................. 136
10.2 Hungary - Property Market Potential .......................... 137
10.2.1 Will you be buying just before the bubble bursts? ......................... 138
10.2.2 What kind of returns can I expect? ................................................ 138
10.2.3 What are the best kinds of properties for rental? ........................... 139
10.2.4 What can I expect to pay for a property? ....................................... 139
10.2.5 Budapest is still best ...................................................................... 139
10.2.6 Be prepared to buy and hold, and avoid the top end of the market 140
10.2.7 Buy let-able properties................................................................... 140
10.2.8 Where to invest in Budapest.......................................................... 140
10.2.9 Healthy returns – spa centres........................................................ 141
10.2.10 Hot tip tourist destination – Lake Balaton.................................... 141
10.3 Hungary - How the Property Market Works ................ 143
10.3.1 How to buy property in Hungary .................................................... 144
10.3.2 Why buying through a company can be best................................. 145
10.3.3 How to set up a company in Hungary ............................................ 145
10.3.4 Extra costs..................................................................................... 145
10.3.5 When buying as an individual is best............................................. 146
10.3.6 The purchase process ................................................................... 146
10.3.7 What about taxes?......................................................................... 147
10.4 Hungarian - Property Finance ..................................... 150
10.5 Hungary - Investment Verdict..................................... 151
10.6 Hungary - Links ........................................................... 152
10.6.1 EU-related ..................................................................................... 152
10.6.2 Country specific ............................................................................. 152
10.6.3 Regions of Hungary ....................................................................... 153
10.6.4 Real estate .................................................................................... 153
11. Poland – The Sleeping Giant 154

11.1 Poland - Business & Economic Overview ................... 155
11.1.1 Polish politics in a nutshell............................................................. 155
11.1.5 Currency policy.............................................................................. 157
11.1.10 What are the prospects for the economy? .................................. 161
11.2 Poland - Property Market Potential ............................ 161
11.2.1 Traps for the unwary in the Polish property market ....................... 162
11.2.2 Why Warsaw? ............................................................................... 163
11.2.3 Where and what to buy in Warsaw ................................................ 163
11.2.4 Avoid the top end…unless you can find a real bargain.................. 164
11.2.5 How to know if you are paying the right price ................................ 164
11.3 Poland - How the Property Market works................... 165
11.4 Poland - Property Finance........................................... 168
11.5 Poland - Investment Verdict ....................................... 168
11.6 Poland - Property Links ............................................... 169
11.6.1 Real Estate Agents ........................................................................ 169
11.6.2 Others............................................................................................ 170
12. Estonia – The Hong Kong of East Europe? 171

12.1 Estonia - Business & Economic Overview.................. 172
12.1.1 Estonian politics in a nutshell......................................................... 172
12.1.5 Currency policy.............................................................................. 174
12.1.7 Problem areas for the economy..................................................... 176
12.2 Estonia - Property Market Potential ........................... 177
12.3 Estonia - How the Property Market Works ................. 178
12.3.1 What about taxes and other costs? ............................................... 178
12.3.2 Other costs .................................................................................... 179
12.3.3 The best way to buy - how to set up a company in Estonia ........... 179
12.3.4 How to establish a new company .................................................. 179
12.4 Estonia - Property Finance.......................................... 180
12.5 Estonia - Investment Verdict ...................................... 181
12.6 Estonia – Links ............................................................ 182
12.6.1 Legal.............................................................................................. 182
12.6.2 Tax ................................................................................................ 182
12.6.3 Others............................................................................................ 182
12.6.4 Property agents ............................................................................. 183
12.6.5 Loan providers............................................................................... 183
13. Lithuania – The Hidden Gem 184
13.1 Lithuania - Business & Economic Overview............... 185
13.1.1 Lithuanian politics in a nutshell ...................................................... 185
13.1.5 Currency policy.............................................................................. 187
13.1.7 Economic problems ahead? .......................................................... 188
13.2 Lithuania - Property Market Potential ........................ 189
13.3 Lithuania - How the Property Market Works .............. 190
13.3.1 What about taxes?......................................................................... 190
13.4 Lithuania - Finance Availability .................................. 191
13.5 Lithuania - Investment Verdict ................................... 191
13.6 Lithuania - Links.......................................................... 193
13.6.1 Agents ........................................................................................... 193
14. Latvia – The Jewel in The Baltic Crown 194

14.1 Latvia - Business & Economic Overview .................... 195
14.1.1 Latvian politics in a nutshell ........................................................... 195
14.1.5 Currency policy.............................................................................. 197
14.1.6 Economic overview and prospects ................................................ 198
14.2 Latvia - Property Market Potential ............................. 199
14.3 Latvia - How the Property Market Works ................... 201
14.3.1 What about taxes?......................................................................... 201
14.3.2 Other costs .................................................................................... 202
14.4 Latvia - Finance Availability ....................................... 202
14.5 Latvia - Investment Verdict ........................................ 203
14.6 Latvia – Links .............................................................. 204
14.6.1 Finance and economy ................................................................... 204
14.6.2 Estate Agents ................................................................................ 204
14.6.3 Other Links .................................................................................... 205
15. Slovakia – Out From the Shadows 206
15.1 Slovakia - Business & Economic Overview ................ 207
15.1.1 Slovakian politics in a nutshell ....................................................... 207
15.1.5 Currency policy.............................................................................. 209
15.1.6 Economic overview and prospects ................................................ 209
15.2 Slovakia - Property Market Potential.......................... 210
15.2.1 How to buy and finance ................................................................. 212
15.3 Slovakia - How the Property Market works ................ 212
15.3.1 What about taxes?......................................................................... 212
15.4 Slovakia - Finance Availability.................................... 213
15.5 Slovakia - Investment Verdict .................................... 214
15.6 Slovakia - Links ........................................................... 214
15.6.1 Estate agencies ............................................................................. 215
16. Slovenia – The Odd Man Out 216

16.1 Slovenia - Business & Economic Overview ................ 217
16.1.1 Slovenian politics in a nutshell....................................................... 217
16.1.5 Currency policy.............................................................................. 219
16.2 Slovenia - Property Market Potential.......................... 220
16.2.1 State of the market ........................................................................ 221
16.3 Slovenia - How the Property Market Works................ 221
16.3.1 Taxes and other costs? ................................................................. 221
16.4 Slovenia - Finance Availability.................................... 222
16.5 Slovenia - Investment Verdict .................................... 222
16.6 Slovenia - Links ........................................................... 223
16.6.1 Banks............................................................................................. 223
1. WELCOME TO EAST EUROPEAN PROPERTY SECRETS
Right from the outset we need to be clear what this book and spreadsheet software
program is all about. In a nutshell, it is a guide to taking investment advantage of a
unique time in history – the absorption of a group of eight former communist
countries into the European Union (EU).
And those countries are:
• Hungary
• The Czech Republic
• Poland
• Estonia
• Slovakia
• Slovenia
• Lithuania
• Latvia
Many people – and you may be one of them – have come to take this momentous
change for granted. The collapse of the Berlin Wall in 1989 and the communist bloc
it came to symbolise can seem like a distant memory.
Even so, for the most part, the names of many of those states that last year joined a
greatly enlarged EU still conjure up images of underdeveloped, poverty-stricken,
uninspiring places.
Strictly speaking, of course, some of these countries are technically in Central

Europe and others are in Eastern Europe. But, for our purposes, they’re all in
Eastern Europe.
Just reel off those names again.
How many people, in all honesty, could point to these places on a map? Poland,
Hungary, perhaps. Maybe even the Czech Republic. But Estonia? Latvia? Slovenia?
So, these obscure places hold little or no interest for anyone interested in making a
great real estate investment. Right?
Wrong!
In fact, these places are far more than merely interesting to investors, because what
some of these eight countries could well represent is that holy grail of real estate
investment – the basement-level opportunity.
Even before EU entry actually happened in May 2004, there were examples of
annualised double-digit growth in real estate prices, as the ‘EU effect’ was factored in
future price predictions. In the time since accession took place, growth has continued
apace.
So, perhaps you’re thinking that you are already too late. If you haven’t already
made your investment move, have you been left behind? The answer is clear –
absolutely not!
That’s the eastern promise of these potential goldmines – despite the fact that prices
have already begun to rocket in some places, there is still so much more potential for
similar, if not better, growth.
There are good, sound reasons for this that are mainly to do with how far behind
these countries are economically – even the most advanced - from the EU average.
But, let there be no mistake, these new EU-member countries are not investment
targets for the faint-hearted.
Maybe investing in fairly well-established markets such as those of Prague in the

Czech Republic, or Budapest in Hungary, may not be particularly daunting, but many
people will balk at the thought of pouring their hard-earned cash into properties in
Estonia, for example, or Lithuania, or Latvia.
But, in truth, locations that are lesser known to investors from overseas may well
represent the best buying opportunities. There are some great reasons, for example,
to invest in Latvia - as we shall see.
This is all fine and good. Except there are a few hurdles to overcome before you can
wisely put your property investment cash to work. How do you find out how the
property market works in these places?
How do you discover what kind of returns you can expect? What about other major
costs? How does the tax system work? What are the best locations? Will there be
language problems? Where do I look for properties? How can I spot an up and
coming area? How can I make sure I’m not ripped off?
In short, how do you take a sensible and measured approach to locating and buying
the best property? Just as important, how do you make sure you avoid making a
horrendous investment mistake?
It’s not important that you may not have even visited the country you decide to target
as an investment. What is important is that you are able to make an informed
decision about your investment.
That’s what this book is all about – helping you to form a rewarding property
investment strategy for these eight EU newcomers.
If you've ever bought or read an e-book from JoJaffa before, you'll know we are crazy
about spreadsheet software. Why? Well, one of the basic mistakes most people
make when buying abroad is that they don't do the sums!
The other way that we can help you is with our Property Secrets newsletters, website
and expert forums at www.PropertySecrets.net .
We've created these to give you the latest and most up to date information on East
European property market and other important issues.
The Eastern European EU newcomers are countries with huge potential, and, if you
are prepared to dare to be a little different in your investment strategy, some of that
potential could well come your way.
Cheers and good luck
Robin Bowman
P.S. If you enjoyed this e-book, you might also enjoy:
• Czech Market and Forecast Report

• Romania Market and Forecast Report
...all available from www.PropertySecrets.net
1.1 How to use this book
Whatever your reasons for considering investing in real estate in Eastern Europe,
you will get the most out of this book by regarding it rather like a road map. It
certainly doesn’t offer a foolproof plan for successful investment, but it will help
minimise risk.
And, without trying to sound too fancy about it, just as you might use a road map to
choose an indirect route to reach a destination, the same is true of this book. There
are chapters you may want to simply disregard because they are of no interest to
you.
But, it is always wise to think about all the possibilities before making an investment
decision. After all, circumstances can change. So can information about taxes and
property laws – especially in fast-moving economies like those in Eastern Europe.
Please bear this in mind and treat the information as guidelines, rather than always
definitive.
As with all property investment, the key is not to be caught out by surprises – at least,
not too many surprises; after all, if you’re buying in this part of the world you are likely
to find one or two novel procedures and the occasional odd turn of events.
Again, bear in mind that things change. A place you intended to buy and hold over
the long-term may become a millstone if at some time in the future you need to
exchange that asset for cash.
If you can’t sell the property because of some simple factor you overlooked when you
bought it, your original investment will become a regrettable one.
Don’t let that happen.
Consider all factors – from 360 degrees. Dip in and out of the sections of this book
as and when you need to, go back to chapters and use the data and advice to set
against the property or the location you’re considering. Consider countries you never
thought about investing in before.
First, to make things nice and simple, let’s take a look at the themes that East
European Property Secrets is going to guide you through:
• What is all the fuss about?
Why many investors in the know consider this zone to be the hottest around.
• What is the unique combination of factors that creates such a great

opportunity?
We’re going to look at these East European countries as a bloc and discover what
they are all about and what the EU could mean for them – and for you, the property
investor.
• How to work out whether this is the market for you.
This is the big picture stuff and it’s very important; but the other key area of
information for you, as a potential investor, is how to form your own personal strategy
to maximise profits – that’s what this book can help you to do.
1.1.1 Section 2 -The Opportunity
It’s important to grasp what EU membership is doing and is likely to do in future for
these countries, before leaping in and considering a real estate investment.
What is clearly unwise, as with any investment, is to simply jump on the bandwagon
because that is what everyone else is doing or, as more likely in this case, because
you’ve heard that an investment target is ‘hot’.
The EU Eight I’ve listed are certainly a hot topic of conversation among property
investors looking for bigger returns overseas than they can get at home.
There’s a sense that an opportunity is present but many people outside of these east
European Eight have not yet made that final commitment and bought a property.
So, what’s important to realise is that, while it is true that some spectacular gains
have already been made in certain parts of these countries, you are not yet in danger
of being left behind.
Stock market watchers like to talk about anticipated events being ‘factored into’ the
price of a stock. And, to a certain extent, that’s true of the property market.
Even before these countries joined the EU, everyone knew it was going to happen,
and they probably also knew something of the advantages that the EU was likely to
bring to these states.
So, a year or more after it’s happened, and now that some of those potential benefits
of EU membership have become reality, the price of real estate has already made its
most significant growth?
Not so.
And, in section 2, we’ll explore why, while actually joining the EU has been hugely
significant for these countries, it is only the start of the story – both for them and for
you, the investor.
We’ll also explain why it’s nowhere near too late to take advantage of the Eastern
Europe opportunity.
Key Tip
Bear in mind that EU accession is only part of the investment

equation. What comes afterwards is what will decide whether the real
estate market in the East European Eight is set on fire or not.
An increasing number of individual and corporate investors in Europe and the United
States are looking outside the traditional zones for investment and seeking increased
returns in new markets.
However experienced you are as an investor, you need to be able to apply the same
tests and assessments as big business when you consider where your money should
be invested.
Scale of investment can make some difference, but, generally speaking, the
evidence we need to consider and the methods we use are the same for any size of
investor.
We need to be quite sure about why this region holds sound promise for growth and
not just blindly follow a bandwagon. That’s when you are in danger of paying over
the top for a property - because you’ve been caught up in a bubble.
Remember the dot com craze and how truly crazy that now appears?
Well, exactly the same phenomenon can occur in the real estate industry when new
markets suddenly become in vogue. You therefore need to apply the same tried and
trusted techniques to making an investment decision as you would to any other
location.
Even so, it’s worth noting that many other investors have already decided that this
region of Europe has what it takes to potentially offer great returns on investment.
They are already voting with their dollars, pounds and euros.
According to US magazine Global Quarterly, a supplement to The Institutional Real

Estate Letter:
‘Europe, which is seeing economic integration under the Euro zone and continued
expansion with the admission of former Eastern Bloc countries in the European
Community, appears to be capturing more than half of the U.S. capital chasing
offshore real estate.’
And the same report goes on to quote John Coppedge, executive vice-president of
international operations at global property services company Cushman & Wakefield,
who outlines why money is shifting away from traditional targets:
‘With yields in prime European properties thin these days, some of the opportunity
funds are shifting to secondary and suburban sites, and even to emerging markets of
Central and Eastern Europe, such as Prague, Budapest and Warsaw.’
That’s what the pros are doing and there is no reason why the individual investor
cannot learn from them and do the same.
1.1.2 Sections 3 and 4: Strategies to maximise returns and how to locate the
best investment areas
To really exploit investment opportunities it’s essential to be able to understand the

most effective investment strategy and read the signs that indicate which area is
going to be the next hot investment opportunity.
You also need to consider your attitude to risk and how much you are prepared to
take. Remember the greater the risk, the greater the potential return.
Potential is the key word there, though. Nothing is certain, and naturally, the greater
the risk, the greater the degree of uncertainty.
1.1.3 Section 5 - Finance
Investment strategy is also all about finance. It’s important to understand how to
leverage your capital for the best returns, and to get the best borrowing deal.
When capital isn’t available locally, what are your options?
In this section we’ll look at the various financing scenarios.
For many people, re-mortgaging their primary home may seem like the best option,
although it is always best to borrow in the currency you will be receiving rent in – if
you are using rental income to finance a loan.
The other option is to buy for cash – never a sensible way of obtaining the best
percentage gain on an investment.
Except that if you pick your Eastern Eight country with care, buying in cash may
actually be a smart move in the longer term because the mortgage market is so
undeveloped in most of the Eight.
Undeveloped, but as we’ll see, growing fast. In this section I’ll explain how you could
exploit this fact.
1.1.4 Section 6 – Twelve-Step Plan to Success
Investing outside your home country requires additional attention and care.
In this section we'll show you the 12 key steps to ensure that you investment is both
secure and successful.
1.1.5 Section 7 - Using the East European Returns Spreadsheet
At the end of the day, every country and every region offers you both good and bad
investments.
So, how do you tell the potential investment stars from the investment dogs? Simple,
you just run the numbers!
In other words, using a sophisticated analysis of your potential returns will help you
determine the good investment options from the bad.
In particular, with East European countries you need to make an allowance of

possible high inflation coupled with potential currency devaluation.
Use this spreadsheet software to run different investment scenarios.
1.1.6 Section 8 - Country by Country comparisons.
In this section I’ll lay out country by country comparisons, so you can see at a glance:
• Which countries have the best rental yield prospects?

• Which countries have the best property price growth prospects?
• Who suffers from the greatest amount of inflation?
• Which country is the least transparent?
and
• How much you should expect to pay estate agents in each country?
• Which country has a zero capital gains rate?
• Which country has a 1% property purchase tax?
• In which countries is finance available (either inside or outside of the country?)
and much more…
1.1.7 Section 9 - 16: East European investment verdicts
OK, so you have your strategy, you are clear about what you expect of your
investment’s performance, you know how much you can afford, perhaps you even
know what kind of property you want to buy. In short, you’ve considered all the
angles.
Now you need to think about location. The old adage is as true today as it’s ever
been – the three keys to buying real estate are location, location, location.
Location is essential at both the micro and macro level. But in this section we’ll start
with the big picture.
You need to weigh carefully the advantages and disadvantages of investing in each
country. While, for the most part, it’s fair to talk about the east European Eight as a
bloc, they are also individual states with separate cultures and economies. For
example, Slovenia has very little in common with, say, Lithuania.
Their prospects for development are not all the same and their real estate markets
are not at the same level of development. How attractive they will be in the future is
also likely to be different.
So, even if you have a pretty good idea about where you want to invest – perhaps for
reasons of family ties – that’s fine, but the smart thing to do is to at least ask yourself
‘Is this the best investment decision I could make?’
Maybe you will decide that although it isn’t perhaps the very best investment, it is still
an acceptable one and anyway other considerations outweigh the investment factor.
Again, fine – so long as it is you, armed with as many of the key facts as possible,
who is making that decision.
As I‘ve said before, the key is to avoid, as far as possible, meeting with surprises – at
least the nasty kind.
So this section aims not only to introduce you to each of the Eastern Eight countries,
their economies, the state of the real estate industry and a brief overview of how
buying and selling works in that country.
The investment verdicts also try to point out some factors that may influence your
decision about whether a location is right, not just for investment, but for you.
Let’s face it, some countries have more going for them than others and this is an
important factor when you come to think about investment potential, both returns
from rental and resale value.
You need to know the kind of risk bracket a country falls into.
Key Tip
If there is no dual taxation treaty between your country and the country
you purchase property in, you run the risk of being taxed in both
countries on rental proceeds and capital gains on your property.
2. WHY IS EAST EUROPE SUCH AN EXCITING
INVESTMENT?
In this chapter you will learn:
• About the East European Eight (see section 2.1)

• What EU membership tells us about these
countries (see section 2.4)
• Why it is still not too late to take advantage (see
section 2.7)
• The drivers in the East European market (see
section 2.8)
• The risk – Government spending and currencies
(see section 2.11)
The countries of Eastern Europe this book focuses on may well contain a few
surprises for the uninitiated.
These states have been widely ignored by the average man and woman in the street
after a brief flurry of interest when they made headlines in the late 80s and early 90s.
At these times they were known either simply because they gained independence
from the old Soviet Union when it collapsed, or for breaking away from Russia, or
splitting internally (the old Czechoslovakia is now two countries).
Since then, for the most part, these places have escaped media attention.
And yet a silent revolution has been taking place as this group of newly-joined EU
members have been quietly developing, in fact literally transforming, their
economies.
This is what drove them along the road to EU membership and reintegration into the
outside world.
That sounds pretty grand but it has big consequences for anyone in search of great
property investment potential. We’ll take a look at why in a moment….
But first let’s take a glance at a few facts and figures about the EU and the eight
countries that are creating all the excitement.
2.1 Do you know…….
• The EU grew by more than 30 per cent geographically in May, 2004 when the
new members joined.
• The addition of new members has made the EU the world’s largest trading
bloc – a market of 25 countries and almost 500 million people.
• Joining the EU means countries have adopted the so-called acquis

communautaire, which includes applying 80,000 pages of EU law, raising
standards of administration and strengthening their judicial systems.
• The average GDP per person in the Eastern Eight is less than half that of the
other 15 EU countries.
• Joining the EU does NOT include adopting the Euro – at least not for the time
being. Most experts agree it will be 2007 before the eight countries join the
Euro.
• Billions of Euros is being handed out in development funds to the new

members – Poland is so far the biggest recipient, with an estimated €11.4
billion coming its way in the first two years after joining.
• EU surveys show that organised crime is among the top three concerns of
people within the new member states. And the biggest fear of Latvians,
Lithuanians and Estonians is an epidemic.
• Around a quarter of Latvians, Hungarians and Slovakians do not know that

Euro MPs are elected by popular votes.
• Surveys show that Slovakians consistently feel the most European, with 68%
saying they feel European to some extent as well as Slovakian.
• The combined population of the Eastern Eight is 73.6 million. Poland is the
biggest country (pop: 38.6m people) and Estonia the smallest (pop:1.4m).
• The average cost of a Big Mac in the eight countries is $1.76 (£1.12)
• Total forex reserves for the eight countries amounts to $55.5 billion
2.2 Seven key reasons for investment now
It is clear that EU membership is a massive stabilising force as well as an economic

boost and a measure of how far the accession countries have come.
Because of this there are a number of reasons why now is the best time to make
your investment move.
Let’s sum up those reasons.
• Foreign investment in these countries has increased since EU membership,

and will continue to do so.
• Greater economic activity will create more domestic demand for property.
• Most of these countries’ property markets remain relatively undiscovered by

outsiders – and domestically, property ownership is still a relatively new
phenomenon.
• Most countries have a number of highly attractive locations for tourism

development and vacation homes – another factor to increase demand as
these areas are developed.
• Restrictions and barriers to foreign ownership of property, where they exist,

are almost certain to decline, as will overly complicated procedures for
purchasing, which will boost property demand.
• Generally there is a good stock of old, character properties to be restored.
• Entry-level prices into these real estate markets are still extremely low outside
of the most popular tourist destinations.
We’ll explore these points again when we come to look at individual countries’
property investment prospects. But, in the meantime, I want to turn to two other
particularly important factors why I believe now is the time to invest in this part of the
world. Let’s look at those reasons.
2.3 What is so EXCITING about investing in this region?
Being a trailblazer has the potential for the greatest rewards.
These markets represent fabulous untapped potential, especially for tourism in the
major cities.
EU membership, with all its checks and balances, offers a high level of security for
investors.
There are FOUR clearly identifiable phases that are central to providing major boosts
to the property market…..
Key Tip
The FOUR key boosts to property markets in the Eastern Eight:
• Anticipation in the run up to EU membership

• Advent of EU membership
• Anticipation of membership of the Euro zone
• Actual introduction of the Euro
Bear in mind also how, as we’ll see below, investment in new EU member countries
tends to rise several years after they join. We can even consider this to be another
key phase.
And the savvy investor will consider all of these phases as investment opportunities.
Key Tip
Think like a big-time investor and identify the key phases that will help
act like turbo chargers to the property market in these countries.
It’s also important to bear in mind that there are currently some barriers in place in
some of the markets we’re considering. In the Czech Republic, for example, it is not
possible for a foreign individual to own property. The same is true in Slovakia.
While there is a fairly simple way around this restriction, it acts nevertheless as a
psychological hurdle that dampens foreign property investment in the countries.
It’s true that some of the barriers that had previously been in the way of investment in
these countries came down when EU membership took place. Some, however,
remain. And they’re likely to remain for several years.
We’ll look more closely at these restrictions when we focus on the individual
countries making up the Eastern Eight. But it is important to not only appreciate the
restrictions as they stand now, but also to see the positive opportunity they represent.
Key Tip
When more of the barriers come down, as they surely will, then if all
other factors are equal, increased property investment is bound to
follow.
2.3.1 Maximising the East European investment opportunity
Before we look in depth at the pluses and minuses of each of the Eastern Eight
countries, it’s well worth taking a little time to plan precisely what we need to keep to
the fore as we plan to exploit our investment opportunity fully.
We’ve considered many aspects of the big picture, and it’s important, as I’ve
stressed, to make assessments in terms of the big picture – after all it’s the big
picture that has made much of Eastern Europe attractive to the individual investor,
whether he realises it or not.
It’s big picture politics and economics that are causing such a stir about these
countries in investment circles.
It’s vital not to forget that without EU accession being a success for these countries,
without EU investment, followed by private capital, the property boom would not
accelerate, indeed, it would quickly end.
It would be hard to find an analyst who sees matters in such bleak terms, but this is
an illustration of how property prices do not rise in a vacuum – they are a product of a
successful economy.
• Rising prices are a product of demand.
But for a successful formula leading to property investment profits we also need to
consider the smaller picture. The vital points we need to think about every step of the
way when we set out to invest.
The watchword here is ‘caution’.
That’s true of property investment anywhere, but it’s especially true of investing in
markets that are causing a lot of excitement, markets that are relatively new, and
markets that are being given a series of powerful kick-starts.
Key Tip
Before making any investment decisions, and certainly before

committing any money, take expert advice from well-established
professionals.
So, what’s the secret to virtually guaranteeing positive returns on your investment in
Eastern European property?
In a moment, I’m going to spell out a three-step, foolproof plan.
But first I want to stress that, as with all big plans and successful formulas, the big
picture, or the theory, if you like, is one thing. Success or failure certainly depends
on whether you apply correct theory to your investments.
But, even if your theory is correct and based on sound logic, it will still fail if you don’t
get the little stuff right. What we mean here is you still need to concentrate on the
detail.
For example, if we look at where to invest. Location is the key to successful property
investment, right? But there’s location at a macro and a micro level.
We may decide that the Czech Republic is the best location to invest in property. But
where, exactly? Prague, maybe.
But which area and in which street and how near to certain facilities and on ground
level or first storey level, and so on. You get the picture.
And, beyond that, what if you deal with a bad estate agent and you overpay for your
property, which then turns out to have serious legal complications.
These may be concerned with, say, sitting tenants, or disputes about adjoining land,
and it then emerges that there are plans to build a refuse collection plant next door to
the property and you didn’t allow for this in the price.
Then, well, it’s pretty clear that even with the best location in the world, you are going
to have a hard time even selling this property, let alone making a profit on it.
None of these problems, in themselves, or even taken as a whole (and you’d be very
unlucky to confront all of these difficulties simultaneously), makes a property un-
saleable.
After all, anything will sell – for the right price. What it does mean, however, is that if
you didn’t allow for these factors when you agreed on the price, then you have
already taken a hit on your investment.
All this is simply by way of a warning, really, not to get carried away with the big
picture and lose focus on the smaller issues.
2.4 What EU membership tells us about these eight countries
Acceptance into the EU club is a measure of just how far the Eastern Eight countries
have travelled since the early 90s.
For many of us in the West it is difficult to imagine the scale of transforming a

communist state in which free enterprise, an impartial judiciary, open government
and freedom of movement are unknown, into a country fit to join the European Union.
It is worth bearing in mind what the European Union - despite the many criticisms it
faces - is all about: creating a free market by removing barriers to trade as well as the
movement of goods, services and people between member states.
It is, as symbolised by the Euro currency, as much about political unity and common
principles as it is about trade.
But what makes all the difference from an investment viewpoint is that acceptance as
EU members means that no longer do these countries quite literally operate laws
unto themselves, they are bound by common rules.
The European Council, meeting in Copenhagen in 1993, laid down the precise way
these countries are assessed and the points they need to satisfy before EU
membership is possible.
This yardstick has become known as the Copenhagen criteria. Countries must show:
• Stable institutions guaranteeing democracy

• The rule of law and respect for and protection of human rights and minorities
• The existence of a functioning market economy
• The capacity to cope with market forces and competition from within the union
• The ability to take on the obligations of membership, including economic and
monetary union.
In short, all the countries must be party to the acquis communautaire (the EU’s set of
legislation governing standards in various areas of administration for all member
states).
So, if you’re an investor you know, for example, that an EU member country is
unlikely to collapse economically. You know that some weird draconian law will not
be enacted to seize all property owned by foreigners and you know that there will be
respect for contract law.
The all-important relevance of this for the real estate investor is summed up in one
word: stability.
2.5 Foreign and EU money is already pouring into Eastern
Europe
Foreign investors have already recognised the significance and have been taking into
account the EU factor for some time now. This has had a huge effect on foreign
investment and, as a consequence, on many countries’ growth.
As I’ve already mentioned, Poland, for example, as the largest of the eight countries,
will have received an estimated €11.4 billion in the first two years after joining the EU.
Slovakia is on the receiving end of €1.7 billion of regional development aid from the
EU.
Inward investment into the ten European Union (EU) accession countries (this
includes Malta and Cyprus), increased by 14% in 2002 on the previous year,
according to the Ernst & Young European Investment Monitor 2003.
That compares with a decline of 11% into the EU itself.
2.6 Huge cash injections are being made to stimulate economic

growth
The main objective is to use the money to stimulate economic growth,

competitiveness and new jobs while also trying to smooth out big regional differences
within the countries.
The EU’s primary vehicles for assigning money to Eastern European countries are
Phare, to help build institutions; ISPA, which funds transport and environmental
programmes; and SAPARD which helps support rural areas and agricultural projects.
The programmes were set up in 1989 after the fall of communism in Europe.
The aim is to help countries rebuild their economies by focusing on business

infrastructure and the development of existing and new businesses as well as
transport, agriculture and developing more isolated rural areas.
Education and training programmes are also funded.
Here’s a look at the kind of amounts we are talking about…
Annual funds SAPARD Av. Phare

ISPA annual Total annual
Country from Phare Annual allocations
funding allocation
2000 onwards funding 1995-99
€m €m €m €m €m
min max min max
Czech Rep. 79 22.1 57.2 83.2 158.3 184.3 69

Estonia 24 12.1 20.8 36.4 56.9 72.5 24
Hungary 96 38.1 72.8 104 206.9 238.1 96
Latvia 30 21.8 36.4 57.2 88.2 109 30
Lithuania 42 29.8 41.6 62.4 113.4 134.2 42
Poland 398 168.7 312.0 384.8 878.7 951.5 203
Slovakia 49 18.3 36.4 57.2 103.7 124.5 48
Slovenia 25 6.3 10.4 20.8 41.7 52.1 25
Source: Eurostat
Most interesting of all is that the Phare programme for 2000–06 has a budget of over
€10 billion.
This kind of investment through the EU is vitally important to the real estate investor.
2.6.1 How to follow the money
For the serious investor it is certainly worthwhile monitoring where this money is
being spent or where there are plans to spend it.
Probably the best way of doing this is through the European Commission’s
comprehensive Internet site
europa.eu.int/comm/index_en.htm which supplies frequent updates on news
concerning EU accession countries.
The European Bank for Reconstruction and Development is a major property investor
in Eastern Europe and details of its projects are worth following at its website -
www.ebrd.com/about/index.htm
Key Tip
Follow the money by investigating where major EU investment

programmes are taking place. The kind of money available is capable
of turning an economic backwater into an area with the potential for a
real estate boom.
An influx of EU cash on this scale can generate new employment opportunities and
new businesses, which in turn, of course, stimulates demand for real estate and,
therefore, leads to price inflation.
Those areas that benefit most from inward investment, whether it is EU cash or
private money, are likely to be some of the places where real estate investors have
the best chance of seeing the most attractive returns on their money.
Vast sums of money are not just coming from the EU; private money is also pouring
into the eight countries.
In Slovenia, for example - a tiny state of two million people - the amount of foreign
direct investment (FDI) for 2002 alone – well before EU accession – was 10 per cent
of GDP, or just under $2 billion. That is almost equivalent in one year to the total
amount of FDI for the previous ten years!
I mentioned earlier that real estate prices in some parts of the East European Eight
were responding to the EU accession even before it took place, and they certainly
have done since.
Some people have even argued that, in many places in Eastern Europe, anyone
considering investing in real estate has already left it too late.
But if past patterns of investment flows of private capital are anything to go by, those
people are making a mistake.
2.7 Investment peaks later – take advantage now
The fact is that, in the past, while foreign direct investment began in anticipation of a
country’s EU accession, it increased massively afterwards.
It’s important to remember why this flow of investment matters.
It’s a simple and virtually foolproof formula –
Investment equals demand and demand (if not met in full), will push up prices.
The more investment coming into these countries, the more demand there will be for
goods and services, and real estate.
And the more rapid the investment is, the more rapid the demand will be for property,
and the less likely it is to be met immediately.
This will push up prices.
Research by PricewaterhouseCoopers reveals that many Western businesses,

particularly the larger ones, planned for EU enlargement several years ago and are
already moving into Eastern Europe.
Smaller businesses – perhaps those that don’t have experience operating outside
their own national boundaries – tend to wait, however, until they actually see the
political and economic stability that EU membership brings.
But what the statistics show is that until countries formally become members of the
EU, businesses do not feel sufficiently confident of political and economic stability to
invest most heavily.
Whatever the reason for their hesitance, the figures show that inward investment
really takes off not at the time of accession or even in the year or so afterwards, but
some six to eight years later.
As an investor, the really important factor to appreciate then is that you should not so
much be looking for the boom in real estate prices now, but several years afterward.
So, while it is unlikely that you will have missed the boat as far as real estate prices
go, it is nevertheless important to make your move now and to devise your strategy
in order to maximise investment profits.
2.7.1 Excellent economic performance prior to joining the EU
It is a startling fact that just a few hours’ flying time from some of the most
sophisticated cities in the world – London, Paris, Milan, Frankfurt – there are
countries that have just joined the EU that can boast economic performances more
developed countries would die for.
GDP growth figures of 5 per cent or more are, by any standard, considered a boom.
And, in total, 16 of the 27 Central and Eastern European countries registered
economic growth of more than 5% in 2000, according to World Bank figures.
Strong growth has continued, albeit sometimes at a less dramatic rate.
Following the tough adjustments to their economies during the mid-nineties, these
countries have gone from strength to strength, even though those most closely
connected to trade with Russia were badly buffeted by the Russian currency crisis in
1998.
2.7.2 Size does matter – and small can be beautiful
Again, according to figures from the World Bank, we can see that it is often the
smaller countries that actually perform the best, especially in terms of trade and
foreign investment.
They often have less of the burdensome heavy industries that are the legacy of the
communist era.
Closing these down or restructuring them often means high levels of unemployment
and all the associated ills this brings.
Estonia, for instance, is the star performer for exports of goods and services as a
percentage of GDP, with an enviable 80%.
Slovakia and the Czech Republic both have export sectors that make up around 70%
of GDP.
Because the larger countries have economies that often rely less on trade and just as
much on domestic demand, they tend to trail smaller countries by ratio of exports to
GDP. Poland’s GDP, for example, is only 27% export-led.
2.7.3 Investment tends to follow the most successful traders
Generally speaking, FDI seems to be attracted to countries that show themselves to

be the most successful traders.
In absolute terms, of course, the bigger countries, such as Poland, attract the most
FDI. But smaller economies like the Czech Republic, Slovakia and Hungary are
pulling in FDI at a level that is almost as high or even higher per capita.
This is highly important for investors because the best returns on real estate are
almost certain to be in countries with the most foreign investment, because
investment will lead to growth and the real estate market will move in synch.
2.8 The drivers of the new East European property market
A combination of factors makes the property markets in these countries attractive for
the medium to long term investor.
We have already looked at the sort of money that will be invested by the EU and
seen how vast sums of private capital are also likely to follow.
But there are also other important factors that are altogether more human in
character and can only truly be appreciated by visiting these countries and talking to
the people – equally by talking to people in the West who have visited Eastern
Europe.
On the one hand there is a curiosity about these hitherto closed communist countries
among Westerners, who have yet to really discover these places beyond the familiar
tourist trail of Warsaw, Prague, Budapest and perhaps Krakow. This will change.
In fact there is anecdotal evidence to suggest it already is changing. Many people

are also rediscovering countries in this part of the world.
One British-born tour operator in Lithuania refers to an increasingly common pattern.
“My father is from Lithuania but has lived in Britain for many years. When he retired
a couple of years ago he decided to revisit. He loved it so much he decided to live
there – he could afford a better standard of living all round.
“I went over, not really expecting much at all. But I loved it too and decided to stay
and set up a tour business. Most of our clients are first-time visitors and are simply
curious. I think it’s true to say almost all of them are very pleasantly surprised by
what they find.”
This trend is almost certain to increase as these countries open up more and become
even more accessible.
2.8.1 Pent-up aspiration is a key driving force
There is an undoubted hunger among the younger people of these countries to open
up to the West and to the free market. A desire to travel, mix with other cultures and
to embrace the sense of being European that membership of the EU is capable of
creating.
On top of that there is an almost palpable sense among many young people of a
straightforward desire just to have more of the good things in life – to get richer.
Part of getting richer, as we know in the West, usually involves owning your own
home.
Demand then for property to purchase in the Eastern Eight is not just likely to
increase because of money coming into these countries, but also from strong and
increasing domestic demand.
One of the key drivers of these economies then is the dynamic of pent-up aspiration.
This is hard to define and encapsulate, but it should not be underestimated. It makes
an economy buzz and generates growth. This is the power of the emerging middle
class.
What marks these countries out as great investment opportunities is their unique
situation.
The fact that they have just become part of a gigantic free trade area – and yet their
GDP and, by any reckoning, their standard of living, is below pretty much anything
seen in the West.
In addition, these countries house populations that for decades were denied any
chance of flourishing economically. Add all this together and you create a highly
charged set of circumstances.
2.8.2 Big potential returns also carry a certain amount of risk and
uncertainty
But, as with most high-return investments, there is usually an element of risk

involved.
The countries of Eastern Europe – even those EU accession countries who are far
down the road to transition between centrally planned and free market economies –
are not without risk for the property investor.
These countries, as we’ve seen, have outperformed the feeble growth seen in most
members of continental Europe over the last few years.
But, as Steven Fried, deputy chief economist with the European Bank of
Reconstruction and Development, points out: ‘The experience of transition, however,
has been too much wasted investment and innovation.
‘Resistance to adapt to market pressures has been strong and governments all too
often have conspired with vested interests to impede this process.
‘The result has been a relatively poor business environment in the region beset by
arbitrary taxation and business regulation, corruption and poor legal systems.’
None of which seems particularly attractive if you’re thinking of dipping your toe into
the property markets of one of these countries.
2.8.3 But change for the better is occurring
These concerns led the EBRD and the World Bank to launch a massive survey
among businesses within transition countries – 10,000 interviews to hear from
business people themselves about what hurdles they face.
And what the survey reveals is that significant improvements are being made that
make doing business a more stable process – which, of course, if good for the
purposes of attracting foreign investment.
Steve Fries reports: ‘Discriminatory practices that favoured the old socialist dinosaurs
over small firms and start-ups have begun to diminish. Tax regimes have improved...
‘Even corruption is starting to diminish, as fewer firms report paying bribes. And
those that do, pay less as a share of their annual sales revenue – an average of
1.5% in 2002, down from 2% in 1999, when the first round of the survey was
conducted.’
The report goes on to warn that there is still a long way to go, and in particular:
‘Courts still have a long way to go in providing timely enforcement of property rights
and contracts.’
For the investor, the report’s conclusion is enlightening.
‘Despite the vulnerabilities, prospects for the region have clearly brightened and have
sparked growing investor interest. The current period of resilient growth, however,
should not give rise to complacency.
‘There are both pressing medium-term challenges to maintain macroeconomic

stability, and longer-term challenges to build sound market supporting institutions
necessary for catch-up growth.’
2.9 Making your investment at the right time in the economic
cycle will create the quickest returns
No one, not even the finest economist in the world, can accurately predict the dips
and troughs of economic cycles. Simply, the world is far too complex a place and the
factors that influence economies too numerous and too anarchic for their effects to
be fully anticipated.
This is why many investment experts will advise a buy and hold strategy. This way
the inevitable and unforeseen ups and downs of the market cancel each other out.
So long as the general value trend over the medium to long term is upwards, the
investor wins.
This makes good sense, particularly with a property investment – that involves a
product that is not portable or relatively easily or cheaply exchanged for cash.
Nevertheless, it is obvious that if you can time your investment so that you buy at or
near the lowest point of an economic cycle and sell just before or at the highest point,
you will maximise your profits.
In fact, if you could do this repeatedly, you would be fabulously rich! The truth is that
no investor can get this right all the time.
But we can make intelligent decisions about what is likely to be the state of any given
market at any given time based on expert opinions and informed organisations. They
may not get things right all the time, but they are the best guide we have.
This is why it’s worth taking a look at the predictions of such groups as the inter-
governmental Organisation for Economic Co-operation and Development (OECD).
The generally held view is that the growth of the economies of these eight countries
will accelerate in the years after accession.
2.10 The Irish experience – to be repeated across Eastern

Europe?
A question worth asking is which of the Eastern European countries that are new to
the EU will do what Ireland did around ten years ago – i.e., blast off into an economic
boom unprecedented in the country’s history.
When you look at the Eastern Eight, it’s obvious that Ireland is a great yardstick for
spotting the best place to invest.
Simply put, many of the reasons for Ireland’s spectacular growth are present, or
potentially present, in the EU accession countries of Eastern Europe.
Right now, you would be a brave investor to buy into Ireland’s real estate market.
Most experts agree that it must be near the peak of its cycle, if not near a sharp
correction.
But had you bought into the market some ten or twelve years ago, you would have
seen gains as good as anything in the world, with rises running well into double digit
growth year after year.
No single factor accounted for this boom, but rather a combination.
It’s worth spending a few moments identifying what those factors were because they
are definitely worth applying to Eastern Europe.
Of course, we can breakdown the growth in property prices into two parts – demand
and supply.
On the demand side, price inflation was fuelled by:
• A huge increase in employment during the 90s of some 30%, brought about
by a massive influx of investment.
• Unemployment fell from 16% to less than 5% in the last decade.
• Major reforms of personal taxation that have helped create an annualised 7%

increase in disposable income
• Big reductions in business taxation
• Big cuts in government spending – not just in real terms, but more importantly
as a percentage of Ireland’s GDP
• A dramatic drop in interest rates as a result of Ireland’s entry into ERM and
later the Euro, meaning that monetary policy (i.e. interest rates) was effectively
decided in Frankfurt rather than Dublin. The effect of this has meant that
money became cheap to borrow. Real mortgage rates have been on a
downward trend since 1992 when they stood at 12%
• A big increase in migration into Ireland, said to have created up to 25% of

housing demand during the 90s
• A bulge in the population of 25 to 44 year olds – the portion of the population

most active in the housing market
• And, on the supply side, Ireland began its boom with a low stock of housing
quite unable to meet the new and sudden demands. New builds increased
dramatically – between 1993 and 1999 there was a 16% rate of yearly
increase in new housing stock.
2.10.1 Inward Investment
While we can see that a number of reasons led to Ireland’s house price boom, the
key factor is inward investment, which created more jobs and disposable wealth in
the country.
So, for the real estate investor with an eye on Eastern Europe, the question is why
did that money head for Ireland?
Perhaps even more interesting is where predominantly it came from.
First, from the EU and, when this began to taper off, from private business, led by a
wide margin by the United States.
What led to this private investment and do the same conditions apply to the Eastern
Eight?
We’ve already looked at what attracts big business to invest in a country. Let’s look
a little more closely at why Ireland seemed to have it all.
Certainly, its boom began at the start of an investment and growth cycle – since 1993
economic recovery in Europe and, most importantly, in the US was solid.
As the era of new technology and the Internet boom took hold, investment grew
exponentially. Ireland reaped the benefits of this.
To a large extent, how much investment flows into Eastern Europe will depend on
how well the global economy performs, especially how well recovery in the United
States takes hold.
Ireland was a relatively cheap source of labour, labour that was also well-educated
and spoke English.
It also offered attractive and simplified tax incentives to big business as well as the
low interest rates dictated by the European Central Bank.
The government’s decision to set corporate tax at an ultra-low 12.5% (even lower
than Hong Kong!) was possibly the single biggest factor in luring private cash to
Ireland.
More than 1,000 overseas investors are estimated to have set up headquarters in
Ireland as a result.
In addition, the government streamlined finances and exercised a cautionary fiscal

policy – both of which are attractive to corporate investors looking for long-term
investment potential.
Do the EU accession countries of Eastern Europe offer the same attractions as
Ireland did around a decade ago? I believe that evidence shows that yes, some do.
Already many of the Eastern Eight have learned from the Irish experience. Take a
look at the attractive tax regimes already in place in some of the countries.
Estonia’s rate of corporate tax is a relatively low 26%. All corporate profits that are
reinvested are exempt from any tax.
Lithuania’s corporate tax rate is 24%.
Latvia’s rate is even lower at just 19%.
The Euro will of course be a huge boost to the countries’ economies as they adopt it.
But even before this happens, house price inflation, fuelled by massive injections of
EU money and foreign investment will lead to more jobs, increased wealth creation
and consumer demand, and will offer fabulous returns.
In fact, remarkable returns on property investment are already happening in this part
of the world.
2.11 Government spending – will it spoil the party?
Government spending is perhaps the number one factor that will influence which of
the Eastern Eight will be successful in the long term.
Those countries that truly manage to bring their spending in line will prove to be the
most stable and the most attractive to investors.
Those that fail to slash public spending will pay the price by not qualifying for
membership of the Euro club and before that ERM.
But it means some painful decisions ahead for many of these governments.
The Czech Republic has already faced and weathered one massive crisis of
confidence (see section 9.1) that was caused by an over-spending government.
Politics aside, developing countries with high-spending governments do not create

the unrestrained conditions needed for the best and fastest economic growth.
Many Eastern Eight governments are simply spending far too high a percentage of
their country’s GDP. This is a fiscal weakness that has been pointed out again and
again.
This, in effect, means that taxation will stay too high relative to sleeker, slimmer and
more modern-minded states.
2.11.1 The currency risk
If a government’s spending exceeds its income, two things are likely to happen
eventually:
• The country won’t qualify for entry into the Eurozone

• International money markets will lose faith in the country’s fiscal policy
and will sell off the currency
This means the country’s currency will devalue relative to major international
currencies.
For the property investor, this is bad news.
You may make a 10% capital gain per year on your investment, but if the currency in
which you’re making the gain is falling by, say 8%, relative to your own currency, you
are only making a profit of 2%. Subtract taxes and you may end up with a loss.
This is why a country’s fiscal attitude is so important.
Those countries with the most stable or strengthening currencies are likely to have
three qualities in common:
• They attract a lot of investment

• They keep government spending low
• They have highly disciplined exchange rate policies, like, for example, a
currency board, possibly the most disciplined exchange policy of all
Government over-spending also means that the long – and often painful – journey
from centrally-planned and controlled economies to the free-market is being
artificially slowed down.
The best place to invest in property will prove to be those countries that introduce
serious measures (not just window-dressing ones), to bring down public spending.
Here are some examples of high spending from 2002:
• Hungary’s government spent 53% of GDP

• The Czech Republic spent 47%
• Poland spent 44%
• Slovakia spent 41%
In Hungary it is estimated that the government will run a current account deficit of
5.5% in 2003, falling to 4.5% in 2004.
The big three accession countries – the Czech Republic, Hungary and Poland – are
all running massive deficits of between around 5.5% and 6%.
Joining the ERM, as countries are supposed to do before adopting the Euro after two
years, makes their currencies vulnerable to speculators who see the weakness of a
government’s fiscal policy and bet that the currency is artificially valued up.
As we’ve mentioned above, the key reason for Ireland’s hugely successful period of
growth from the late 90s onwards, has been low, low taxes and big, big cuts in
government spending.
Certainly no government can afford to run a current account deficit for long. If they
do, they are likely to see investors lose faith in their currency and sell it, provoking a
currency crisis like that in the Czech Republic in 1997.
Since 1998, Ireland’s administration has kept spending to below 35% of GDP.
This speaks for itself.
2.12 Years of growth potential remain
The other (and perhaps the key) reason supporting the view that the Eastern Eight
will see huge growth is that they have years to go before they will approach anything
like the level of output or GDP of their fellow EU members.
Writing for the Urban Land Institute, David Hutchings of property consultant
Cushman & Wakefield Healey and Baker and Monika Bukowska, research consultant
at Cushman and Wakefield Healey & Baker, have made some calculations that will
be of interest to any investor who fears they have missed the boat.
Using data from a variety of sources - EIU, Euractiv.com, Eurostat, Cushman &
Wakefield Healey & Baker – they calculated the time it will take Eastern European
countries to match 75% of the 15 states of the EU’s average per capita GDP based
on current rates of growth.
Here are the results for the eight EU accession countries:
Time to match 75% of the average GDP

Countries
per head of the EU 15
Hungary 11 years
Czech Republic 15 years
Poland 33 years
Estonia 19 years
Slovakia 20 years
Slovenia 1 year
Lithuania 31 years
Latvia 27 years
Excluding Slovenia - which stands out from the other candidate countries in many
ways - then we are talking of, at the least, more than a decade of growth before
these countries match even three quarters of the economic muscle of the Western
EU members.
Therefore, even with Eastern European countries outside of the candidate countries
– Russia, Romania and Bulgaria, for instance – competing for inward investment and
advertising themselves as low-cost centres, there is still huge growth potential within
the Eastern Eight.
2.12.1 Average monthly salaries
Monthly salaries provide another way to estimate how much lag there is between
these countries and their new EU partners (and therefore how much growth potential
remains).
This data provides fascinating comparisons.
AVERAGE MONTHLY SALARIES (GROSS) IN EUROS
(Source: Investing in Central and Eastern Europe, Dresdner Bank)
These two indicators – GDP comparisons and earnings lag - really highlight just how
far the Eastern Eight have to go economically to catch up with current EU members.
And what that adds up to is a lot of real estate growth potential as big business and
industry takes advantage of lower costs, along with the stability EU membership
represents.
2.12.2 Massive property price growth potential from within these countries
What is also exciting about these countries is a twin boost to property markets from
within. That is:
• Ultra-low levels of domestic mortgage penetration

• Huge growth rates of mortgage sales
Put another way, this means that very few people in most of these countries have
mortgages and yet the number of people acquiring them is growing exponentially.
This demonstrates a huge appetite for home ownership that will increasingly fuel the
upward trend in residential property prices.
These twin phenomena are true, to greater or lesser extents, in most of the Eastern
Eight.
But let’s focus on Latvia – one of the three Baltic states of Latvia, Lithuania and
Estonia, which are often lumped together as they are so small and their existence so
inter-woven, culturally and economically. We can see the extent of what we are
talking about …
The fact is there is a quiet revolution taking place in the banking and credit sectors of
this country, and it’s being fuelled by foreign cash deposits.
Non-residents made up an extraordinary 52% of all depositors in Latvian commercial

banks in the first six months of 2003. This compares to 4.8% in Lithuania and 11.4%
in Estonia. And this money is being used to fuel the domestic debt market,
particularly mortgages.
According to assessments made by Latvia’s Latvijas Unibanka, total assets in all

banks in the three Baltic states grew by 7.1% in the first seven months of the year. In
real figures, this is growth of €1.26 billion to €18.99 billion.
In the first six months of 2003, the number of mortgages approved by Latvian banks
for the purchase of apartments went up by 42.8% to €522million, according to the
Association of Latvian Commercial Banks.
Around 55% of these credits were issued by just three institutions – Hansabanka,
(23,4%), Latvijas Unibanka (18,8%), and Hipoteku banka (13%).
This is massive rise and yet a relatively small amount of money issued by a small
number of banks.
This tells us three things:
• There is big and growing domestic demand to own property in Latvia

• The amount of credit advanced for mortgages is still small
• There is plenty of room for more competition from banks for the growing
business, so bringing more borrowers (and more money) into the market
Not only is the amount of credit advanced very small, the number of people doing the
borrowing is still, as yet, tiny.
Key Tip
Although the rate of mortgage penetration is growing at an amazing

rate in Latvia, it started from an ultra-low base.
There is therefore little to zero chance of rapidly growing domestic

demand causing the residential property market to overheat in the
near future.
This is vitally important because it suggests there is plenty of growth still to come in
the market and that, long term, it will not only be fuelled by foreign money, but by
domestic buyers.
Hence, a sustainable real estate market is establishing itself as a key component of

the country’s economy.
Naturally enough the banks are fuelling the growing popularity of mortgages and the
idea of property ownership. And, of course, Latvians are keenly aware of the kind of
returns it is now possible to make in the property market.
But consider how few people actually have mortgages at present: in Latvia it is
around 7 or 8%; in Estonia, 12%.
Corresponding average figures for Europe are around 30-40%, even 50%.
In short, the potential in these markets is huge.
2.13 The Euro factor
Joining the EU is only half the story – that much is clear. I’ve already talked about the
impact on investment after joining. But what about the potential effects of the Euro?
The whole question of the Euro is not, as it first might appear, a simple one, but is
actually quite complex.
Adopting the Euro will have a profound effect on not only the economies of these
new EU member countries, but also their real estate markets.
In a nutshell, adoption of the Euro will:
• Eliminate currency fluctuations
• Stabilise and (mostly) lower interest rates
• Impose fiscal stability
However, as I mentioned briefly earlier, having joined the EU does not qualify any of
the Eastern Eight to join the Euro. That will, or may, come later, at the earliest in
2007.
Some populations have often been decidedly reluctant to adopt the Euro, often
seeing it as representing a loss of control over their economic affairs and a loss of
national identity.
Many of the advantages are political rather than economic, but for a former
communist state, membership of the Euro club is an important indicator of arrival on
the free market scene along with a clear signal that the country is a member of a
stable trading zone.
Certainly, the governments of the Eastern European countries that have recently
joined the EU will all almost certainly want to also join the Euro as soon as conditions
allow.
2.13.1 Euro membership – don’t bank on it short term
It is important to recognise that, although the idea is that all countries will join – there
is no opt out, as for the UK and Denmark – membership is not certain.
It is not simply a case of when, not if.
This is a key consideration for real estate investors because those countries that are
first to adopt the Euro are likely to see the quickest and most dramatic returns on
investments.
There is an element of a gamble here as well because any country that fails to meet
the conditions necessary for Euro membership is likely to suffer in terms of
investment and, as a knock on, in terms of real estate price inflation.
While none of the new member countries have the option of an opt out in theory, it is
also the case that they cannot either be forced to join.
Remember that Sweden had no opt out either, but despite this it held a referendum
and rejected the Euro.
Key Tip
Anyone trying to anticipate which countries will be first to join the Euro
should not expect entry conditions to be necessarily the same as
those laid down in EU fiscal policy.
Criteria for Euro membership currently are those conditions laid down for the first 12
members – low inflation and low long-term interest rates, budget deficits that are
below 3% of the country’s GDP and government debt that is below 60% of a
country’s GDP.
In addition, candidate countries are supposed to peg their currencies to the Euro for
at least two years within the exchange rate mechanism (ERM2), and keep their
currencies to within a 15% band of that fixed rate.
But, for some existing members of the Euro club, rules about debt and exchange
rates were not rigidly applied. The same loose approach may well re-occur for new
members.
Most of the East European Eight have already linked their currencies to the Euro in
anticipation of adopting the currency.
But few analysts believe any country will join much before 2007.
Indeed, racing toward Euro membership is not necessarily desirable for all the new
member countries.
Many of the countries have big budget deficits well in excess of the required 3% of
GDP maximum (most notably in Poland and Hungary), and bringing these down
rapidly may well have an undesirable effect on income growth, and therefore
spending power.
The European Central Bank has been keen to focus the minds of the candidate
countries’ governments on fiscal structural reform rather than quick membership of
the Euro.
It has also made it clear that it believes it will be vital for the countries to spend the
policy minimum of two years within ERM2.
Others believe this rigid application of policy is outdated and not only unnecessary,
but dangerous. Dangerous because a currency crisis could be the outcome.
2.13.2 Why you should be wary of countries that race to adopt the Euro
Some experts believe that there is great economic danger during the period between
joining the EU, when all capital controls are lifted and a fully liberalised economy
results, and the moment when the Euro is adopted and monetary harmonisation is
complete.
The discipline of having to keep a country’s currency within ERM2 limits, with interest
rates as the main lever of control, means that there is vulnerability to attack by
speculators.
Not only that, but large capital inflows as a result of EU membership mean that there
will be upward pressure on a tightly controlled exchange rate, perhaps forcing a
country to cut interest rates at a time when inflation can start to run too high.
The dangers are numerous. And if ERM2 broke down, it may well delay Euro entry of
these countries for a considerable time. And such a forced and public delay would
almost certainly be a big blow for real estate prices.
For some countries the answer may well be unilateral adoption of the Euro before
being officially admitted to the Euro area.
2.13.3 Why the Euro doesn’t count in the short term
This might at first seem like a contradiction.
Yes, the Euro is very important for real estate investors, and no, it doesn’t count in
the short term.
Let’s take a look at how this works.
Whatever the various currency options available to the newly joined countries, it
seems likely that few, if any, of the eight states will be allowed to join the Euro club
immediately.
For the real estate investor, the Euro is an important consideration. Official
membership of the Euro club will almost certainly push up a country’s property prices.
The Euro too offers the kind of stability to investors I’ve already mentioned.
But, as Euro membership isn’t going to happen for several years, what really matters
in the medium term is the popularity of a country as a target for business investment.
The likely adoption of the Euro will be a factor here, but not the main one, I believe.
So, while taking into consideration the likelihood of the Euro being adopted in any
one country, I would recommend that the real estate investor places greater weight –
at least in the short to medium term - on how attractive a country is to big corporate
investors.
And what those investors look for are a number of key factors:
• How easy is it to set up a business operation – i.e., how much red tape is
there?
• Low tax regime?
• How good, how available and how cheap is the labour pool?
• What are the cost extras, the hidden or unofficial costs?
• How forward-looking is the country’s government in creating new sectors in
the economy – finance and banking, for example (Estonia), or car
manufacturing (Slovakia).
The answer to these questions is the most likely indicator of whether or not a housing
boom is on the way.
2.14 Pluses and Minuses of investing in the East European Eight
Let’s consider both sides of the equation.
Naturally, it’s not all good news – high returns rarely come without a certain degree of
risk. And it is as well to be fully aware of the downside before you make any
investment decision.
Bear in mind that each country has specific advantages and disadvantages (which
we’ll explore in the individual country chapters), even so, there are some general
points we can establish right away.
You also need to consider carefully what it is you expect to get from your investment
and how long you are prepared to wait to get it. Generally speaking, in any
investment, the higher the return the greater the degree of exposure and risk is
involved.
2.14.1 What is good about investing in the eight?
This, basically, boils down to two things – cheapness and growth potential. But, to
be more specific…
• Fairly new, but firmly established property buying processes in most countries
• Barriers that exist now will almost certainly lessen in the next few years –
increasing investor interest and therefore prices
• Abundance of basement-level investment opportunities
• Prices, even in more established areas, are often relatively cheap
• Growth potential in these countries is huge and certainly far greater than their
Western European neighbours
• The advent of the Euro in a few years will increase the attractiveness of
property investment from European neighbours
• Large stocks of character properties to be renovated
2.14.2 What is risky about investing in the eight?
And this breaks down quite simply also – a certain amount of risk involved in
investing in relatively unexplored markets. But, as usual with investments that
involve risk, they also carry with them the potential for high rewards. Risk, for the
most part, is, I believe, psychological. Here’s a more specific look at concerns …
• Potentially less stable markets than those of Western Europe

• Will all the promised inward investment flow to just one or two lucky
recipients?
• Lack of historical property price data stretching back more than around ten
years
• Uncertainty about what kind of housing stock will be in demand in the future
• Currency risk – government over-spending may lead to devaluation in the
local currency
• With the potential for high profits from property and with a relatively new
market, the potential for coming across cowboy operators is high
• There’s always the possibility that greater growth in property prices will occur
in countries in Eastern Europe outside the Eastern Eight.
2.14.3 How the Eastern Eight might actually lose out by joining the EU
We need to look at all the negatives carefully and, like a good, level-headed investor,
not get too carried away by the exciting prospects that are represented by the
Eastern Eight.
Some analysts will argue that EU membership will damage the prospects of the
Eastern Eight countries attracting foreign investment.
Now, while there is very strong evidence to show that this is false picture, we need to
be aware of the argument.
The Economist Intelligent Unit, for example, predicts a decline in FDI in the Eastern
Eight, despite conceding that 2003 being a record year overall.
It reports that between 1998 and 2002, the Eastern Eight attracted almost two thirds
of the US$143 billion invested in transitional economies in the region.
For 2003 to 2007, the EIU predicts that this share will fall to below 50 per cent of the
estimated US$200 billion invested in the region. Still, of course, a huge chunk of
money.
And the EIU points out that this is not a ‘zero-sum game’ and that the inflow of
investment will remain ‘substantial.’
Among the reasons for a possible decline in business investment are the facts that
EU membership:
• Requires businesses to adhere to certain relatively expensive rules and

regulations governing such areas as labour laws
• Means the end of special incentives to attract businesses
Despite this argument, the EIU predictions of investment in the Eastern Eight that are
impressive, to say the least, when compared to regional rivals of similar size.
2.14.4 Predictions of annual foreign investment 2003-2007
EIU predictions of annual foreign investment in US$m between 2003-2007
CZECH
5,000 RUSSIA 9,400
REPUBLIC
HUNGARY 1,770 KAZAKHSTAN 2,470
POLAND 7,300 UKRAINE 800
SLOVAKIA 2,100 ROMANIA 1,800
SLOVENIA 800 CROATIA 1,350
SERBIA &
ESTONIA 430 850
MONTENEGRO
LATVIA 610 BULGARIA 840
LITHUANIA 890 GEORGIA 190
2.14.5 Why the pessimists will be wrong….
So, there is a body of opinion that says the EU factor won’t count for a great deal.
This will be proved wrong over the short to medium term.
Why?
Well, let’s recap on what was said earlier.
• EU investment will be an important driver of foreign investment initially
• Private capital investment does not start to peak until several years after EU
membership, as has been seen in other newly joined countries
• The psychological security of a country being in the EU will outweigh many of

the cost disadvantages for business
• Even the worst-case scenario investment predictions show very impressive

amounts of money being injected into the Eastern Eight
Key Tip
Business investors like stability and predictability only slightly less

than they like low operational costs and special investment incentives.
And here’s another reason to inspire confidence that EU membership will deliver
when it comes to property investment.
Latio, the oldest and most respected real estate agency in Latvia, found that
apartment prices in Old Riga leapt by approximately 10 per cent in the month right
after the positive vote by Latvians to join the EU.
What better indicator could there be that confidence – which is what ultimately fuels
the property market anywhere – will continue to be boosted by EU membership?
Interestingly, Latio, in the same report, also makes the point that one of the factors
holding back foreign investors in Latvia’s property market is ‘lack of information’.
This applies, to a greater or lesser degree, to all of the Eastern Eight.
2.15 The Eastern Eight vs established property investment

countries
There is no doubt that most people would regard these countries warily as
investment targets and anyone buying property there will probably be thought of as
something of a pioneer. The key factor here is, of course, uncertainty.
Investors, for the most part, feel safer and more certain about what is familiar.
Second property buys by foreigners in Spain, Portugal, France, and Italy – to name
only the most popular countries in Europe – are now very common.
Certainly, buying as a foreigner in Spain and so forth is anything but risk-free, and yet
it probably feels less risky than buying in Eastern Europe.
The truth is that the risk in most of the Eastern European countries is probably
only marginally greater than in the more established markets.
And yet, the potential returns are substantially greater!
The ‘marginally greater risk’ view will be true if you stick to the areas of the country in
which dealing in real estate is the most established – in reality this will often mean
the big cities.
The other reason why the risk is not as high as our perception might expect is
because these countries are in the European Union and EU laws and jurisdiction now
apply.
This will undoubtedly give comfort to the more nervous investor.
3. THE SECRET OF SUCCESS – CHOOSING THE RIGHT
LOCATION
• How to assess Risk and Stability of each country (see

section 3.2)
• Which country / which property sector? (see section 3.3)
• Where to target your investment (see section 3.4)
• Where not to put your money (see section 3.5)
So, as the second part of our investment strategy, let’s take a look at some of the
factors that indicate that property prices are likely to be on the up and up in an area –
signals you need to recognise in order to generate maximum capital return.
Of course, such an analysis is not foolproof. It doesn’t come with a guarantee, but it
does establish indicators that an area may be worth looking more closely at from an
investment viewpoint.
And an investor should always remember that one or two of these signals are usually
merely the triggers, rather than the entire reason for an area to experience property
price inflation disproportionate to the rest of the market.
Having said that, the smart investor will always spend some time looking for signs
that make an area stand out and give property prices there the potential to rise
strongly.
Obviously, it’s wise to take a look at why you should avoid other areas like the
plague, so we’ll be doing that too.
Key Tip
Before scanning for signs that an area may have the potential to
boom, it is a good idea to establish your attitude to two things: Risk
and investment timescale.
This will affect where you should consider investing … and, of course,
how you invest – for maximum capital growth, for high rental income,
or for a mix of both.
3.1 Choosing an investment location based on the risk factor
To most property buyers who are solely in search of the biggest gains, it probably
won’t matter much which of the Eastern Eight they end up investing in.
If, however, you have some kind of link with a country – even if it’s only that you’ve
visited it – then you are probably drawn to that country as an investment target. It’s
quite normal to seek out the more familiar, where risk and money are involved.
Risk is the big factor here, though. What any investor will want to know before
spending capital is: what is the risk?
The question is, it will come as no surprise to learn, unanswerable. And yet, there
are certain factors that can be weighed up in order to give something like an
objective assessment.
There is no absolute science to this process and pretty much anyone can carry out
the same exercise as the experts. Very often a layperson’s assessment will be just as
valid as an expert’s.
Having said that, it’s worth taking account of what the experts say. The EU has
carried out these kinds of country assessments, without producing actual risk
rankings for countries.
Pretty much whatever criteria are used, three countries always seem to emerge as
what we might call the best in terms of potential set against risk. In other words, the
least risk for the most potential.
These countries are: Poland, Hungary and The Czech Republic.
Property experts Cushman & Wakefield Healey & Baker carried out a detailed
analysis to determine the equation between growth and stability for countries in this
region.
Almost 50 factors were examined and covered such areas as the countries’
economies, politics, levels of corruption, property market structures as well as
occupier and investor demand.
Data from findings was then converted into a score to provide country rankings.
As Cushman & Wakefield Healey & Baker point out, the findings produce no more
than a snapshot of the markets – ‘and one that can change quickly’. The research
included Russia, Bulgaria, Turkey, Romania and Croatia, which for our purposes
have been excluded.
Below the Cushman & Wakefield Healey & Baker findings are presented in three
parts – rankings for stability/risk first, then rankings for growth and then overall
positioning.
3.2 Country by country risk and stability rankings
Cushman & Wakefield Healey & Baker’s Rankings for Risk/Stability - the less risk
and more stability, the higher the ranking.
Rank Country Score
1 Hungary 83%
2 Czech Rep 80%
3 Poland 74%
4 Estonia 67%
5 Slovakia 61%
6 Slovenia 61%
7 Lithuania 59%
8 Latvia 52%
It is possible from these figures to see Hungary and the Czech Republic as one
group, with Poland and Estonia as another and, then Slovakia, Slovenia and
Lithuania as the third grouping, leaving Latvia trailing in a group of its own.
These are all interesting assessments, and, to a large extent, coincide with EU
findings.
But, as the data’s authors, Cushman & Wakefield Healey & Baker, caution, such
rankings, however comprehensive the considerations, are no more than a snapshot.
In fact there are very good reasons for seeing Latvia as an excellent investment
target.
They can never be a truly complete picture and they can, of course, be altered by
changing circumstances.
There are other criteria that can help you through the country maze. We’ll come
back to an examination of each of the eight countries in the next chapter and
conclude with investment verdicts on each.
In the meantime, have a look at the following table – FDI per head of population –
another measure of how affluent a state may become and how much confidence
international business has in a country. In fact, it maybe the best measure of all.
FDI Stock per capita as of 2002 in $
Czech Republic 3,603
Slovenia 2,754
Hungary 2,659
Estonia 2,647
Slovakia 1,859
Latvia 1,282
Poland 1,191
Lithuania 1,040
Source: Eurostat
3.3 Choosing the right Country or Sector?
Having established the rationale for firmly believing that the Eastern Eight will plug
into a strong growth cycle at strategic points following EU membership, the really big
question must be: which countries will perform the best and, therefore, where do I
decide to make my property investment?
Curiously, perhaps, the answer to this question is not just about looking at the stats
for a country as a whole and then adding into the mix factors like, ease of doing
business, tax rates, and labour costs.
3.3.1 Perhaps not so much which country as which sector?
Competition for inward investment among the accession countries, and with their
non-EU accession neighbours, is already intense.
Undoubtedly, just being able to show membership of the EU club has boosted what
we might call each country’s branding.
However, how much money flows into countries and, especially, into sectors, both
geographical and industrial, will depend on how well those sectors have adapted
themselves to receive investment.
Basically, if the infrastructure and communications are poor, investors will stay away.
If industries are working along out-moded lines, it is unlikely they will attract much
investment.
On top of that, it is likely that certain types of industry will attract more investment
than others.
All this matters greatly to the real estate investor because, as we’ve established, the
key to securing good returns on investments in this part of the world is to follow the
money.
Thinking along the lines of which industries and which locations are most likely to
receive investment is more advantageous than only looking at countries.
After all, that is what the EU is all about – a borderless trading bloc.
In the case of the Eastern Eight, it is still not completely borderless (there are still
many restrictions – on the free movement of the new members’ citizens, for
example, and in some of the new member states, on the acquisition of agricultural
land by foreigners), at least for a few years.
3.3.2 Sector-based investment
While it is undoubtedly a very good idea to be aware of the strengths and the
shortcomings of each of the Eastern Eight countries, it is also a good idea to think, as
we’ve said before, of the countries not only as individual states, but also as an
investment bloc.
This doesn’t mean thinking of them as all the same – far from it. But, it is undeniable
that they all have certain factors in common, the most significant being that they are
all emerging markets. And even a year or more after joining the EU, they remain
developing nations and will do for some time.
Really, it brings us back to the message from chapter two – follow the money. And,
yes, the money will head for specific countries, but it is more likely to head for specific
areas within countries where all the advantages it seeks exist.
In a moment we’ll draw up a possible investment strategy in detail to demonstrate

how things might work in practice.
But, for now, I would recommend that you establish your strategy by searching for
the types of property that will be in demand around the following investment sectors,
regardless of which country they are in.
3.4 Where to target your investment
The following list is, of course, not exhaustive, but it gives a good idea of what we’re
talking about here, and it does, I think, cover the main categories of importance.
• Tourism centres
• Budget airline routes
• Hi-tech industry
• Superstores and shopping mall development
• Big infrastructure projects – roads, rail, airports
• Large business investment
• Universities
• Main and secondary cities
3.4.1 Tourism
Areas with strong potential for tourism are a great bet for property investors, because
most countries will almost certainly try to develop this industry – said to be the fastest
growing industry on the planet!
Areas that were once successful tourist destinations pre-communism, are certainly
worth looking at for investment potential.
Things to check:
What projects are on-going?
How is infrastructure being developed and is the ‘software’ in place, i.e., does the
nearest airport serve the right destinations to bring in tourists? Are any of the budget
airlines planning routes into the nearest airport.
What is the tourism model and can it attract the affluent, foreign customer?
For example, a site for ancient hot spas that has been hugely popular in the past may
be thought to be unsustainable nowadays … unless new life is breathed into it by
some inspired and inspiring entrepreneur.
While, plans for a health farm, or sports holiday complex, are, perhaps, sustainable.
This is where your gut feeling comes into play.
What are the standards of service like both in the country generally and specifically in
your selected tourist spot?
You may conclude that they are not, at present, very good.
But if you know, for example, that a major international hotel chain whose service
and facilities you greatly admire, is planning to take over and renovate some
crumbling Stalinist bloc of a building, then you may feel confident that money and
know-how is coming into an area and it will be revived.
Once again – follow the money. What you are really doing is using the experts with
the big money as your trailblazers. Basically, if they are willing to put money into an
area, then it’s probably worth you having a look as well.
It’s not a guarantee of success, but it’s certainly a useful pointer.
Properties in this sector have strong capital growth and rental potential. Ask yourself:
what are you looking for?
3.4.2 Follow the budget airlines
With some exceptions, Eastern Europe has not been well served by the budget
airlines that have proved so successful at opening up property markets to many more
people in the west of Europe.
There are a few exceptions – easyJet flies to Prague (www.easyjet.co.uk) and

Slovakia’s budget airline, Sky Europe www.skyeurope.com flies to Bratislava and
Budapest from many Euro destinations – but there is still massive potential for
expansion. Ryanair (www.ryanair.com) has in 2005 put several East European
destinations on its route map.
Also worth keeping an eye on is the German and Austrian team Air Berlin and Niki
www.airberlin.com . They already fly to a huge number of destinations around
Europe and have now launched a site in Polish.
New routes opening up can have a radical effect on property prices. Suddenly an
area or city can become reachable for a weekend from Western Europe – not
reachable by distance, but by cost.
3.4.3 Hi-tech industry and technology parks
If you become aware that large employers in the hi-tech industry are planning major
investments, it is a good idea to plan to buy property for rent in the same area.
Such cutting-edge industries attract all kinds of other investments, so boosting

demand for property. Links at the end of the country sections may help you to keep
tabs on such events.
But, in general, look to chamber of commerce groups, the EU, and any organisations
that promote business in the individual countries for news of such investments.
Industry-specific magazines can also be helpful.
3.4.4 Superstores and shopping mall developments
These developments can literally transform an area from a heartless, soulless zone
into a thriving, trendy area in which people will want to live and work.
Along with big mall developments come all the accoutrements – at least, it’s as well
to check they are planned - like infrastructure: transport links, car parks, police
stations, banks and so on.
And as consumers are drawn into the area, so too are add-on businesses, like
restaurants, gyms, specialist shops and so on. Voila! You have a place in which
more people will want to live and there will be more demand for housing.
Hence, the price of land will rise and, along with it, the price of existing good quality
housing stock.
3.4.5 Big infrastructure projects
Of all the signals that are worth looking for, this is probably the most significant.
Why? Because shopping mall developers and industry investors and anyone who
wants to develop a tourist destination will first look at existing and planned transport
to and from that location.
Roads, rail and, especially airports, are all signals that an area is likely to receive not
only investment in such projects but also a whole lot more will follow.
Major roads are likely in many of the Eastern Eight to be one of the priorities for EU
investment as they are seen as absolutely vital for all of the countries’ development.
Obviously, we’re not really talking about a new road to take traffic away from a city
centre here, although this can be an important trigger, especially in a tourist location.
We are talking about major arterial routes that open up new areas of the country for
easy access, or routes that form exciting trade links between cities, or between, just
for an example, a hi-tech development zone and its markets further west.
3.4.6 Business investment
Anywhere where business invests heavily in new production centres is likely to put
that area, and the area nearby, on the map in terms of property investment.
This is especially true of high-end foreign companies moving into an area.
If they are bringing their own personnel with them and/or hiring highly skilled and
qualified local employees, demand for affordable and desirable accommodation in
the area or within a commutable distance of it will increase.
All countries have organisations to encourage this type of FDI and are only too
pleased to trumpet new projects and contracts. There are helpful websites to check
in each of the country sections.
3.4.7 Universities
Universities almost always offer excellent investment prospects, but particularly those
in countries which are especially keen to open up to the world and establish new
links.
This means more students from overseas attending courses and more tutors from
overseas. This can, of course, lead to greater demand for housing in an area; but,
perhaps more importantly, a dynamic and reputable university can make an area a
desirable centre.
I would recommend that you look at areas around universities that are particularly
active in attracting overseas staff and that are strong in research into sectors such as
technology, and biochemistry.
Also, seek out universities that set up schemes that link private business with
academia, as is now popular in Western Europe and the US. These are good signs
to look for.
3.4.8 Main and secondary cities
Outside of tourist areas – and many cities in this part of the world are must-see
tourist destinations anyway – look first at investment potential in the main cities,
certainly if you want to minimise risk.
The bottom line is that if these countries are going to thrive and continue to grow at
the kind of rates they have been doing over the last few years, then their main cities
of administration and commerce will continue to play a leading role.
Demand for housing in and around these centres will remain high.
It is hard to see that if a country’s economy remains robust – as the Eastern Eight’s
economies are fully expected to do – then the property market in its main city will not
thrive.
Where you may decide to be adventurous is to look towards second cities in

countries where you see signs that the market is, for the moment, at least,
overheated.
3.5 Where NOT to put your money
Just as important as working out where to invest is to be aware of what kind of

locations you should think twice about. Of course, there are far too many kinds of
properties and too many kinds of locations in this category to list them all here.
They are the kind of thing you would want to avoid anywhere and, for the most part,
they are common sense. Here are a few examples: properties with ruined views;
properties very near busy and noisy roads; properties with fundamental structural
faults, etc, etc.
But beyond these considerations the investor needs to think about avoidance in the
context of the eight countries we’re examining.
There are some factors specific to this region. Not all of them mean you should
definitely rule out a property or location, but they are all certainly worth bearing in
mind.
3.5.1 Countries and areas with old thinking
Areas that are selling themselves to foreign investors solely on the basis that they
can provide inexpensive labour pools and special breaks for businesses that invest.
It may be that a country does trumpet this fact, but note that we are talking here of
areas that are using this as their ONLY or central selling point.
In the longer term, this will not be a sustainable model for attracting foreign
investment.
It is old, pre-EU thinking.
The problem is simply that there will always be somewhere - probably next door -
that is even cheaper and yet can also provide similarly skilled workers.
Many of the Eastern Eight are indeed pointing out their cheapness and also their
geographic advantages as production centres - next to Germany, for example.
But most the administrations, central and regional, are aware that more needs to be
done in the long term.
Ask yourself, for example, what is a location doing to become a hi-tech production
centre, not just a centre for cheap labour?
Is money being put into infrastructure to demonstrate long-term commitment?
Are there programmes for improving language skills, especially English? This may
come from the state or the private sector. It doesn’t matter, so long as there is an
active and dynamic effort taking place aimed at developing the right skills for the
future.
If the answer to these kinds of questions is ‘No’, then think very hard about whether
this is an area that is going to grow in desirability and therefore property demand in
the medium to long term.
Key Tip
There is an irony here. And that is that the reason the cheap labour
and special breaks for investors model is not sustainable is the very
reason these countries are attractive to investors - membership of the
EU.
Along with the backing and stability provided by the EU’s institutions
and its financial clout, comes the downside.
Members have to agree on what is more or less a level playing field.
Many, if not most, of the special breaks for investors vanished when
these countries became EU members.
Those countries on their borders, further east and still outside the EU,
are still able to use special incentives to attract investment and argue
that they are still cheap sources of labour.
Membership of the EU not only means the disappearance of many country-specific

incentives for investors, it will also almost certainly, through a more regulated
workplace, increase the cost of labour.
And it is not just the EU that will act against the ‘we’re the cheapest’ slogan. The
very fact that a country is successfully growing economically will lead to greater
wealth and higher wages and land prices. It will therefore lose its edge as a low-cost
centre for business.
3.5.2 Areas dependent on a single industry
Be wary of any location in which the local economy is based solely on one industry.
Pockets of this kind of Soviet-style centrally-economy still exist.
It may be that an area once-dependant on, say a giant steel works or a system of
coal mines, or some other heavy industry, may attract large amounts of money from
the EU aimed at revitalisation.
But there is no guarantee this will be successful.
And the chances of such heavy industry, unprotected from the efficiencies of the
market-place – which is what the EU means – surviving are not good.
So, check out what makes the local economy tick before jumping to the conclusion
that the small pocket of basement-level priced properties you’ve discovered is indeed
the bargain it may appear.
It may be basement level, but it may stay that way!
3.5.3 Stay well clear of anything nuclear or chemical or polluted
Whatever your views about nuclear energy, under no circumstances should you buy
property in a location that is anywhere near a nuclear power plant. The same goes
for major chemical plants or areas of pollution.
What amounts to ‘anywhere near’ is open to discussion. Obviously, in the event of

an accident, pretty much anywhere in Europe is too near.
On that basis, you may as well own property on the doorstep of a plant as 100 miles
downwind of one. True.
But few prospective buyers of your investment will feel the same. It’s a psychological
matter and you can’t reason it away. Only you can judge how near is too near.
3.5.4 Unsettled issues
We don’t need to go into all the historical reasons, but it is probably as well to note
that there are certain legacies from the past that have created issues between some
countries. Usually, they relate to Germany and the two world wars.
Other sensitivities relate simply to the idea of large numbers of foreigners, or foreign
money, pouring into a country and buying vast swathes of land.
For historical and purely economic reasons, many people in Poland, for example,
fear something of a German invasion. Other countries, too, don’t like the idea of their
land being gobbled up by foreigners, in particular their agricultural land.
For this reason, many of the new EU members have agreed on transition periods
with the EU, during which time there will be broad restrictions on foreigners owning
agricultural land.
These restrictions cannot last, of course - the doing away with such barriers is at the
core of the EU’s philosophy.
Most countries have negotiated seven-year transition periods for land, except
Poland, where the matter (especially in relation to Germany), is particularly sensitive.
In Poland the restrictions will stay in place for a 12-year period. Shorter periods –
five years – usually affect private investment in property.
Some of these restrictions are based on economic reasons, others are not.
This may or not affect the foreign real estate investor. It may be that such
sensitivities are simply throwbacks to a past long gone and the concerns of an older
generation.
They may be the concerns of a dying, parochial, insular mentality. Nevertheless,
even if this is so, it does not make the concerns any less real for some people.
And it is as well to be aware that such feelings may possibly lead to a political
backlash of some kind.
Many surveys and polls have shown that too much foreign ownership is a core
concern for many people.
Obviously, such a political reaction would not be advantageous from a property

investment viewpoint.
It is probably true to say that such concerns about a foreign invasion of money are
probably linked more to a fear of losing a perceived national identity as much as
anything else. This is certainly true in Slovenia, for example, as well as border areas
in Hungary and Poland.
But if people feel that things are getting better after their country joins the EU, a
sense of loss or of grievance will not develop.
Once again, it comes down to selecting those countries, regions or sectors that you
expect to do well economically from becoming part of the EU 25.
4. INVESTMENT STRATEGY
• Securing your investment (see section 4.1)

• Figuring out your investment aims (see section 4.2)
• Should you invest directly or through a fund? (see section
4.3)
• The ABC of investment (see section 4.4)
• How to ensure your investment is cash positive (see
section 4.5)
Let’s take a moment to bring things into focus and to summarise the pluses and
minuses of investing in the eight countries we’ve been discussing.
4.1 Securing your investment
Bear in mind that your circumstances can alter. For this reason then it’s important to
think long-term.
You need to consider whether a property not only meets your current needs and
aims, but whether it can serve you well in a changing environment.
The most important consideration is undoubtedly – can I resell this property easily?
You may well consider the property as a long-term investment, perhaps towards
retirement. Nevertheless, it is wise to look for properties that you know or at least
believe will sell easily, just in case at a later date you need to realise the capital you
have tied up in the place.
Key Tip
To protect yourself from changing personal circumstances, look for a

property that you know will grow in value at least in line with the
market rate, and one that will always be letable and sellable.
Now let’s look at some questions you should ask before you buy.
4.2 Your investment aims
It is important to establish, right from the start, what you intend for your investment.
Just about the worst thing you can do is go into property buying with only a vague
notion of a place being ‘a good investment’.
You need instead to be clear what you expect so that you can at least estimate
whether a property you have in mind meets your criteria.
In general, your aim will be one of the following:
• You want capital growth (and a holiday home)

• You want rental income (and a holiday home)
• You want to highly leverage your assets and achieve both – so you need a
high yield to service a big loan
4.2.1 If you want capital growth from a holiday or primary home
Whether your property is to be used as a holiday home or you are planning to live in
it full-time is not nearly as important as the fact that you are not relying on rental
income.
From an investment view, this gives you a big advantage. It means you can afford to
consider properties in areas where prices have not yet taken off and sit it out until
they start to accelerate.
However, even if your plan is for long-term investment, you should still be cautious
about being too much of a trailblazer, as we’ve discussed before.
4.2.2 If you want rental income and a holiday home
If this is your aim, and you want to maximise that rental income, then, quite
obviously, you are going to have to choose a property in an area with an already
established pedigree for rental – in other words, where there is plenty of demand.
If you also want to use the property as a holiday home, then this shouldn’t be a
problem for you.
But one thing to remember is that if rental income is very important to you, then you
need to be guided far more by the market than by your personal preferences.
And, of course, you need to consider the short-term rental market or the holiday
rental market. If you want to use the property yourself for a certain amount of time a
year, then longer-term lets are out of the question.
4.2.3 If you want to buy purely as an investment
In these circumstances you have only two central considerations:
Where is property price inflation the fastest?

Is there a rental demand for the kind of property I am considering?
You will be looking for a property with potential to rent for the longer-term, most
probably in a city, say, for example, Prague or Budapest.
Here you know that property price inflation is likely to be strong, if the two countries in
question remain buoyant economically and if the two cities remain central tourist
destinations.
Another advantage of sticking to main cities is that maintenance and management of

your property is likely to be easier.
You will be able to locate experienced managing agencies and therefore have as
little to do with caring for the property as possible.
Here are the most straightforward pure investment methods:
4.2.4 Buy New
Buy a new/renovated apartment, rent it out then sell in two to five years time,
depending on the precise state of the market.
This is perhaps the easiest option of all. So long as you buy an easily maintained
property (preferably an apartment in a large city) and make sure it has good rental
value, it’s hard to go wrong.
4.2.5 Buy, renovate and rent out
Buy an old property, renovate it yourself, rent it out and sell in two to five years time,
depending on the precise state of the market.
With this option you certainly stand to make a bigger capital gain than with the first
option., However, there is the added complication of having to decide exactly how
much to spend on renovation in order to maximise profit.
Also, picking the right property is far more difficult.
Dividing a large property into smaller units is one tried and tested method of
increasing the return on an investment.
4.2.6 Buy to renovate and sell on
Do up an old property and sell it straight away.
This has the advantage of a quick profit and also there is no administrative hassle in
dealing with rentals, tenants and management fees.
The other big advantage is that if you get it right, you can do it over and over in a
relatively short space of time.
It will work best if you are confident you can:
• Select a bargain of a place to renovate in the right area

• Know precisely how much it will cost to renovate BEFORE buying
• Avoid having all your profit eaten up by the taxes and selling costs – in other
words it will work best in countries with low sales taxes and fees
4.2.7 Do any of the above, but outside the capital city
There is no getting round the fact that, in most cases, investing in secondary cities or
areas carries more risk.
But where a market is quite mature (Budapest, Prague, Warsaw, for e.g.), then the
returns made by moving to different parts of the country may be greater.
4.3 Invest Direct? Or through a fund?
Another way of investing in the property market is to go through a fund. If this is your
choice then the same criteria for selecting a country or sector applies whether you
are using a fund or going it alone.
The scope of this book is aimed at investors who intend to invest directly, but there
are advantages and disadvantages you should perhaps think about before deciding
which route you want to take.
Fund investment
For:
• Safer – less risk as the investment is spread

• Easier – you just write a cheque
• You plug into the judgements of experts
• No need to manage your property
• Can be tax efficient
• Less homework needed before investing
Investing directly
For:
• Higher potential profits – and you get to keep them all

• More control – you do the background research, do the sums and you make
the investment decisions
• Can be tax efficient – setting up a company, for example
• No fees
• You’re far more likely to be leveraging through a loan – in other words your
percentage return will be much higher.
4.4 The ABC secret of successful investment in the Eastern

Eight
The fact is that when assessing a market like that presented by Eastern Europe, it is
necessary to be clear about what is required in principle to make your investment
work.
We have already discussed the fact that the property market in these countries is
likely to be driven by a series of significant price spikes.
What we cannot determine, however smart we are, is the timescale in which these
spikes will occur. We can certainly look, as we’ve done already, at other examples of
countries joining the EU and when investment has kicked in for them.
But, while this kind of examination acts as a good indicator for the future, it is, of
course, no guarantee.
So how can we be sure of a good buy, when we can’t be certain of the timescale of
price rises?
Here’s the ABC answer:
A. Buy property that is easy to rent to high-end tenants. This means making inquiries
about which areas are most in demand and by what kind of renter.
What this useful combination adds up to is: high occupancy and low maintenance – a
landlord’s dream!
B. Only ever buy property that is cash positive, in other words the rent covers any
loan you may need to take out for the purchase as well as any other letting costs.
C. Buy property in an area that, based on all the criteria in this book, has excellent
medium-term capital growth prospects.
If you can honestly say that your property investment meets these three criteria, then
you can be pretty certain that you have backed a winner. We’ll look at selecting
areas according to positive signs for growth later.
Meanwhile, the big question, of course, is exactly how long is the medium term?
Well, whatever anyone might tell you, the truth is that it’s quite simply impossible to
say with any real precision how long you will need to wait for an acceptable return on
your investment.
Naturally enough, this will also depend on what you consider to be an acceptable
return.
For all the reasons outlined earlier, there certainly will be a series of spikes in the
prices of property in these countries – either that, or a gradual and sustained rise in
prices in the years following EU entry.
And, in fact, the beauty of this ABC strategy is that the question: ‘how long is the
medium term?’ becomes less important. So long as your investment is cash positive,
how long you have to wait for the property price spike to kick in is not relevant.
However long the medium term ends up being, you, the investor, are in a fine
position to sit things out. You can hold the property without risk whatever the medium
term turns out to be – two years, or ten years.
4.5 How to ensure your property is cash positive
The ABC strategy sounds simple enough – and it is!
Simple, that is, so long as you take great care over the details of your investment, as
I stressed above.
One sure fire way of messing up an investment is to get your sums wrong and leap
in, lured by the promise of fabulous investment returns.
The key factor here is to calculate correctly when deciding whether your property is
cash positive. Let’s take a closer look at what this means.
It’s quite true to define it as above – ‘rent to cover any loan you may use to invest as
well as other letting costs’.
But, one of the commonest mistakes investors make is to underestimate the on-going
costs of maintaining and letting a property.
There is no big secret to getting the sums right so long as you don’t overlook costs.
They include:
General maintenance of a property – this can easily turn into a monthly expense,
especially if your property is old.
Making allowances for fussy tenants who constantly demand items to be fixed and
which require tradesmen to be called out.
Problems that you could normally deal with quickly and easily yourself, such as faulty
boilers, leaking radiators, dripping taps, etc, will require the attention of a skilled
tradesman in a managed property.
In your absence you will almost certainly need to have an agency manage your
property – i.e. find tenants and monitor the building, etc. Allow for the cost of this.
Tax: bear in mind that your rental income will be taxable.
Legal costs – you may be unlucky enough to find yourself in dispute with tenants. If
this happens and you need to take action to evict, you will incur legal costs.
It’s worth making sure you’re reasonably clear about the costs and expense of this
process in your selected country before you buy to let.
Your costs – if you plan to visit your property at certain times of year, then allow for
the cost of this.
If you plan to keep it clear of renters for a certain number of weeks a year in order to
use the property yourself, again, allow for this and consider it as a cost.
If you’ve re-mortgaged to buy this property, you’ll also need to think about how you
intend to approach the matter of currency fluctuations.
Keep in mind that if you borrow in, say, dollars, and your rental income is in another
currency, a devaluation of that currency against the dollar will affect your ability to
service your loan. Seems obvious, and it is, but it’s often overlooked.
Of course, this could work the other way around – a rise in value of the foreign
currency against the dollar would make your loan easier to repay and give you more
surplus income – but there is little value in planning for such happy eventualities!
5. FINANCING YOUR PROPERTY INVESTMENT IN EAST
EUROPE
• How finance leverages your investment (see section 5.1)

• Can you borrow against a property in your chosen
country? (see section 5.2)
• The effects of re-mortgaging another property (see section
5.3)
• Why pay in cash and refinance later? (see section 5.4)
• How much money do you need to invest? (see section 5.5)
When you start to examine where to invest, a key factor is obviously going to be
finance.
You have several options to look at:
• Borrow at home/in the country where the property is located

• Re-mortgage your existing property
• Buy for cash
• Invest through a fund – again for cash
5.1 How finance leverages your investment
The great thing about borrowing to invest is that when you make a capital gain you
do it for the most part with someone else’s money!
Borrow money to invest and your percentage gain will be far greater than if you buy a
property all with your own cash.
Here’s how a 70% loan to value mortgage can help you make massive percentage
gains when compared to buying for cash.
Let’s assume you buy a property for the equivalent of €100,000.
And the property rises in value by 15% per year.
End of year 1 = €115,000

End of year 2 = €132,250
End of year 3 = €152,088
Profit = €52,088 (rounded down)
If you buy for cash you have made a profit of 52% over three years. Not bad.
Now let’s see what happens when you take out a mortgage of 70%.
You invest €30,000
At the end of year 3, your property is worth the same €152,088. And your profit is the
same €52,088.
But, as a percentage of your €30,000 investment, this represents a massive 73%

profit spread over three years.
Which rate of return would any sensible investor favour? Not difficult, is it?
5.2 Can you Borrow Against an Eastern Eight Property?
The fact is that most of these markets are not as established for foreign buyers as,
say, France or Spain are.
Lenders outside the country where the property is located will often be wary of
providing mortgages. In many cases, it will simply be impossible – or not economic –
to borrow to buy in your home country.
Things are a little easier in some of the Eastern Eight.
It is very difficult to be categorical about loan availability, but after thorough searches
of what is available, here is a summary…
Loan outside the Loan inside the

Country
country country
Czech Rep Possible Possible
Poland Possible Difficult
Hungary Possible Difficult
Possible, but difficult if
Estonia Highly unlikely
non-resident
Latvia No Possible
Slovakia No Possible
Slovenia Highly unlikely Extreme difficulty
Lithuania No No, unless resident
Lenders will, perhaps not surprisingly, favour the more established markets that at
least sound less risky. These tend to be:
• The Czech Republic
• Hungary
• Poland
But Latvia, Lithuania, Slovakia, Estonia and Slovenia will prove to be problematic.
However, with the exception of Lithuania, loans to non-resident foreigners are

available in these countries – if you can convince banks that you’re a good bet and
have a good income and good track record of making debt payments.
Obtaining them is not an easy process, however, and nearly always involves a
personal appearance at the bank.
Loan-to-value ratios also tend to be lower than we are used to in the West, usually
around 70% or less.
Interest rates are generally on a par with the West – except in Slovenia where
they are between 12 and 15%!
One of the most active and flexible mortgage brokers in the UK is Conti Financial
Services (www.mortgagesoverseas.com), who it is believed are the first broker to
introduce mortgage schemes for Eastern Europe in the UK.
They have introduced a mortgage scheme for Poland and are planning schemes for
Hungary and the Czech Republic. Other schemes will follow based on demand from
clients.
For Poland the Conti scheme allows loans of up to 70% of a property. Loan
repayment is over 20 years and repayment mortgage rates currently stand at 5.90%
for US dollar or Euro mortgages, comparable with many of the ‘old’ EU states.
If you’re self-employed or you are in another ‘complex’ category, you may only be
able to borrow 50% of a property’s value. Each case is judged on its merits and
individual circumstances.
5.3 Re-mortgage your existing property
For many people this is the easiest option, simply because other sources of finance
are often difficult to obtain or unavailable.
The large amount of equity locked in many people’s homes makes re-mortgaging
attractive.
You become a cash buyer in the country of your choice.
5.4 Pay in cash now – refinance later?
This is traditionally seen as a highly unattractive option for the investor. Here’s why:
Paying in cash
Cost of property €100,000.
Buy for cash.
One year later property is worth €120,000.
Profit = €20,000.
Profit as % of original investment of €100,000 = 20%
Borrowing
Cost of property €100,000
Put down €10,000, borrow €90,000
One year later property is worth €120,000
Profit = €20,000.
Profit as % of original investment of €10,000 = 200%
So, basically, paying in cash when you can borrow is dumb…
…or perhaps not always?
One element of investing in property in the Eastern Eight countries is that it is more
of a gamble, perhaps, than investing in more established property markets.
So, an extra gamble you may be willing to take is that the mortgage market in your
country of choice will develop so rapidly in the next two to five years that you can buy
for cash now and mortgage easily in a couple of years time.
This is a distinctly realistic option. Once these countries have settled in to the EU, it
is very likely that the tiny mortgage market will blossom.
And, if it doesn’t and you are unable to re-finance, you still have the capital gain, so
you sell the property and re-invest elsewhere.
Where is likely to develop mortgage markets fastest? This is a tough call, but
examine the Czech Republic, Estonia, Latvia and Poland.
5.5 How much money do I need to invest?
£50,000 per property is definitely realistic for a good investment apartment in a lot of
the Eastern Eight countries.
Even in Prague or similarly expensive capitals, it is possible to pick up reasonable

quality property for less than £100,000.
So, the answer to the question of how much you need is the following:
Cost of Property
Cost of Purchase and set up
Less mortgage available (if any)
Working on a conservative estimate of a 50% loan to value mortgage, you would

need the following:
In Czech:
£50,000 property
£5,000 purchase and set up costs
Less £25,000 mortgage
Therefore, you’ll need £30,000 per property.
Remember, this is just a rough guide and will be greatly influenced by your ability
(and desire) to raise finance, but it will help give you a reasonable starting point of
what you should be expecting to invest.
6. A TWELVE-STEP PLAN FOR SUCCESSFUL PROPERTY
INVESTING IN THE EASTERN EIGHT
In this chapter you will learn about:
• Legal advice and selecting an estate agent (see sections

6.1 and 6.2)
• What to beware of, and your investment goals (see
sections 6.3 and 6.4)
• Restoration and Rental Potential (see sections 6.5 and
6.6)
• What to check – including local taxes (see sections 6.7
and 6.8 and 6.9)
• Funding, using cash and finance to maximise returns (see
sections 6.10 and 6.11 and 6.12)
Let’s now summarise the key steps to succeeding with your East European property
investment.
6.1 One - Legal advice
Whatever else you may decide, do not be tempted to dispense with the services of a
lawyer. Strictly speaking, you may not need one to actually purchase a property
(although I would recommend you employ one).
But at least consult one before you begin the process. If nothing else you will fully
understand what is going on.
Unless you are an expert in a country’s property law you will be very rash indeed not
to consult a lawyer who is an expert in this field. Why? Well, read on and the
answers will become pretty obvious.
6.2 Two - Selecting an estate agent
It’s probably fair to say that estate agents or realtors around the world are not the
most trusted of professionals. Some of this reputation is, of course, undeserved.
But, just as in any country, there will good and bad estate agents in the Eastern
Eight.
The main difference in these markets, however, is twofold.
• First, the property markets have been showing big returns for several years
now and further booms are expected
• Second, the markets are still relatively immature
Added to this there is the complication of some corruption in many of the countries.
These factors are going to attract some less-than-desirable operators.
If you do business in a system that depends on a certain amount of corruption to

function, then such practices can and do rub off on business people. You have been
warned!
This all adds up to a breeding ground for unscrupulous, get-rich-quick operators who
are only too eager to grab dollars, euros and pounds from any unsuspecting foreign
investor.
Well, it is, perhaps, not quite so bad as that.
Nevertheless, who you deal with when you decide to buy property is crucially
important.
There are really only guidelines to follow on this, not hard and fast rules that cover all
countries.
Only deal with well-established agencies who have been in business for several
years.
Make sure they belong to the professional body governing their business. Do not just
take their word for this. Check.
Insist on meeting other clients of the agency, preferably of the same nationality as
yourself.
Make certain an agency’s terms and conditions are completely clear before dealings
begin – both for buyer AND seller. Get them in writing and make sure they are
signed by both parties.
Make certain that you are reasonably clear about what the buying process involves
before you deal with an agency. You will almost always have to pay a commission for
buying a property – get the amount in writing.
Be specific about what kind of property you are interested in and make it clear if you
are being shown inappropriate properties.
This almost certainly indicates the agency has nothing of the kind you are looking for
on its books.
Be wary of ever paying any fees, charges or deposits before signing agreements.
Unless you are very clear about what a contract says, and you fully understand it, get
a lawyer to check it. In many of these countries, contracts will be in the language of
the country, not in English. I would advise getting a verified translation.
Be wary of being asked to deal in cash, unless you have proper receipts for your
payments.
In some of these countries foreigners are currently not allowed to own land directly
and need to purchase through a company. Beware of any other suggestions to ‘get
around the rules’, unless you fully understand what is taking place.
Shop around – even if you feel comfortable with a particular agent, try others too.
These warnings probably make doing business in the Eastern Eight countries sound
like a nightmare. You will be wise to be wary, but if you proceed with caution, this is
not the case.
The main point is to keep common sense to the fore, do not take anything for
granted, and do not expect proceedings to be the same as in the West.
6.3 Three - Beware of what seems too good to be true
Because it probably is just that.
This may seem obvious, but in a trail-blazing market it is easy to get sucked into
believing in unrealistic returns.
It’s also worth bearing in mind that the best investment is sometimes attained by
avoiding the herd mentality – in other words, steering clear of what seems to be the
easiest way into a market.
For example, you can look at the market in Prague and see the obvious – that high-
end apartments aimed at the corporate market have come down in value.
But examine the market a little more carefully and you can identify another
opportunity – properties aimed at the growing middle class.
They may be more difficult to manage, but the returns will almost certainly make it
more worth your while.
6.4 Four - Be clear about your investment goals
It’s important to understand your investment goals in order to assess whether a

particular property is right for you.
For example, if your desire is to generate constant rental income throughout the year,
then you may be better off buying an urban property rather than something in a
seasonal tourist resort.
6.5 Five - Restoration opportunities
Restoring a property that, although dilapidated, is full of character and original

features, is a great way to get a good return on your investment – provided the
project is carefully planned and managed.
Taking a large property and then dividing it into apartments is one well-tried method
of boosting an investment return.
But before a project like this is undertaken it is vital to have the property properly
assessed by a professional and to be sure of the amount of work you are taking on.
Also make sure that skilled craftsmen are available in the area to carry out the
necessary work. Make sure you inspect their work on other properties.
Get detailed quotes for labour and materials and assessments of how long the job
will take.
Do all your sums BEFORE you make an offer.
6.6 Six - Rental potential
If you’re relying on rental receipts to fund the purchase of your Eastern European
property, you are going to have to carry out some detailed research beforehand.
Anecdotal evidence will simply not do.
Generally speaking, if you need to rely on rental yield before you decide to sell a
property, then I would recommend that you look towards the major cities.
This is where the consistently high yields are likely to be and, aside from temporary
trend reversals, prices of property in these cities are unlikely in the short to medium
term to stop rising in value.
In fact, they are the most likely properties to benefit immediately from the various
boost stages we’ve talked about.
Right now, property price inflation in the medium term of around, or well in excess of,
15% per annum is not unlikely.
Then again, the downside to buying in the major cities, such as Prague, Budapest,
Warsaw and so on, is that prices are already high. These are, to a certain extent,
already tried and tested markets for foreigners.
For really big capital gains on your property, you will probably need to consider
locations that are a little less discovered.
6.7 Seven - Check before buying
Don’t, whatever else you do, be rushed into buying. Even if you believe you need to
hurry to take advantage before an upward climb in the property price cycle, make
sure you don’t act in haste.
And ask the agent to show you which other properties they’ve sold in the immediate
area and for how much.
Visit the property more than once and at different times of day. Check out the
neighbours, what kind of people are they? Locals, expats? What kind of profession?
What are nearby facilities like? Are there schools, shops, a hospital?
These factors may all be important to give you a flavour of the kind of neighbourhood
you are in, rather than listening to an estate agent’s selling pitch. And, if you care
about renting, short or long term, then you should consider some of these matters.
6.8 Eight - Understand the tax implications of selling
Before you buy, you must make certain you understand the effects on your tax return
if you sell at a profit. To a certain extent, this will depend on where you are living.
But, if your country of residence does not have a dual tax agreement with the country
you purchase your property in, you could find yourself paying tax twice – once in the
country you sell in and again in your country of residence.
6.9 Nine - Avoid being the first in an area
Unless you are truly confident you have got all assessments correct, or you are the
kind of person who likes to play for higher stakes and does so with calm detachment,
I would always try and avoid being ‘the first’.
That is, being the first ex-pat to invest in a particular area or even a type of property.
The object of the exercise here is to be early, but not the very first to arrive at the
party. That is if you want to minimise investment risk.
6.10 Ten – Can you fund it?
If you’re buying to invest – pure investment, or with investment as the purpose above
all other considerations – it is always best to take a cold hard look at what you can
afford before you start looking at properties.
Sure, you may have made a decision about what you want to afford, or can afford,
and then, once the hunt begins, you realise that you want to commit more funds to
your investment. That’s fine, if you are still swimming well within your depth.
Do not be tempted to over-extend yourself because you become convinced the

returns, from either capital gains or rental, are pretty much guaranteed. They never
are – not even in this exciting market.
6.11 Eleven - Use the power of cash to get a better price
If you’re property hunting with cash in your pocket, make sure you use this to your
advantage.
If you are a cash buyer, you are at a huge advantage in any market. You are
immediately massively more attractive as a buyer than nearly all domestic
purchasers.
Why?
Because they will, in nearly all cases, be afflicted by those twin property buying
headaches:
Finance and a chain.
By that I mean they will be buying with a loan and this will need to be approved for
the property they want to purchase. And they may well have another property to sell
before they are in a position to go ahead and finance any offer they make on a new
place.
If you have raised capital either from savings, from re-mortgaging your home
property, or from a pre-approved loan, then you are a cash buyer. You have nothing
to sell and you don’t have to wait for a loan approval.
So, how does this give you an advantage in reality?
It means that, as a foreigner, the Eastern European estate agent will see you coming.
They will know that, if you are a serious buyer, you will have cash to buy. They will
often allow for this by, in a nutshell, jacking up prices.
This can actually be to your advantage because it gives you a pretext to make low
offers, perhaps 25% below asking price. The seller can always say ‘no’. And you
can always walk away.
Of course, however, you need to use common sense here. If you are negotiating a
price in an area in which you know properties have exchanged for a certain price,
you will not get very far if you make a very low offer.
Of course, being a cash buyer can also mean that you are buying with your own cash
– completely.
This can make sense if you believe the prospect of re-mortgaging in the future is
likely (see section 5.4)
6.12 But use finance to get a better return
Given the choice you should always use a loan to finance your purchase.
Why? Because you will basically be using someone else’s money to make a profit –
and the percentage profit on your capital will be considerably higher (see section 5.1)
6.13 Twelve – Cut currency risk by ensuring that your loan and
the income are in the same currency
Euro, dollars or sterling, currency fluctuations are unavoidable.
However, if you know that you’ll fund your property from sterling or a dollar income,
through a home re-mortgage, then a sterling or dollar-based loan will avoid any
problems with changes in currency rates.
You’ll be unaffected by currency fluctuations. Equally, if your property will generate

sufficient rental income in euros (or the transaction currency in the country of your
investment) to service a loan, then take the loan in euros.
Again, this will avoid any problems with currency fluctuations.
If you are taking a loan to make your investment, there is another distinct advantage
in taking out one in the same currency in which you make your purchase. Basically,
this way you will be protecting the relative value of your capital investment.
But at the same time you will not be protecting your loan repayments against
currency fluctuations.
7. USING THE SNAP SHOT RETURN ANALYSIS
SPREADSHEETS
The purpose of the Snap Shot Return Spreadsheet software is to help you figure out
if your potential investment is worth the trouble!
For instance, if your likely investment return is less than the returns you can achieve
in (say) Manchester or London, then there is no point going through the hassle of a
foreign investment, in a foreign currency with a foreign language that you probably
don’t speak?
So, the decision on whether or not to invest in Eastern Europe will depend on the
potential returns and how they compare to the returns that you might achieve back
home, or on the Costa del Sol.
In the spreadsheet, this is the 'average yearly growth of investment':
Average yearly growth of investment
In the example (for a property costing 70,000 pounds in Czech, and a 64%
mortgage) the spreadsheet shows the following return:
Year 1 2 5 10
Average yearly growth of
investment -15.9% 3.9% 19.6% 19.4%
This means that by the 10th year of owning this property, you will have made an
annual cumulative return of 19.4% per year!
To match this return, you would need a bank interest rate of 19.4%! (At the time of
writing, you’d be lucky to achieve a quarter of that).
In addition, a rate of 19.4% is perhaps twice the level of return that you might expect
from a good performing property in the UK.
However, it is based on a number of Key Factors that could increase further or

decrease your investment return.
These are:
Key factors affecting your investment Czech Rep

Mortgage amount 45,000
Estimated property price growth 12.50%
Estimated rental gross yield 10.00%
Mortgage interest rate 10.00%
Inflation rate 1.00%
Gross Rental Income growth rate 3.00%
Maximum (potential) currency devaluation 15.00%
For instance, if you were to increase the size of your mortgage, then the annual rate
of return after 10 years would increase to 20.6% simply by taking a 70% mortgage
instead of the example 64% mortgage.
Equally, you can increase or decrease your projected returns by adjusting the
property price growth, the rental yield or any other figures.
Assuming that you manage to forecast these basic property items reasonably
accurately, then the biggest two risks to achieving your projected return are:
• Potential Currency devaluation
and
• Mortgage Interest Rate rises
Let’s have a look at these in turn:
7.1.1 Evaluating potential currency devaluation
If you ever decide to repatriate your investment from the local currency to your own
currency (whether that is £ Pounds, € Euros or US$ Dollars) you may find that the
local currency has devalued.
If so, then the ‘value’ of your investment will fall.
Of course, if you intend to never return your investment back to your original currency
then you have a zero risk and can enter 0% for in cell B26.
Maximum (potential) currency devaluation 15.00%
On the other hand, if you believe that you are investing in a country with a high
growth rate, but also high inflation and high government debts, then you might take
the view that devaluation against the harder currencies is likely.
So, in the example, we have entered 15% devaluation. This gives you your worse
case scenario.
Year 1 2 5 10
Average yearly growth of investment -15.9% 3.9% 19.6% 19.4%
Worse Case Scenario - currency

devalues at the point of repatriation -
Total average yearly growth rate -13.9% 3.4% 17.7% 18.0%
If your investment still looks attractive under this ‘worse case’, assuming that you’ve
used reasonable assumptions, then you have an attractive investment on your
hands.
7.1.2 Evaluating mortgage interest rate risk
The other factor that could badly damage your returns is an increase in mortgage
interest rates.
This will probably have two effects; the first to slow down property price growth, and
the second to increase your yearly costs.
If you are able to fix your mortgage then you can at least remove the risk of
increased costs.
In addition, you might argue that rental prices will rise faster in this scenario, but you
will still find that the returns are hit.
Probably the key to managing this risk is to ensure that your property can still return
a rental profit or (if a rental loss is likely) that you have sufficient funds to cover any
shortfall.
The nature of interest rates is that they tend to equalise out over time. The key thing
to avoid is a sudden requirement to sell your property at a time when you may be
forced to realise a loss.
If you can get through this scenario, then you are very likely to go on to make good
long-term gains.
7.2 Opening and using the Snap Shot Returns Calculator
Opening your spreadsheet software
There are different spreadsheets depending on your computer software.
Essentially,
If your PC runs Microsoft Excel then

Click here to open the Snap Shot Returns Calculator
If your PC runs Microsoft Works then

Click here to open the Snap Shot Returns Calculator
If you have problems opening or using the spreadsheets or any other parts of your
Property Secrets e-book, there is a comprehensive help section online at the
following address:
www.propertysecrets.net/faq
7.2.1 Opening the Spreadsheets on an Apple Mac
According to Apple's website www.apple.com/appleworks/

the latest version of Appleworks software should be able to read Microsoft Excel
spreadsheets.
If you have Appleworks 6.04 then there is a small file to download to upgrade it to
accept Excel files at:
www.apple.com/appleworks/update/,
instructions are on the web page.
If you have an earlier version of Appleworks (6.0 or 6.03) then please go to:
www.info.apple.com/usen/appleworks to upgrade to Appleworks 6.04, then use the
above link (www.apple.com/appleworks/update/) to upgrade to Appleworks 6.1 first.
It seems a little complex - but all the info is on Apple's support page for Appleworks.
At the time of writing, the upgrades are free.
7.2.2 Sourcing rental yields and property price growth figures
Speak to your local estate agent to estimate rental yields and potential property price
growth figures.
However, failing this, use the estimates as set out below in section 8.1.
8. IN WHICH COUNTRY SHOULD YOU INVEST?
• How to compare the Tax, Finance and Legal position of

each property market (see section 8.1)
• How to compare the Property Buying Costs and Property
Market Potential of each property market (see section 8.2)
• How to compare the country risk and economics of each
country (see section 8.3)
• How to view the different East European countries (see
section 8.5)
My intention in the following chapters is to provide you with the tools to make your
own decision. In other words, an investment guide that explains something about
each country as well as its attractions and its drawbacks or risks from an investment
viewpoint.
There are many other considerations you could or should take into account
depending on your personal investment profile.
What each country section will do, however, is include an investment summary, or
verdict.
These verdicts are based on various data sources and the opinions and
assessments of specialists in the field.
They are intended to be thumbnail investment verdicts and should be treated as a

guide only. And, after all, you may reach a completely different conclusion – and you
may well be right to do so. Sometimes there is no substitute for a good old hunch
about an investment.
What is important is to know what you’re getting into before you make a decision.
What you really do want to avoid is finding yourself in the position where you are
about to take a plunge into a high-risk investment without realising it, or all the
possible consequences.
8.1 Country by country comparison - Tax, Finance and Legal
Finance available Comprehensive Restrictions on

Need for Outside double tax Property law property purchase
Country Capital Gains Tax on rent company Locally country treaties established after EU entry
Czech R 28% 31% Yes Yes Yes Yes Yes Yes
Individual - 20% Not

Company - 18% essential,
Hungary 18%+20% Yes Yes Yes Yes Yes
plus 20% but good
dividend tax idea
19%, 30% 19%, 30%
Poland No Yes Yes Yes Yes Yes
or 40% or 40%
Estonia 26% 26% No Yes No Yes Yes No
Lithuania 15% 15% No No No Yes Yes No
Latvia 0% * 25% No Yes No Yes Yes No
No if EU
Slovakia 19% 19% Yes No Yes Yes No for EU citizens
citizen
25% if through
Yes with
company -
Slovenia 30% No ext. No Yes Yes No for EU citizens
otherwise up to
difficulty
50%
* If property is bought by an individual and held for 12 months or more
8.2 Country by country comparison - Property buying costs and potential
Stamp duty/Transfer Estate Agent Fees Projected price rise

Country tax Buyer Seller per annum Yield
Czech R 1% Usually nothing 3 to 8% Double figures 10-15%
Hungary 10% 3% + 3% + 15%+ 7%
Poland 5% 2 to 3% 2 to 3% Double figures 10%
Estonia 0.075% of sale price 4 to 6% 4 to 6% 10-20% 8%
Lithuania 1-3% Usually nothing 3% 5-10% 8-14%
Latvia 0.5%-3% Usually nothing 3 to 5% 10- 30% 10-12%
Slovakia 3% Usually nothing 3 to 5% 10-15% Double figures
5%+20% VAT on new

Slovenia 3 to 6% 3 to 6% 10% (in the capital) 6-8%
properties
8.3 Country by country comparison - Country risk and economics
Exchange rate stability Transparency Rank

Country Currency Policy 1 to 5 (Poor = 1, 5 = rock solid) 1 is best Inflation rate (Dec 03)
Czech R Free float 2 5 1.0%
Hungary Crawling peg 3 3 5.7%
Poland Free float 2 8 1.7%
Estonia Currency board 5 2 1.1%
Lithuania Currency board 5 4 -1.3%
Latvia Currency board 5 6 3.6%
Slovakia Managed float 3 7 9.2%
Slovenia Managed float 3 1 4.6%
8.4 Why you are as good a judge as anyone
But let’s not forget that the enlargement of the EU that took place in 2004 was
without precedent.
Not only was it the largest single expansion of the political/trading bloc, it was
also the first time that out-and-out developing countries had been allowed to join.
The road ahead is fundamentally uncertain for experts and novice investors alike.
There are, however, one or two pointers to guide us ...
8.5 Meet the Eastern Eight countries
While we can look at the Eastern Eight as a bloc in some regards, when it comes
right down to investment in one of the countries, it’s a good idea not to see them
simply as one place.
The most some countries have in common with one another is that they have just
joined the EU.
That’s why it’s important to examine them individually.
Even so, we are able, with a little licence, to divide the countries into groupings.
In section 4.1 we saw how this could be done using one set of valid criteria.
If we are talking about levels of development, then a clear pattern emerges.
The most important measures, though, are probably economic development and
the stability and levels of development of institutions and the rule of law.
8.5.1 The top-tier countries
Way ahead of the other countries, if we measure on this basis, are The Czech
Republic, Hungary and Slovenia.
To put it simply, these are the most developed of the eight countries and, it’s fair
to say, the most sophisticated.
Certainly, the EU regards them as having made the best progress towards its
requirements for membership.
That, of course, does not necessarily give them the best property investment
potential. Slovenia, for example, is not, as we shall see, especially attractive as
an investment.
There is also a tendency to group together the three Baltic countries – Latvia,
Estonia and Lithuania.
8.5.2 The second-tier countries
I view the second tier of countries as Slovakia, Poland and Estonia.
These three have had specific problems relating to adapting their economies to
the EU. Estonia, however, probably holds the most promise as it is developing a
reputation as a banking and finance centre.
8.5.3 The third-tier countries
Lithuania and Latvia, by just about any economic measure, trail the other
countries. They, too, however, have their strengths for the investor, especially
Latvia.
And, of course, the fact that they are not as far along the path of reform as the
other six countries, does make them more attractive for the investor who is less
risk-averse.
9. THE CZECH REPUBLIC – AN ESTABLISHED
INVESTMENT TARGET
To many people, the Czech Republic is the most familiar of the Eastern Eight.
This is probably largely due to the fact that Prague has long been a ‘must see’
European destination – especially over the last ten years or so, for American
visitors to Europe.
And certainly Czech nationals are keen to embrace the outside world in the form
of the European Union, if their response to the referendum on EU accession is
anything to go by.
A massive 77% of voters backed membership of the EU in a referendum in June

2003, with a mere 23% voting against.
The Czech Republic is positioned more or less in the centre of Europe, with
Germany in the west, Slovakia to the east, Austria to the south and Poland to the
north.
The country’s population of around ten million is centred mainly around the
country’s five largest cities, with the capital Prague, being home to more than one
in ten Czech citizens.
9.1 Czech - Business & Economic Overview
• The so-called Velvet Revolution (no one died), in 1989 led to the collapse
of the communist government of Czechoslovakia and democratic elections
in December, 1989
• The Czech Republic formed after peaceful breakaway from Slovakia in
1993
• The country is a parliamentary democracy. The executive and legislative
arms are separate from the courts
• The Prime Minister holds the greatest political power. Government
executive power is through the Cabinet, appointed by the PM through the
President
• A proportional representation voting system operates
9.1.1 Country profile - Key data
Population 10.2 million

Land mass 79,000 sq kms
Capital city Prague
Borders Germany, Poland, Austria, Slovakia
Climate Temperate, with cool summers and
cold, humid winters.
Notes No coast.
Air and water pollution in areas of
northwest Bohemia.
Certain areas liable to flooding.
9.1.2 Key economic data
Currency Koruna (CZK) exchange rate, 2003,

approx €1 = 32 CZK.
+ 11% since launch of Euro
Unemployment 9.8% (2002)
GDP $155.9 billion (2002 estimated)
GDP growth rate 1.5% (2002 est.)
GDP per head of
$15,300 (2002 est)
population
Machinery, transport equipment,
Key exports
chemicals
Electronics
Telecoms
Energy
Key sectors of the
Transport
economy
Car industry
Engineering
Chemicals
Value of exports $40.8 billion f.o.b. (2002)
Germany 35.4%, Slovakia 7.3%, UK
Key export target
5.5%, Austria 5.3%, Poland 5.2%,
countries
(2001)
Machinery and transport equipment
40%, intermediate manufactures 21%,
Key imports
raw materials and fuels 13%, chemicals
11% (2000)
Value of imports $43.2 billion
Germany 32.9%, Slovakia 6.4%,
Main import
Russia 6.0%, Italy 5.8%, Austria 4.6%
partners
(2001)
Government Revenues: $16.7 billion
budget Expenditures: $18 billion (2001 est.)
Inflation 2.2% (2003 est)
Source: CIA World Factbook
Foreign direct
$8.4 billion
investment in 2002
Germany (56.5 %), Netherlands (11.3
Main countries of
%), Austria (9.6 %), United Kingdom
origin
(3.3 %), Belgium (3 %).
Transport and communications (49 %)
Manufacturing industry (20.2 %) of

which car-making was 15.3 %,
Metal products (15.2 %)

Main sectors
Food processing (12.1 %)
Financial sector (14.8 %)
Real estate
(6.8 %).
Source: Dredsner Bank
9.1.3 Labour costs and spending power
Within the industry and services sectors, average annual earnings per person
are:
€5,148. (2003)
The cost of labour is, of course, different to the salaries of those employed.
Here’s a look at the costs:
Hourly labour cost in

€3.90
industry and services
Pre-2004 EU member
€22.19
states’ average
Monthly labour cost per
€590
employee
Pre-2004 EU member
€3,169
states’ average
Source: Eurostat
These measures of wage costs per hour and per week starkly reveal just how far
a country like the Czech Republic has to go before catching up with the wage
levels of the more established EU members.
If the hourly wage rate rose at an annual rate of 6%, it would take 30 years for
the Czech worker to reach his fellow worker’s average in the pre-2004 EU-15 –
and that supposes salaries within those 15 countries will remain static!
9.1.4 Currency policy
The government’s currency policy was turned on its head in 1997 when the
country was hit by a crisis of confidence that did great damage to the Czech
Republic’s reputation as a model of stability amongst the post-Communist states.
In 1996 the country’s current account deficit reached nearly 8% of GDP. The
currency crisis in May the following year was the result.
Investors feared such a shortfall could lead to financial collapse.
The Czech government, in a repeat of the UK government’s ultimately futile

attempts to bolster its currency against the market trend in 1992, spent around
$3 billion trying to support its currency against a huge sell off.
The current account deficit was basically fuelled by higher wage demands not
being supported by increased productivity and exports.
In reaction, the government introduced a tough programme of spending cuts,

slashing its budget by 2.5% of GDP.
The Czech government’s policy for the koruna then has virtually turned full circle
since 1993.
Then, it was linked to a basket of currencies, but with the German Mark and the
US Dollar weighted the heaviest.
Initially, the currency was allowed to move within a range of plus or minus 0.5%
before the Czech Central bank intervened. This was widened to 0.75% in 1996.
Following the currency crisis of 1997, the Central Bank allowed the currency to
float freely.
Since then, apart from blips, the currency has appreciated strongly, showing
gains of almost 10% in 2001.
During most of 2003, for instance, the koruna hovered around 31.5 to the €.
Stability has returned.
9.1.5 Economic overview
The Czech Republic is, by any standard, one of the most successful of the
accession countries.
It has thoroughly shaken off the shackles of the communist era and, in many
regards, has a thriving free market economy.
Foreign direct investment doubled between 2000 and 2002.
It is certainly one of the most successful of the accession countries in attracting

foreign direct investment (FDI).
More than 99,000 Czech companies are now supported by foreign money and
since 1990 almost $36 billion of FDI has been registered.
According to Czech Invest, the organisation that promotes foreign investment in
the country, foreign-backed companies now:
• Produce 72% of all Czech manufactured exports
• Directly employ 359,000 people in the Czech Republic
• Provide contracts for an estimated 10,000 Czech suppliers in the

manufacturing and service sectors and a minimum of 600,000 jobs in local
supplier companies – around 10% of the entire employed labour force
The country can be regarded as one of the most stable of the Eastern Eight,
economically and politically.
The economy is still in recovery mode after being hit by recession in around mid-
1999.
Strong privatisation programmes are underway in the banking, telecoms and

energy fields, which should encourage increased foreign investment over the
next several years.
Reforms already undertaken and underway, as well as investment incentives,

have attracted large amounts of foreign investment to make The Czech Republic
one of the leading recipients of foreign money among the Eastern Eight.
Economic growth has been around 3% over the past few years.
9.1.6 Problem areas for the economy – what to look out for
A high government-spending deficit remains a cause for concern and will require
tough measures.
The country’s current account deficit has averaged around 5% for several years.
This figure can rise to 7.3% depending on how it is calculated, according to the
OECD.
Either way, it is far too high. And this was the main reason for the currency crisis
of 1997.
Big government deficits and borrowing requirements are undoubtedly going to be

THE BIG issue for many of the Eastern Eight countries in the next few years.
Those hoping to be early entrants into the Eurozone will have to meet strict fiscal
requirements, so tough decisions will have to be made, many of which will be
politically unpopular.
But those countries that do face this problem with real determination will
undoubtedly be seen as far more attractive investment locations for big business.
And that also makes them the best places for the individual property investor in
the medium to long term.
Unemployment is still relatively high, but is falling. Increased job creation should
result from inward investment following EU accession.
The OECD identifies a growing divide between the FDI-fuelled section of the
economy, which has boomed, and the lacklustre performance of domestically
driven growth.
In other words, there are still a lot of poorly performing industries from the state-
supported era.
The OECD, in its 2003 report on the country, warns that the government must
guard against the creation of private monopolies. It cites energy and telecoms
and suggests these should be fully opened to competition because consumer
prices are too high.
The same report also highlights the fact that taxes are considerably higher than
in other comparable countries. This hampers incentive for businesses to invest
and grow.
9.1.7 How open is the economy?
The US Heritage Foundation, in its Index of Economic Freedom for 2003, uses a
large number of measures to assess the openness of countries’ economies
around the world.
It gives the Czech Republic a score of 2.5 (the lower the score the more free and
open the economy).
For comparison, the USA receives a score of 1.80 and the UK 1.85.
Hong Kong is ranked the freest economy in the world with a score of 1.45.
The Czech Republic’s score means its economy is far from open, but, even so
it’s not bad for a country that only a decade or so ago had a centrally planned,
communist-run economy.
Its ranking places it in fourth position amongst the Eastern Eight.
9.1.8 Does corruption affect the country?
Corruption and perceived corruption is a persistent problem in Eastern Europe. It

is often not a subject the authorities like to address or acknowledge.
Like its fellow accession countries, the Czech Republic does have a significant
problem with corruption. Few people would deny this.
The Transparency International Corruption Perceptions Index measures

corruption in 133 countries around the world.
A score of 10 is equivalent to a total absence of corruption in public

administration. 0 is the worst possible score.
In its report for 2003, the Index lists the Czech Republic with a score of 3.9,
along with Brazil and Bulgaria, and one slot up from Jamaica, and Latvia.
The European Commission has noted this problem and has stated that although
the government has introduced strategies, these are not as ‘effective as the
Commission would like them to be’.
It has identified the civil service and public procurement as two areas of special
concern.
9.1.9 What are the prospects for the economy?
The countries’ slowdown in growth to some 2% and 3% in recent years must be

set alongside the performance of the Western European countries the Czech
Republic mainly trades with, especially recession-hit Germany.
The OECD says that the continuing strength of the Czech economy will depend a
great deal on how it copes with the large numbers of jobless resulting from a
shake-out of old, redundant industries.
Big-scale unemployment is likely to shake consumer confidence and have a

marked effect on growth.
9.2 Czech - Property Market Potential
The real estate market is centred, as ever, on Prague.
Other big regional cities are starting to catch the eye of investors, however, and
this is likely to be a continuing trend. (See investment verdict 9.5, for a city tip).
German property funds in particular continue to pour money into Prague.
Most new builds in the city fall into the build-to-sell category, although build-to-let
is starting to become more popular.
There is a growing demand from domestic investors to buy property too, which is
likely to further fuel rising prices in the medium term.
The domestic mortgage market is worth around $5.1 billion – double its value in
2000.
Key Tip
Around €2.7 billion was advanced by Czech banks for mortgage loans
in the first half of 2003. This compares with €1.96 billion for the same
period in 2002.
That’s a staggering rise of 38%!
This tells you a great deal about what is and what will be fuelling the
market in Prague for some time.
Rent levels in desirable, central areas of Prague vary between around €12 and
€15 per sqmetre, per month. Other districts vary from around €5 to €10 per
sqmetre, per month.
The yield on residential investment should be between around 9% and 10.5%.
And, as a rough guide, the costs of buying an apartment in the centre of the city
will cost between €1,800 per sqmetre and €2,343.
Outside of the centre, expect to pay between €1,250 and €2,343 per square
metre.
9.2.1 Drawbacks to buying property in the Czech Republic
One problem with investing in the Czech property market is connected directly to
the system of registering a sale.
The fact that this process is so slow is cited again and again as a major problem.
In effect, it means that a property sale process from start to finish can take as
long as six months, simply because a sale is not complete until it is formally
registered.
An official copy of the register showing the official owner of a property is the only
recognised method of ownership proof.
Without such a copy, not only is a sale considered incomplete, but, of course, a
re-sale is problematic. Obtaining insurance can also be difficult without proof of
ownership.
9.2.2 Domestic driving force
Most experts believe that property demand will be driven as much by Czechs as
by foreign cash – in fact, far more so in the years ahead (see Investment Verdict,
section 9.5)
Therefore, it is mortgage-borrowing rates and the spending power of Czech

citizens that will have the greatest effect on property price increases in the
medium term.
The greatest demand for property following the collapse of communism came
from the commercial sector – offices, mainly. Residential demand, where it
existed, was hardly catered for at all.
The average Czech would only have dreamed of owning their own property
anyway. The reality was for foreigners and the very affluent few.
Now, the supply of commercial property has met and probably exceeded demand
– this is why office rents have been falling for a few years now (see section
9.2.3).
And, the fact is, that despite the huge increase in mortgage lending, which seems
set to grow even faster (so long as lending interest rates remain affordable),
around 90% of Czechs still live in government-subsidised accommodation.
Key Tip
There is massive pent-up demand in the domestic market that will only
grow as the country becomes more affluent through increased foreign
investment and access to markets through the EU.
This is why such economic barometers as unemployment rates – or, more

importantly, employment levels (the two don’t always go together) – government
spending levels and interest rates are so important.
Sustainable government spending levels, falling unemployment levels, a rising

number of people in work, and low interest rates, help not only to create a pro-
business environment but also a knock-on effect on demand for property and
therefore property prices.
They also create that all-important feel-good factor.
9.2.3 Converted office spaces
Huge amounts of residential space in Prague were converted into offices in the
early nineties to meet insatiable retail demand.
Many property dealers in Prague now note the start of a new trend, which is
highly significant.
As office and retail property supply has caught up with demand, (and probably
overtaken it), businesses have tended to leave old premises and relocate to
swanky new modern offices more able to cater for their needs.
Many old buildings, hastily converted into what was ultimately inadequate office
space, are now being turned around and restored to their original use – as
residences – simply because the yield on residential lets is better than office lets.
In the city centre, certainly, this trend is likely to continue as there is an

acute lack of residential living space there.
Such buildings are selling for around $225 per square foot and up.
Certain criteria seem to determine whether buildings remain, for the time being at
least, offices, or are reconverted to residential use.
Those that are converted tend to be:
• Historic or quality, period buildings
• Quiet areas, where there is parking
• Desirable neighbourhoods – those generally considered to have a good

reputation
As modern office supply increases, rents of offices in older buildings are falling
the fastest – these will tend to be converted back to residences for greater profit.
This development, which is still in its early stages, is significant, however.
It marks the transition of the Prague property market from being supply-driven –
there simply wasn’t enough purpose-built office space on the market, so
residential buildings were converted – to demand driven. Buyers are now more
able to stock pick.
While this may indicate less rampant property price inflation, it also means that
quality will be more of a deciding factor on price, and this, longer term, is far
more sustainable. It also marks out Prague as a more mature real estate market
than many of its neighbours.
9.2.4 Czech investment verdict and tips
New builds, especially in Prague are continuing rapidly.
Construction in the country leapt by 9% year-on-year in the nine months to

October 2003 as the building of some 27,199 new homes was underway,
according to the Czech Statistical Office.
Of these, 13,000 were family houses, 25% more than the previous year.
In the third quarter alone, housing construction rose by 16.8%.
The increase is being fuelled by cheap mortgages, higher wages and a relatively
new aspirational attitude among the Czech people.
This kind of building programme must eventually lead to some kind of equilibrium
between supply and demand, and probably an over-supply, just as has
happened in the office space sector.
And this has already happened to a limited extent at the top end of the residential
market.
9.2.5 Over-supply presents a buyer’s opportunity
But over-supply can mean two things for the investor, one relevant for investing
now and the second for investing later.
Bear in mind that the classic cycle from base of circle to peak that has been
widely noted in property markets around the world is usually about seven years.
If we are considering investing now and we predict over-supply in the immediate,

short and medium term, we can expect buyers to become more choosey.
Therefore, invest in good quality properties in up-and-coming areas.
But either wait a little until prices start to fall, or make offers well below the
currently inflated asking prices.
Certainly, you need to be aware that a large percentage will be added onto any
realistic asking price of a property in Prague, especially at the upper end of the
market.
Key Tip
You should make offers on apartments at around 20% below asking

price and on houses, around 10% less.
These properties may take a hit if there is a price correction, but, ultimately, they
will prove to be the best investment.
Prices at this end of the market have risen by double digits a year for several
years now, and in many cases by over 100% in a year.
But bear in mind that rentals on properties at the very top of the market (the
€2,000 to €5,000 per month bracket) have started to fall by big numbers – more
than 50% in some cases.
Such falls in rent must soon have a big effect on purchase prices.
When this happens it will present a great buying opportunity because, long term,
such luxury properties (as in pretty much any capital city in Western Europe) will
prove to be great investments.
9.2.6 Prestige properties in prestige areas away from the centre
Key Tip
The investment focus will become even more intensely trained on

quality residential homes in prestigious areas.
In its 2003 market report, Colliers International notes a growing trend of

companies moving away from the most central locations in Prague. In 2002,
Prague 4 was the most popular destination of choice.
Such decisions are clearly influenced by available infrastructure and, especially,

Metro links.
Good quality residential properties in these non-central areas that are well served
by transport and other facilities are therefore a good tip for investment.
9.2.7 Falling yields for offices – more residential property
A huge influx of businesses demanding offices drove up prices in Prague

throughout the nineties. Institutional money, coming from investment funds,
especially German-based ones, pushed up demand even higher.
This led to huge numbers of offices and business premises being built or
converted from residential buildings.
The result of this is over-supply. The result of this over-supply is falling yields.
This, of course, will even out in the longer term as market forces play their part,
but in the medium term there are likely to be many properties that are far more
valuable to their owners as residential units.
The start of the trend to re-convert old buildings back into residential units
presents a useful opportunity for the smart residential investor.
Converting these properties into high-end luxury apartments is likely to prove an

excellent investment.
Apartments in renovated buildings in prestigious Vinohrady are now fetching from

€1,875 to €2,187 per square metre.
This is the kind of investment recommended by many estate agents.
According to one estate agent, the Prague market has never ceased to surprise
with its ever-upward prices … and it’s likely to continue to do so.
“When apartments first came on to the private market in the early

nineties, prices started at around €312 per square metre.
Nobody expected such property at these prices to sell. But they
did.”
9.2.8 Target property that Czechs will buy or rent
A winning strategy is to target property that Czechs can afford.
The rise of a young, relatively affluent middle class will have a marked and
significant effect on the housing market.
This younger generation, multi-lingual and employed perhaps in a new industry

or in the service sector, will have an increasing amount of disposable income and
rising aspirations to match.
They will be one of the two engines driving the residential property market.
The second engine will be the low quality of current housing stock and the
inability of new builds to keep up with demand.
One estimate, this one from the Czech Statistical Office, says that for demand at
its current level to be met means 50,000 new homes need to enter the market in
Prague every year until 2010.
In the first nine months of 2003, according to the Statistical Office, builders
started work on just 27,199 new homes
The proportion of income spent by Czechs in the private property market is

around 30%, equivalent to private renters and buyers in the pre-2004 EU 15. In
many cases, the percentage is higher.
This demonstrates a willingness to commit to property as a major personal

investment in a way that is common in the West, but certainly not so in the recent
past in these former communist countries.
Small, modern properties – usually flats – that are affordable by the average
middle-class Czech are therefore likely to be great investments over the next few
years. These are the kind of properties that will rent for below €600 per month.
And these are the properties that affluent Czechs are now starting to buy off-plan
in big numbers.
Here are some figures reported in the Prague Post:
• Korunni Dvur Prague 2-Vinohrady 250 flats

Construction not yet started, 40% sold.
• Podbaba Prague 6-Dejvice 700 flats

Construction not yet started, 50% of the
first group of 230 flats sold.
• Podvinny mlyn Prague 9-Vysocany 345 flats

• Andel City Prague 5-Smichov 106 flats

Many experts believe further price growth in the market is inevitable and that
double-digit figures will be achieved certainly over the next couple of years,
possibly around the 20% mark.
Beyond that, double-digit growth is still anticipated, but a lot less, perhaps up to
around 10% to15%.
So, target new properties priced between €60,000 and €100,000.
Here’s an example of the kind of development that is being snapped up by
domestic buyers and will make an excellent investment.
These apartments Podbaba in Prague 6, are a construction project managed by

ICKM Real Estate and being sold through Lexxus. They represent modern
Italian chic at prices that are affordable to the burgeoning young Czech middle
class.
More information on this development at www4.podbaba.cz
9.2.9 Dismiss the EU factor at your peril
We’ve already talked about how people who say the EU has already been
factored into property prices are missing the point.
And this is especially so in the Czech Republic and other countries that will
maintain property-buying restrictions on foreigners even now that they’re part of
the EU.
While it’s true that the restrictions are fairly easily circumvented (you set up a
company and buy the property through it), this process is still off-putting
compared to a country in which you can walk straight in and buy whatever you
like without such hassles.
When this restriction is lifted, it will undoubtedly provide a big fillip to residential
property demand in Prague – and elsewhere.
But this factor is not all.
Despite its current account difficulties and the difficult round of public spending
cuts that have to be faced, The Czech Republic must surely be one of the
favourites to enter the Eurozone at the earliest opportunity.
So, combine these two factors and you have a complete lifting of restrictions on
EU citizens buying property in the country as well as – for a majority of the EU
countries - a common currency.
In other words – no, you haven’t missed the boat, and, yes, now is a great time to
invest.
Cushman & Wakefield Healey & Baker, notes in its report, European cities
monitor 2002, that:
“Investing now may well be a wise move: while currently the

capitals of the three countries (Poland, Hungary and the Czech
Republic) are not among the most attractive European locations
for business, recent research suggests that over the next five
years Warsaw can expect the greatest influx of companies in
Europe and that Budapest and Prague are also part of
companies’ expansion plans.”
9.2.10 Here’s a potted investment guide for Prague:
Prague 1 – the city centre. Anything from neo-gothic villas to modern

penthouses will sell rapidly here. Property is very difficult to find, however, and
expensive.
Mala Strana and the historical areas are the most sought-after. Prices are
comparable with those of many other big Western cities.
Prague 2 – this is a high-end, sought-after residential area with easy access to

the centre of the city.
The Vinohrady area in particular is in demand and has become a trendy area
popular for singles and the young.
Plenty of companies have also moved into this area creating a mix of business
and residential.
Prague 4, 5 and 6 – these are the high-end residential areas, popular with
families, and especially Prague 10. The international schools are also located
here. Prices are as high, if not higher, than comparable Western capitals.
Prague is unlikely to see huge price rises in the near term.
Steady growth is far more likely as the market reaches a more mature level.
The lifting of all restrictions on citizens of other EU countries buying property in the
Czech Republic, however, is likely to see a boost to the more expensive end of the
market, as more investors move in.
Key Tip
Many investors will see Prague and perhaps later the Czech Republic
as a whole as one of the gateway countries to property investment in
this region.
This is another reason why its remarkable price gains will continue in
the medium term.
It offers a sense of relative security from a fairly developed, confident economy,

reasonably well-adjusted to a market forces environment.
So long as this is the case, business will be attracted to this centrally located
capital with its highly educated and still cheap workforce. And, in that case,
property prices will rise.
But there is – and there increasingly will be – more to the country than Prague….
9.2.11 The spill-over effect – look outside Prague
Another possibility for the buyer is to end the foreign investor’s fixation with
Prague.
For a long time now, property in the Czech Republic has meant only the capital
city to the private buyer.
But it’s inevitable that as the country develops and becomes more affluent, other
centres, both for tourism and commerce, will grow.
For this reason, the country’s second city, Brno, is a great bet for property
investment.
The city has a lot going for it – excellent infrastructure, it’s attractive, and it’s lots
cheaper than Prague – around one third of the price.
Not only this, but the city’s administration is hungry to get its hands on more FDI
– and, more importantly, they’re active in trying to do so.
Vitally, as discussed earlier, they’re not sitting back and waiting for the attraction
of cheap labour to lure investors. They are busy establishing the city as a centre
for business parks, academic research and cutting-edge industries.
The city is also selling itself as being in the centre of Europe – and it is.
Here are some facts about the city. It is:
• The country’s second-largest city with a population of just under 400,000 –

200,000 are economically active, i.e., working
• The industrial and business capital of South Moravia
• Well on its way to becoming an important educational centre in Central

Europe for science and research. It is the second-largest centre for
university education in the country with six state universities and 29
faculties.
In its capacity as the highest receiver of FDI per capita, the Czech Republic will
inevitably draw investors to new opportunities within its borders.
From an FDI perspective, the country is so heavily Prague-focused that there is

great opportunity here for the early-bird real estate buyer – a near basement-
level opportunity in a relatively secure, stable and yet still burgeoning economy.
No doubt Brno will not be the last major city in the Czech Republic to steal some
of Prague’s thunder, but it is likely to be the first.
9.2.12 …and beyond
And after Brno? Well there are other exciting investment opportunities in the
country’s larger cities.
Undoubtedly, the country’s growing middle class will focus on Prague first, but,
as greater affluence becomes more widespread, so too will the benefits form a
ripple away from the capital.
The Czech Republic’s third city, Ostrava, is also a good candidate for the
investor who is a little more interested in basement-level opportunity than in
playing safe.
Ostrava’s big selling point is that it can serve as a distribution centre for Poland
and Slovakia.
Over the medium term (five to eight years), these secondary cities may well
prove to be the best investment opportunity in the whole region.
Key Tip
In the Czech Republic, consider more than just Prague.
9.2.13 The peace dividend
Like many of the Eastern Eight, The Czech Republic has a significant military
legacy from the communist era.
This legacy is now being put to more constructive use, however, as big efforts
are being made to transform former military bases into valuable construction
developments and infrastructure.
Again, this is a great opportunity for the property investor.
Some of these projects are on a very large scale and have the potential to put a
previously anonymous area on the map.
Buying property in such an area before it takes off is potentially a great

opportunity.
For example, there are advanced plans to turn the abandoned military airfield in
Hradec Kralove into an international airport for small planes.
The abandoned military airfield, a mere 60 miles east of Prague, could turn into
one of the biggest development projects in this part of the country.
And it is just one site of many that are likely to come to life in the next few years.
Over the past decade, the government has abandoned military bases all over the
country. When the land was first offered to other government bodies, no one
was interested. Towns and cities neighbouring the bases, however, snapped up
the free real estate.
The land in total is estimated to be worth around €62 million.
Besides Hradec Kralove, the other towns to take advantage of the land windfall
are: Vimperk, South Bohemia; Rokycany, West Bohemia; Louny, North Bohemia;
and Hodonin, South Moravia.
Military might….
Location What’s there What’s planned

Military air base, An international airport
Hradec Kralove barracks and Aviation museum
assorted buildings Commercial zone
Split into two areas - one
23 hectares of land
Rokycany will be residential and
and barracks
commercial, one industrial
Divide into three zones:
35 hectares of land
Louny one commercial and two
and barracks
residential
Barracks,
Create a commercial zone
recreational
Vimperk plus a large recreation
building, warehouse
area for ski and bike trails
and water station
Hodonin Barracks Not yet known
Source: Prague Post
The comments of local officials about the kind of developments that are planned
are interesting and show the forward-thinking, investor-friendly minded approach
that is attractive to anyone thinking of investing in property.
All are looking for the projects to attract foreign investment.
The mayor of Louny, Jan Kerner, sees three development areas emerging from
the old barracks there – a business area, a central residential area made up of
apartments as well as family-style houses in the eastern part.
He expects the site’s proximity to Prague 6 will appeal to commuters looking for
accommodation outside of the city.
"This part of town will also be close to Louny's industrial zone, where in the
upcoming years about 1,500 new jobs will be created by foreign investors." 1 he
says.
Hradec Kralove Mayor Oldrich Vlasak sees the airport within a transport network
that will ultimately make the town much more attractive to “international high-
technology and medical firms.”
“Right now the airport will be a supplement to transportation options," Malir said.
1
Mr Kerner was speaking to The Prague Post
"It will gain in significance after the D11 highway connecting Hradec to
Podebrady is completed [in 2006]. Investors will find the completion of these
projects very important."
Vlasak sees the airport as a destination for low-budget commercial jets.

Ultimately, though, the private contractor the town leases the airport to will decide
its use. (See note 2 below.)
All these areas offer very exciting prospects for the investor willing to look outside
of the relative security of the Prague market.
9.3 Czech - How the Property Market Works
The first thing any foreigner wanting to buy a Czech property should note is …
they can’t.
Well, that is, they can’t buy property directly.
In order to protect the ownership of land from a foreign invasion following the
collapse of the socialist government, restrictions were introduced.
In practice, while these restrictions are still very much in force, they are more
irksome than a real hindrance for the foreign buyer.
9.3.1 How to buy property in the Czech Republic
Non Czech residents can only buy property by setting up a Czech company.
This process is quite simple although it cannot be done without legal advice and
expertise, so a lawyer will be needed.
Forming a company and having it registered takes around two months and will
cost between €1,000 and €2,000.
There are basically two ways of buying and holding real estate.
Limited Companies
A limited liability company can be set up by one or more resident or non-

residents, whether they are another company or individuals.
There is a minimum amount of capital that must be invested, however – but this
is a mere $8,000.
2
Mr Vlasak was talking to The Prague Post
Joint Stock Company
A joint stock company is another option. This may be founded by one founder if
that founder is a legal entity, otherwise it must be set up by two or more people.
A joint stock company has a minimum share capital of $80,000.
It is quite common to hold Czech property investment companies from overseas,

but it is important to check that the jurisdiction in which the company is held is the
most tax efficient.
Key Tip
It is definitely worth paying for the services of a specialist accountant

to check the implications of the way you choose to hold your property.
Holland has traditionally been a favourite jurisdiction because of a favourable

double taxation arrangement with the Czech Republic. Luxembourg is another
possibility.
But didn’t this restriction disappear with entry to the EU?
The answer to this one is Yes…and No.
Yes, it will disappear eventually, but the Czechs, along with several other
accession countries are sensitive about foreign money pouring across their
border and buying up all their land and property.
As a result, they have negotiated a deal with the EU that allows the restrictions
on foreigners – including EU citizens – buying second homes to stay in place for
five years following membership of the EU.
Other rules apply to the purchase of agricultural land.
9.3.2 What about taxes?
The seller must pay a property transfer tax of 1%.
If the seller does not pay this tax for any reason, the buyer becomes responsible
for doing so.
Rental income is subject to tax at the corporate rate and the same rate applies to
capital gains if a company formed to hold the property sells it.
There are many items that can be offset against this cost, such as interest
charges and wear and tear, as well as the cost of furnishing, etc, of your
property.
The sale of land carries no VAT. And the same is true of the sale of buildings if
they are sold after two years of ownership. Otherwise they are subject to a
standard VAT charge of 5%.
There are no restrictions on repatriating profits.
Here’s a summary of all the relevant taxes a property investor needs to know
about (obviously these are subject to change by the legislature):
Tax Details
Corporate income 31%
Personal income 15% -32%
Value Added 5% on services / 22% on goods
Varies depending on the type of property, its
Property tax
location and its use.
Property transfer tax 1%
Inheritance and gift
From 7% to 40% for unrelated inheritors
tax
Czech residents are taxed on their worldwide income, while Czech non-tax
residents are taxed only on their income from Czech sources.
To be defined as tax resident you will fall into one of two categories:
• Have a permanent address in the country, one in which you intend to live
permanently and live at this address for at least 183 days per year.
• Be a legal entity, such as a business registered and based in the Czech

Republic (not a branch of a business).
Corporate tax
This is what you will pay if you are a foreigner who buys property by setting up a
company.
Corporate tax is levied on income worldwide for companies based in the country.
Foreign or offshore companies pay tax only on income generated in the country.
For 2003 the rate was 31%. It fell to 28% in 2004.
This is the rate of tax payable on any capital gain made on the property
regardless of how long it has been owned.
This is one big disadvantage of owning a property through the establishment of a

company – individuals are given special discounts over time on capital gains.
Value added tax
This is imposed on what are called ‘taxable supplies’. These include: the supply
of services, delivery of goods, the transfer of real estate, buildings and structures.
All taxpayers, both individuals and companies, who have a turnover of more than
the equivalent of $91,000 must register for VAT with the authorities.
Annual property tax
This tax is made up of two parts – land and buildings. Property or real estate tax
is usually paid yearly by the registered owner of land or buildings.
Every taxpayer must file a tax return by 31 January of each year. The tax
period is a calendar year.
Tax on land that has planning permission is a trifling CZK 1 per square metre.
Building tax is based on the registered ground area of the building.
This works out as:
• CZK1, CZK5 or CZK10 per sqmetre for buildings used for business;
• CZK 1, CZK3 or CZK4 per sqmetre for residential buildings;
• In urban areas both these taxes are multiplied by a coefficient set by local
authorities. In the Czech Republic’s second city, Brno, for example, it is
3.5.
Property transfer tax
Transfer tax was a minimal 1% as of January 1, 2004 payable by the seller,

although the buyer is the guarantor.
Inheritance and gift taxes
These are payable on property. It makes no difference whether the inheritor of

receiver of the gift is resident outside the Czech Republic, they are still liable.
If a property is given, as a gift, to a non-resident, the resident/giver is liable to pay
the gift tax.
9.3.3 Restitution status
As with all previously communist-run countries, there are issues in the Czech
Republic regarding the restitution of property and other items to their original and
rightful owners.
These issues relate both to the communist era and to WW2.
The country introduced property restitution laws after the fall of communism.
These first laws were mainly concerned with private property, farms and land as
well as religious buildings and works of art all relating to the period 1948 to 1989.
Later, this was extended to goods and property seized from 1938.
People claiming private property must be Czech nationals.
Anyone buying an old property now, however, is unlikely to be affected by

restitution claims.
Key Tip
The Czech government maintains that it has settled virtually all claims
on private property.
Large parcels of land and many buildings claimed by the Roman Catholic Church
as well as other religious groups are still the subject of restitution claims,
however.
This is likely to be the case for several years.
To give an idea of the scale, the Catholic Church is claiming ownership of 700
buildings and 175,000 hectares of land.
Local authorities will know if a building is the subject of a claim.
While it is unlikely that the individual property investor will be affected by claims
of restitution, it is as well to bear it in mind when considering properties for
purchase that may, possibly, fall into this category.
9.4 Czech - Property Finance
Finance is fairly easily available for property purchase in the Czech Republic.
Once you have established a company, loans of up to 70% of the value of a

property (the lender’s valuation), are available at competitive interest rates,
comparable with the West.
Loans are also likely to become increasingly available outside the country (see
section 5.2)
9.5 Czech - Investment Verdict
• One of the most stable of the eight countries to invest in.
• Returns may be less spectacular than elsewhere because the market has
been growing rapidly for some years.
• A safety first, good growth second investment location but still with
excellent returns, surely well into double-digit growth annually.
• Currently, rental yields of 10% to 15% can be expected, which is highly

attractive.
• In addition, the Czech Republic now has one of the lowest property
transfer taxes of all the Eastern Eight countries by just 1%.
9.6 Czech - Links:

9.6.1 Government links
Site URL
Czech Statistical Office (CZSO) www.czso.cz/
Macroeconomic Analyses of the www.mfcr.cz/
Ministry of Finance
Czech National Bank www.cnb.cz/
Tradelinks www.tradelinks.cz/
9.6.2 Trade and Information
Site URL
WWW.SUPPLIER.CZ www.supplier.cz/
CzechTrade - Government trade www.czechtrade.cz/
promotion agency
Current privatisation offers www.fnm.cz/
Inform Katalog www.inform.cz/
Kompass CR www.kompass.cz/
Registry of Companies www.justice.cz/
Finance and Insurance Export www.egap.cz/
Guarantee and Insurance Corp.
Export Bank www.ceb.cz/
List of fairs and exhibitions www.expo.cz/
Brno Trade Fairs and Exhibitions www.bvv.cz/
(BVV)
CzechInvest www.czechinvest.org/
9.6.3 Professional Associations
Site URL
Economic Chamber of the CR www.komora.cz/
British Chamber of Commerce www.britishchamber.cz/
9.6.4 Misc links
Site URL
Brno Chamber of Commerce www.ohkbrno.cz/
Regional Economic Chamber www.pvtnet.cz/www/rhkostrava
Ostrava
Confederation of Industry of the www.spcr.cz/
CR
The Chamber of Tax Advisors www.kdpcr.cz/
Union of Accountants www.mfcr.cz/su/sumaine.htm
Chamber of Auditors www.kacr.cz/
Czech Management Association www.cma.cz/
9.6.5 Estate Agents
Site URL
prague.tv/realestate/ prague.tv/realestate/
Horizon Realty Czech Republic www.eured.com/go.php?id=1086
Czech & International Real www.eured.com/go.php?id=311
Estate Market
9.6.6 Solicitors
Site URL
Seddons www.seddons.co.uk/
10. HUNGARY – FIRST AMONG EQUALS
Hungary is the holder of a number of important firsts among the Eastern Eight:
First country under communism to attempt to create a consumer-orientated

economy – described at the time (the 1960s), as ‘Goulash Communism’.
First to join the International Monetary Fund and the World Bank
First of the Eastern Eight to apply for EU membership
First to join NATO (1999)
It is quite clear that this early liberalisation of the market in Hungary meant it was
better placed economically and psychologically (if not politically) to fully embrace
and adopt the free market after the fall of communism.
It also meant that it was in pole position when it came to attracting foreign
investment. By the end of 2001 around €26 billion had already poured into the
capital.
Only Poland has exceeded this amount. But in terms of FDI per head of
population, only the Czech Republic has a higher level than Hungary.
Perhaps because of its early courtship of the West economically, Hungary is
more dependent than any of the other accession countries on trade with the
EU15.
Around 75% of all Hungarian exports go to the EU, and some 65% of imports into
Hungary come from the EU.
And there is no doubt that the population recognises the level of integration and
interdependency with the EU – they showed their enthusiasm for joining with an
84% vote in favour in a referendum in April, 2003.
10.1 Hungary - Business & Economic Overview
10.1.1 Hungarian politics in a nutshell
The country became communist following World War 2.
In 1956 the country announced it was leaving the Warsaw Pact amid a revolt
against Soviet authority. The USSR launched a huge military intervention.
From 1968 onwards, Hungary began the experiment of liberalising under

communist rule. With Soviet approval, the country launched what became
known as ‘Goulash Communism’.
The country became a parliamentary democracy and multi-party elections were

held in 1990 and a free market followed.
Since April 2002 the country has been governed by a socialist-liberal coalition.
10.1.2 Country profile – key data
Population 10m
Land
93,030 sq km
mass
Capital
Budapest
city
Austria, Croatia, Romania, Serbia &
Borders Montenegro, Slovakia, Slovenia,
Ukraine
Temperate – cold, cloudy, damp
Climate
winters. Warm summers
Landlocked
Notes The Danube and Tisza rivers divide

the country into three regions.
The Forint.
Currency
2003 €1 = approx 282 Forint
Unemployment 5% (2002) (falling)
GDP $78.2 billion (2003)
GDP growth rate 3.1%
GDP per head of
$7,670 (2003)
population
Machinery and equipment
Food products
Key exports
Raw materials
Fuels and electricity
Mining, metallurgy, construction
Key sectors of the materials, processed foods, textiles,
economy chemicals (especially pharmaceuticals),
motor vehicles
Value of exports $38.4 billion
Key export target
Germany, Austria, Italy, US
countries
Machinery & equipment
Other manufactures
Key imports Fuels and electricity
Food products
Raw materials
Main import partners Germany, Italy, Austria, Russia
Revenue: $13 billion
Government budget
Spending: $14.4 billion (2000.)
Inflation 5.1%
Source: CIA World Factbook
Foreign direct
$1.5 billion
investment in 2002
Main countries of
Holland, Germany, US, Sweden, Austria
origin
Production industry (esp. electrical and
optical instruments)
Main sectors Mechanical engineering
Real estate
Wholesale and retail
Source: Dredsner Bank
Labour costs and spending power within the industry and services sectors,
average annual earnings per person are: €6,216 (2003)
The cost of labour is, of course, different to the salaries of those employed.
Here’s a look at the costs:
Hourly labour cost in industry and services €3.83

Pre-2004 EU member states’ average €22.19
Monthly labour cost per employee €566
Pre-2004 EU member states’ average €3,169
Source: Eurostat, 2000 data
These figures place Hungary very much on a par with the Czech Republic for
salaries and wage costs.
This means that it would take roughly the same 30 years for the average salary
in Hungary to catch up with the equivalent in the 15 Western European countries
that made up the EU prior to the new joiners coming aboard in 2004, even if
salaries in those 15 remained static.
Hungary experimented with a Crawling Peg system of currency control from

March 1995. This involves setting an exchange level for the currency and
allowing the currency to move up or down around the par value by a set amount.
The basic difference between this system and ERM is that the par value is
changed from time to time. The system was dumped in 2001.
From that time onwards, Hungary linked its currency to the Euro, allowing it to
move with a 15% range up or down against the Euro.
There has been a clear pattern to the Forint’s worth over the last decade or so.
Basically, until 1999 it was in decline, showing quite dramatic devaluation

annually. From then on its decline slowed and finally reversed.
In 2001 the Forint appreciated 8.1% against the Euro and by 3.8% in 2002. In
2003, it did, however, decline against the Euro by around 11%. This is more to
do with the strength of the Euro than the Forint’s weakness.
Clearly, the demands required of the government and the Central Bank to peg
the currency to the Euro, are similar to those that will be required of the country
when it enters ERM.
The range the Forint is allowed to move within (15%) is, of course, the same as it
would be in ERM. This gives Hungary something of an experience advantage.
Fixing a currency to within a narrow range of another currency does, however,

leave a country open to attack from speculators.
If there is a fiscal weakness – like the government is running too high a budget
deficit, which it is unlikely to be able to sustain – the speculators may well move
in and start attacking the currency, basically selling it and driving its value down.
Such attacks, which often result in a currency bounce following the oversell the
speculators provoke, can be very destabilising for the economy of any country,
and especially the credibility of the policies of the Central Bank.
Such shockwaves in the economy will have a swift and often quite dramatic
effect on property prices.
Certainly, a serious and sustained attack by speculators on any of the Eastern

Eight would be highly damaging for a developing country such as Hungary.
The constraint of keeping a currency within a certain range compared to another

currency can also hamper sensible fiscal policy.
This was well-illustrated in Hungary at the beginning of 2003 when, at a time

when the Central Bank needed to maintain interest rates to tackle inflation, it was
forced to cut them to prevent the Forint from breaking through its 15% upper limit
against the Euro.
By most estimates, the assessment of the Hungarian economy is that it is in

good shape.
Domestic consumption is still fuelling growth, even while Hungary’s exports have
suffered because of the sluggish economies in Western Europe.
But it is foreign investment that has really fuelled the economy. Of the total ($26
billion by 2001), the United States has accounted for some $7 billion-plus.
The largest US investors include GE, General Motors, Coca-Cola, Ford, IBM,
and PepsiCo.
Many experts anticipate around 4% annual growth of the economy for the
medium term. Inflation is falling and is now dipping under 5%. The
unemployment rate is also coming down as more jobs are created through FDI.
Exports – despite being hit by the slowdown in Western Europe – continue to

grow and make up some 45% of GDP.
Overwhelmingly, Hungary is dependent on the EU for a market for its exports –
63% of all its exports go to Western European markets, with Germany the
dominant trading partner.
Around 80% of the economy is now privatised – higher than in several EU

member states!
In fact the privatisation process can be considered complete. Almost 90% of

small and medium-sized businesses are privately run.
Since 1990, when the state started its mass privatisation process, over 1,500
government-run companies have moved into private ownership.
Some $10 billion has been raised – more per head (at around $1,000) than any
other of the emerging markets.
The government published a list along with the 2001/2002 budget listing those
companies that are still state-owned. There were some 200, of which some will
remain in the hands of the state, or at least the state will maintain a controlling
stake.
These include the railways, the mail service and the state forestry companies, as
well as utility companies.
Hungary’s workforce is generally viewed as skilled and well-educated – and, of

course, compared to the West (and some Eastern Europe competitors), relatively
cheap.
Business sees Hungary, perhaps more than any other of the Eastern Eight
countries, as receptive and open to foreign investors and their ideas and their
methods. This accounts for Hungary’s great success in attracting FDI.
Undoubtedly, the big issues for the Hungarian economy are twofold:
Reduction of the public sector deficit
AND
Solving the imbalance between development rates within the country.
10.1.7 Reduction of the public sector deficit
As we see repeatedly with other Eastern European, the levels of government

spending is a major problem in Hungary.
The fact that the economy is growing at around 3% is obviously a healthy clip.
But it is far from earlier postings of 5% plus.
Much of this slowdown in Hungary’s growth has been attributable to the poor
state of the economies in Western Europe economies, particularly the world’s
third-biggest economy – Germany.
Perhaps unfortunately, the Hungarian government has, in response to this

deteriorating economic environment, decided to spend its way out of trouble.
The spending budget deficit was 8% of GDP in 2002!
This is on its way down, but it is still alarmingly high and needs to be below 3% in
order to meet Euro currency demands.
Many also see unsustainable wage rise inflation creeping in Hungary, which
threatens to make it less competitive compared to rivals.
10.1.8 Currency attacks
Unsustainable government spending deficits could lead to the Hungarian

currency coming under pressure, as happened at the beginning of 2003.
The rigid link to the Euro (the same as will be required in ERM), makes the
Hungarian Forint more vulnerable to attack by speculators.
An inability to keep within the self-imposed 15% band would be extremely

destabilising for the country.
10.1.9 East-west divide
There is a very clear divide between those areas of the country that have
benefited from high levels of FDI and those areas that have received relatively
little.
More than 75% of FDI has flowed into the area of Budapest and the surrounding
region, as well as west of the capital – basically, the centre and west of the
country.
The northwest, towards the Austrian border, has also seen significant foreign
investment – particularly in the Gyor and Sopron areas. Here, big companies
such as Audi, General Motors and Philips have set up manufacturing bases.
The eastern part of the country, on the other hand, has received relatively little in
the way of FDI. Despite some government efforts to rectify this disparity –
incentives to invest in the east – the problem remains and may prove
destabilising in the longer term.
The US Heritage Foundation’s index of economic freedom for 2003 gives

Hungary a score of 2.65, which places it in the middle of the Eastern Eight
countries.
The score, which is defined by the Heritage Foundation as meaning the country’s
economy is ‘mostly free’, places Hungary in 44th position globally out of some
155 countries.
Also placed in the same ranking are Armenia, Bolivia, Costa Rica, Panama and
South Africa.
Hungary’s overall ranking is a little misleading, however.
In most areas of the economy, the country actually scores quite well – 2 for
foreign investment (low barriers), banking and finance, 2 (low level of restrictions
and property rights, 2 (high level of protection).
Where the country scores badly is in trade policy (3), where there are too many
licences needed and general impediments to trade – and many of these are
being removed or scaled back now that Hungary is a member of the EU.
Where Hungary really scores badly is when it comes to the fiscal burden of
government (4). This is basically the amount of taxation in the country. (see
section 10.1.2)
Like its fellow accession countries, Hungary does have a problem.
The Transparency International Corruption Perceptions Index places Hungary in

40th place out of the 133 countries it surveys.
It scores 4.8 out of 10, with 10 being totally free of corruption.
It’s a poor score, but it is a measure of how much of a problem graft is in these
countries that Hungary is actually in 3rd place out of the Eastern Eight, just ahead
of Lithuania but quite a long way behind 2nd place Estonia.
The Open Society Institute (OSI) - the George Soros-backed foundation -

produces reports through its EU Accession Monitoring Program (EUMAP).
A recent report noted that:
"A number of countries with persistent and serious problems of

corruption will be admitted to a European Union which lacks
adequate framework for dealing with these problems even in
current member states”
Corruption in the accession countries has been a major EU concern since the
European Commission began producing its annual progress reports on the EU
applicants back in 1997.
Obviously graft at a basic level completely undermines the EU’s Acquis and
makes meaningless any country’s formal adoption of it.
The OSI has noted that the high levels of corruption are, to a great extent,
legacies from the Communist era when corruption was pretty much
institutionalised.
And the US Chamber of Commerce in Hungary’s magazine has noted that while
Hungary is generally perceived from outside as one of the least corrupt states,
perceptions from within are different.
It notes:
“Domestic surveys of perception indicate widespread corruption

within the public healthcare system in particular, followed by
traffic police, customs and central state administration.”
The Eumap report notes several areas where corruption is apparent in Hungary:
• Political party patronage

• Independence of prosecutions in the courts
• Public procurement
• Media independence
It seems likely that, for the medium term at least, these are all facets of the
country that the investor will have to live with.
The Hungarian economy, like those of most of its fellow accession countries has
suffered somewhat from the slowdown in growth among EU countries.
This has inevitably had an effect on exports, FDI and therefore growth.
It is unlikely this trend will be turned around rapidly, but recovery depends almost
entirely on the world, and more specifically, on the economies of the Western EU
countries and the US.
This is where the investment money predominantly comes from. Beyond this,
relatively small and open economies like Hungary’s are highly dependent on their
trading partners, in Hungary’s case this is overwhelmingly Western Europe.
Something more needs to be done to cut government spending. In Hungary’s
case this means a radical overhaul of social welfare policies.
Once government spending is reined in, it is likely the investment taps will be
turned on again as confidence that the government is prepared to act is restored.
Despite these drawbacks, Hungary’s economy is still posting positive growth, and
was still doing so during the worldwide economic slowdown.
And another plus is that Hungary’s financial system is, without question, one of
the strongest in Central and Eastern Europe.
The country was on track to attract around $2 billion in FDI in 2005. Almost 75%
of the world’s largest companies have a Hungarian presence or subsidiary.
If evidence of the continued flow of foreign investment is needed, this fact alone
speaks volumes.
The OECD view is that growth will rise to close to 4% in 2005. Exports are
expected to pick up and accelerate.
10.2 Hungary - Property Market Potential
There is plenty to be bullish about the property market in Hungary.
The economy may have slowed a little in the last couple of years, in line with
global trends, but the fundamentals in Hungary are very strong, perhaps the
strongest of all the Eastern Eight.
Like the Czech Republic, there is a property investor fixation with the capital.
There’s good reason for this – Budapest has shown fantastic gains over the last
few years. But already there are warning signs that the market is over-inflated in
some areas, most notably at the top end.
At this end of the market, prices have actually been falling for the last couple of
years. However, in the mid-market prices have been stable or climbing.
With all Budapest’s attractions as a modern, attractive European centre with

good property laws, a stable government and a long tradition of openness to
foreign investment, it is hard to see how property demand will not continue over
the medium term and even long term, basically fuelled by two factors:
• A growing aspiring middle class
• An increasing number of medium cap foreign companies attracted to

Budapest and its opportunities along with smaller firms – legal practices,
accountancies, PR, management consultancies and so on – who feel the
need of a presence in such a dynamic city
As with others in the Eastern Eight, it is likely to be domestic demand that drives
the market as much as foreigners over the coming years. This means that what
is now considered the mid-market type of property may well be the most
profitable for an investor.
Around 90% of Hungarian families own their own homes but the non-subsidised
mortgage market is still tiny.
Hungarians are entitled to a government-subsidised mortgage loan with a 3-4%

interest rate up to 15 million HUF (€53,000). 70% mortgages are available.
There are still many off-putting barriers to foreigners investing in Hungarian real
estate. As we’ve seen, the barriers are actually little more than inconveniences
and, from a tax viewpoint, can actually be advantageous.
Even so, there is a psychological barrier here – a sense that the market is not
fully open to foreigners. And, in a sense, it isn’t. When those barriers to buying
end, as they must after five years in the EU, there is likely to be a boost to
property prices as more buyers enter the scene.
The only question for investors is: is the timing right?
10.2.1 Will you be buying just before the bubble bursts?
This is obviously the question any potential investor should ask. And just as
obviously no one can give you a definitive answer. Perhaps the only real answer
is to weigh up all the relevant factors and ask whether you believe in the market.
There are those who argue that the property market in Budapest is over-inflated
and prices will tumble.
Of course, no market is risk-free. And maybe if you want fast and big profits (for
which you will naturally have to accept risk), then Budapest is not the place to
buy.
But, given five or more years, who would bet against the business favourite –
Budapest?
10.2.2 What kind of returns can I expect?
This is clearly the hardest of all calls to make.
But in the past few years, the right apartment in the right part of Budapest has
returned an average of between 15% and 30% capital growth.
And rental returns have also been good. Again, for the right apartment in the
right area, around 7% yield is possible.
10.2.3 What are the best kinds of properties for rental?
Basically, you can’t go far wrong with smart, thoroughly modernised, and fully
furnished (which just means the essentials) flats in central areas. The standard
of renovation is all when it comes to attracting maximum rent.
Here are some rough price guides for Budapest:
• Two-bed apartment with one living room in Pest – between €360 and €470
per month
• Same apartment in a tree-lined street in Buda – between €1,200 and

€2,500 per month
• Small studio flats in desirable areas - €316 per month
• Luxury, top-end properties with swimming pools and extensive grounds -

€3,000 to €4,000 per month
10.2.4 What can I expect to pay for a property?
In Budapest, where the overwhelming majority of foreigners buy, expect to pay

between €1,400 and €2,127 per sqm for the most prestigious properties in the
very best locations.
You’ll pay about €1,000 per sqm for good properties in good areas and around
€780 for mid-priced properties. Run-down properties in decent locations are
obtainable at around €550 per sqm.
10.2.5 Budapest is still best
Unless you have real pioneering spirit, stick to Budapest and areas around it.
This, in the short and medium term will be the safest bet.
Certainly, don’t be tempted into the east of the country, which remains relatively
undeveloped and shows no signs of presenting much opportunity for the first-
time property investor.
Another reason to stick to the capital (with one exception, see section 10.2.10), is
that solid price information relating to areas outside Budapest is not easy to
come by.
Budapest is likely to grow in economic strength and diversity as more businesses

are attracted to it.
The mortgage market is undeveloped in Hungary and it is likely government
subsidies will soon go and western banks will move in and transform the market,
so unleashing new demand.
It will almost certainly be Budapest that will feel the benefit of this new wave of
demand first.
10.2.6 Be prepared to buy and hold, and avoid the top end of the market
The top end of the market has seen prices stable or falling for a while now.
There has been talk of a property bubble in Budapest and while this may not
result in a burst bubble, and a steep price fall, such talk can be self-fulfilling.
For this reason, it’s a good idea to be prepared, at least, to hold your property
asset for five years, longer if possible, in order to weather any downturn in the
market.
10.2.7 Buy let-able properties
For the best return and the safest investment make sure you concentrate on
properties that will easily rent.
Between €50,000 and €100,000 apartments in central locations surrounded by

transport options and other essentials. This kind of property will realise the sort
of yield mentioned in 8.1 and is the most likely to show the best rate of increase
in value.
10.2.8 Where to invest in Budapest
To invest best in Budapest you need to know which are the up and coming areas
and what kind of property is hot. Things can change pretty quickly.
The best way of doing this is to check out information freely supplied by estate
agents in the city, many of whom send out emailed updates and newsletters.
For example, in Pest, demand has been seen moving away from studio
apartments and towards one-bedroom flats, according to estate agents.
I would recommend looking for small apartments either to restore or that have
been restored already to a high standard of finish.
And while the domestic market will undoubtedly develop over the next few years,
for the time being, the best areas to invest in are those places popular with
foreigners, or best of all, just being discovered by foreigners.
The 6th, 7th, 8th and 9th districts of the city are recommended by a number of
marker watchers, plus the old Jewish quarter by the Great Synagogue.
The 8th and 9th districts are university areas – nearly always good for investment
and rental potential.
As a general rule, estate agents advise that Buda is best for apartments and
Pest, across the river, is better for buying a plot of land and developing it.
And if you’re buying an apartment, always keep in mind how near it is to the
metro line.
10.2.9 Healthy returns – spa centres
Budapest itself has often been referred to as the Spa Capital of the world, and
with good reason. There are said to be more than 30 thermal springs in and
around the city.
But it is not only Budapest that is blessed with abundant spa centres.
The health resort industry is certain to be developed in a big way in Hungary over
the coming years and buying a property in a place with great tourist potential is
an excellent way of maximising potential returns.
Good places to consider investing in the kind of properties that will make luxury-
end accommodation for health tourists are Buk, Balf, Sarvar, Zalakaros and
Gyula.
10.2.10 Hot tip tourist destination – Lake Balaton
Spa centres is a specific section of the tourist industry in Hungary that is ripe for
further investment. However, other tourist centres are also worth considering for
property investment.
Balaton, the largest lake in Hungary, probably in Central Europe, and which is
south of Budapest, is one of them. This is one of, if not THE, busiest holiday
resorts in the country.
Prices, on average, have moved about 20% up over the last couple of years.
Property prices in the area, which is close to the Yugoslavian border, were badly
affected by the war in 1999.
Since then things have changed.
While many foreigners – especially from Germany and Holland – have already
bought in the area, they tend to target the north shore and there is huge potential
upside to the property market in the south.
Older properties here are like gold dust close to the shore and newer properties
are far more common.
The real estate market centres – in terms of price, at least – around Siófok. As
you move away from here, prices fall. But the difference is lessening.
The southern shore of the lake is currently the most popular with foreign
investors and is likely to retain its prime position for some time.
Here the best properties are close to the beach, around 1000sqm and fetch
between €70,000 and €90,000. Further away from the beach and from Siófok
and the price will be halved.
Older properties in and around Siófok, on or close to the beach will fetch around
€39,000, regardless of their condition. Newer houses are priced at around
€56,000 and smaller, semi-detached weekend properties go for around €35,000.
The northern shore of the lake remains the more exclusive area and certainly a
favourite with foreign buyers, mainly because they can afford the prices.
Demand is in a much smaller area – in and around two towns, Tihany and
Balatonfüred.
But Balatonalmádi is slowly being discovered and is a good investment bet –

prices here are up to 40% less than in Balatonfüred.
Foreign buyers focus mainly on Györök or in Vonyarcvashegy as well as villages

a little way away from the lake. Here a three-bedroom house with a large patch
of land can be found for around €35,000 and upwards.
Rental yields are not enormous – it’s capital gain that is interesting here. Rents
obviously depend on location and type of property, but a typical modern
apartment that may sleep around six people will rent for around €20 per person
per night in the summer months.
For a better idea of yields visit www.siofokbella.hu/bella_eng.html
Prices have increased by 400% in eight years, say estate agents in the area.
The Balaton area, with its 100km long lake, which is never deeper than three
metres and has its own Mediterranean micro-climate, is likely to become hugely
popular with foreign visitors in the near future as Hungary is increasingly opened
up as a tourist destination.
A great place to invest!
10.3 Hungary - How the Property Market Works
Rather like Prague and the Czech Republic, Hungary is perceived by most
property investors as being simply Budapest.
This is fair enough as it’s a stunning city – often dubbed the Paris of the East –
as millions of tourist will attest.
And, according to Forbes magazine’s Best Cities for Business survey, which
looks at cost of living, culture and economic growth, among other factors,
Budapest is the business’s third most favoured city in Europe after London and
Amsterdam.
Certainly, that is where the investment money goes and where the best returns
have been up to now.
Data and information about areas outside the capital are quite difficult to come
by, but this will surely change as investors look for basement level opportunities
in the country.
For now, however, it will be difficult to locate agents specialising in properties

outside the capital that are used to international clients.
Foreigners wanting access to the property market in Hungary have a number of

choices – and none of them involve a simple process of just buying a property.
For some private investors wanting to own an apartment in Budapest, the

apparent barriers can be off-putting.
There is, though, no need for the seemingly difficult obstacles to be a problem -
so long as you choose the right way of doing things.
In fact, buying in Hungary is actually simpler than in many other places and can
be carried out very swiftly.
And there is most definitely a right way and a wrong way.
As with the Czech Republic, foreigners are, in principle, prohibited from owning
real estate.
As with the Czech Republic, the restrictions will remain in force until 2009 – five
years after Hungary’s admission to the EU. Prohibitions on agricultural land will
remain for longer and are more stringent.
However, even this difficulty can be, and frequently is, overcome by foreign
investors who are known to have officially ‘leased ‘agricultural land, when in
effect they have bought it from Hungarian farmers, especially near the Austrian
border.
10.3.1 How to buy property in Hungary
There are two ways for a foreigner to approach buying a property in Hungary:
• Apply for a permit to buy as an individual

• Buy through a company
The problem with the first way is that it involves legal fees and can be time-
consuming, and, most importantly, you have no guarantee of success.
Since a change in policy in 2002, refusal is no longer common, and the

authorities need to show that your purchase would be damaging to the welfare of
society.
There also used to be quotas for buyers from each foreign country.
Key Tip
Under no circumstances should you try and apply for a permit to buy
or set up a company without taking legal advice first.
If you are attempting to buy a second property in the same area, you may be
considered a speculator and will almost certainly not be successful.
If a permit is denied you can 1) Re-apply 2) Buy through a friend who will need
to apply for a permit or 3) try option b.
The main problem with buying as an individual is that you need to settle on a
property and sign a contract to buy BEFORE you have obtained the permit.
If you are unsuccessful, the contract becomes void and you have to start again,
which involves more time and expense.
To apply for a permit an individual needs to take a copy of the buying agreement,
details of a property registered Hungarian lawyer who represents the buyer and a
certificate from the tax authorities saying they have no claim on the property in
question.
The process costs the equivalent of around €200.
Option b. usually involves setting up a company and registering it in Hungary,

which is a fairly simple process.
It will cost around €700 to get the company off the ground and the necessary
administration to keep it running will cost around €400 a year. You don’t need to
be physically present to set up a company – it can be done through a lawyer.
You will need to actually be present in the country to set up a bank account,
however.
10.3.2 Why buying through a company can be best
There are several reasons why buying through a company is best:
It’s still the fastest way. Plus, once the company is established there are no
limits to how many properties you can buy.
Just about everything you spend that relates to the property can be claimed
against tax – this includes airfares, hotel bills, agency costs, cost of furnishing,
etc.
If you sell the property within two years, you will save 4% on purchase tax – you
will pay 2% instead of around 6%.
If you sell the company along with the property then no purchase tax will be
payable by the buyer, making your property a more attractive buy. Technically,
you sell the shares in the company rather than the property.
10.3.3 How to set up a company in Hungary
In most cases the only parties necessary will be a realtor or estate agent, a
lawyer and an accountant.
Once the particulars of the company are established – name, its seat, who owns
the shares, etc - the Articles of Association can be prepared and specimens of
signature will need to be provided before a public notary.
Obviously, a bank account will also need to be opened in Hungary. For this
process you will need to be physically present.
An accountant will need to be hired to take care of all the ensuing paperwork,
including claiming expenses against tax.
10.3.4 Extra costs
As a company, you can expect to pay lawyer’s fees of 1.5% of the cost of the
property, plus agent’s fees of around 4% and sales tax. If a declaration is made
that the property will be sold within 2 years, 2% purchase tax is payable.
An individual, buying as a private person, will pay 2% of the first 4,000,000 Forint
(approx €14,000), and then 6% of the rest of the purchase price.
10.3.5 When buying as an individual is best
Now the authorities have changed their approach to the issuing of permits to buy
to foreigners, it is probably fine to apply for a permit and buy this way. The
exceptions are:
If you’re only planning to buy one property

If you intend to hold the property for at least two years
Anything else could be considered speculative and a permit is likely to be

refused.
10.3.6 The purchase process
There are some similarities between buying in Hungary and in other countries in
Europe – Spain and Italy, for example.
Certain aspects of the process will be strange to the overseas buyer, however.
Paying a deposit, which you will do before you have had all your lawyer’s
questions answered, will normally be between 10 and 20% of the purchase price.
And it will normally have to be paid in cash.
Cash, not bank drafts or cheques, is what people trust and understand. To a
Westerner, this may seem strange.
Another strange part of this process is that the lawyer handling the sale must be
paid for by the buyer, but must act on behalf and for BOTH the buyer and the
seller.
If you’re buying as an individual, it is quite possible to complete the whole

purchase process before receiving a permit to buy, so long as one has been
applied for. But if you’re turned down for any reason, you will lose your deposit.
As mentioned before, the restrictions on foreigners buying property in Hungary

did not end with EU membership.
Key Tip
As with other countries that have set up hurdles to hamper foreigners

buying property, it is logical to assume that some people are put off by
these restrictions. When those restrictions end, therefore, it is likely to
provide a boost to the market.
Tax Details
20-40 % (increases with higher earnings)
Personal income The rate was coming down in 2004 to
around 18% to 38%
Value Added (25% standard rate)
Varies depending on the type of property, its
Property tax location and its use. Maximum of €3 per
sqm
Property transfer Varies (see below)
Certain kinds of land registered with the land
registry can attract a yearly tax. This varies
Land tax
but will not exceed €0.7 per sqm
Also, from 2004,VAT (see below)
Capital repatriation No tax
Let’s take a closer look some of the taxes likely to affect the property investor.
Property transfer tax or sales tax
All sales of property are subject to a sales or transfer tax. The standard rate is
10%, plus VAT.
But, if the company making the purchase is officially registered as a property

trading company and declares an intention to sell within two years, the rate is
2%, payable by the person or company buying the property.
This rate applies up to the first 4m Ft (approx €14,000), then afterwards the rate
becomes 6%.
If you buy property through a company the sale of the company (along with the
property) will be treated at the same level of taxation.
The buyer of shares in a company holding property is not liable for any tax.
If you buy as a private person, you pay the same tax as a company established
to deal in real estate – i.e., the 2% + 6% rate. But this is for a property that will be
used more or less constantly.
If it can be described as a weekend home, or secondary residence, or holiday
home, the 10% tax will apply. A good reason to set up a company and buy the
property that way.
Buying commercial property attracts the full 10% standard rate of transfer tax.
All transfer taxes have to be met within six months of the sale.
Key Tip
Buying land with planning permission that you declare will be

developed within four years attracts zero tax on purchase.
Income tax
The top rate of income tax in Hungary is 40%. But income from property is
treated separately.
A company pays 18% of its yearly rental profit, plus dividend tax at 20%.
However, as mentioned earlier, many items can be set against tax and it is not
uncommon to be able to declare no profit.
An individual pays a tax of 20% on rental profits.
Key Tip
A private buyer can get tax breaks on rental income if they buy and
sell within four years. Check with an accountant.
Value Added Tax
The VAT rate is 25%, but individuals do not need to charge VAT when they sell
their property and the rate for letting an apartment is zero. A new law, with effect
from 2004, means that buying a plot of land attracts 25% VAT.
Profits tax on the sale of a property
A company pays 18% of its profits as tax, plus a 20% dividend tax. However,
many expenses can be deducted, including interest paid on loans.
An individual pays 20% but has little opportunity to claim against tax.
Land Tax
Apart from the yearly tax that may be due on plots, a new law has been
introduced and came into effect from January 2004. This adds 25% VAT on the
purchase of plots of land.
It is generally felt that this tax will bring about an increase in the purchase price of
new builds, perhaps as much as 10%.
Building Tax
If a building is liable for this tax then it will be paid by the owner, whether that is
an individual or company. It is due on January 1 each year. It is usually based
on the size of the property. The maximum rate is HUF900 per sqm.
Waste disposal
This is a yearly charge determined by the local authority - expect around €50.
Other costs
Lawyers’ fees for the purchase process – 1.5% of the sale price, plus VAT.
Management fee, if you let through an agent – expect to pay between 10-15% of
the monthly rent, plus VAT.
Agency fees, these can be anything from 3% upwards, plus VAT.
Key Tip
Taxes, especially those relating to expenses set against a company’s

tax return are complicated.
Get an accountant that belongs to a reputable professional body and is

used to dealing with foreigners.
Members of the International Federation of Accountants in Hungary can

be contacted through www.mkvk.hu.
Hungary was something of a trailblazer – as with so much else – in dealing with

property restitution problems. This was both for private and communal
properties.
For example, a law was introduced as early as 1991 allowing religious groups to
apply for compensation for property seized by the state after 1946.
Since 1991, 12 religious groups have applied for no less than 8,000 restitution
claims. Of these, 1,383 were given property, 2,670 were turned down and 1731
were given cash compensation, a total of $271m.
A further 968 cases were settled without government intervention. There are
around 1,000 cases still outstanding and the deadline for settlement is 2011.
The 1991 law allowed successful claimants to receive a voucher up to the value
of $21,000. This could be used to buy shares in privatised companies or land at
state land auctions.
One weakness in the system is that there is no law covering property that
belonged to Holocaust victims who have no heirs.
These properties, which revert to ownership by the state, theoretically could be

the subject of some legal wrangling.
Make sure that any property you are interested in is checked for ownership in the
land registry by a lawyer.
10.4 Hungarian - Property Finance
For almost all foreigners buying property in Hungary, getting a loan in Hungary is
not a sensible idea. The mortgage market is uncompetitive and the lending rate
is likely to be in double figures.
A normal market value loan is 14% and lenders will usually only go up to 50% of
the value of the property.
However, if you have any Hungarian ancestry, it is possible to be eligible, just as

Hungarians are, for a government-subsidised mortgage.
This allows you to borrow at a rate of 3-4% up to a total of around €53,000.
Up to 70% of the registered value of the property can be loaned and this value is
usually about 20% short of market value.
Any foreigner, who has Hungarian forbears or strong family ties can apply to the
Interior Ministry for the loan subsidy.
10.5 Hungary - Investment Verdict
Hungary has seen huge price rises in property over the last decade – prices have
doubled and even tripled in many parts of Budapest in the last five years or so.
The fear is that this inflation is over-heating and the market will suddenly cool.
Such speculation is the wrong way of looking at the market.
Even if there is a correction in the market in the short term, in the longer term the
fundamentals to create a fast-developing, increasingly affluent society are all
present. And that means that high demand for good quality properties, especially
in Budapest, will continue.
Budapest remains one of the cheapest cities in Europe, according to the

Economist Intelligence Unit. And, like Prague, it’s also one of the most beautiful.
This, along with the fact that it is highly attractive to business as a place to invest,
will ensure that demand for property will grow.
Hungary is ahead of most of the other EU accession countries in attracting

investment because it came early to the party. It is highly likely to maintain its
favourable position.
It’s also highly likely – despite the difficulties – to be one of the early entrants to
the Eurozone. This will almost certainly boost the real estate market.
The home loan market is highly undeveloped and this is likely to change with the
dropping of all restrictions and barriers to buyers from within Europe that
membership of the EU brings.
It is clear that the government – by easing restrictions on foreign buyers

obtaining permits to buy – is intent on freeing the property market completely.
This will be a massive boost to the market.
Budapest, like Prague, is a great place to invest if you’re looking for properties
that are easy to rent out and that will steadily gain in value steadily in THE
MEDIUM TO LONG TERM.
Outside of the capital, look to spa centres and tourist areas and carefully pick
properties that have strong rental potential and great location for capital growth.
10.6 Hungary - Links
10.6.1 EU-related
Site Name URL

Statistical Office of Hungary www.ksh.hu/pls/ksh/docs/index
eng.html
Referendum on EU Membership www.valasztas.hu/en/index.html
Commission Delegation in www.eudelegation.hu/
Budapest
EU Information Team www.magyarorszag.hu/
Hungarian EU Communication www.eukk.hu/
Public Foundation
10.6.2 Country specific
Site URL
Prime Minister's Office www.meh.hu/
eGovernment portal site www.ekormanyzat.hu/
"Eufórium" Website on the www.euforium.hu/euintegra-
National Development Plan main.php
Central Finance and Contracting www.cfcu.hu/
Unit (CFCU)
Ministry of Foreign Affaires www.mfa.gov.hu/
Ministry of Foreign Affaires. www.kum.hu/euint/index.html
Hungary's EU integration website
Ministry of the Interior www.b-m.hu/
Ministry of Economics and www.gm.hu/
Transport
Ministry of Agriculture and www.fvm.hu/euint/euint.html
Regional Development
Hungarian Enterprise www.mva.hu/
Development Foundation
Budapest Chamber of www.bkik.hu/
Commerce and Industry
Office for Ethnic and National www.meh.hu/nekk/defhu.htm
Minorities
Prime Minister's Office. www.civil.info.hu/
Department for Civil Affairs
10.6.3 Regions of Hungary
Site URL
South-Plain Region www.del-alfold.hu/
North-Plain Region www.eszakalfold.hu/
North Hungary Region www.norda.hu/
Central Region www.kozpontiregio.hu/
West-Transdanubia Region www.westpa.hu/
South-Transdanubia Region www.ddrft.hu/
10.6.4 Real estate
Site URL
Lake Balaton property www.balaton.net/
Lake Balaton property irec.hu/avidek.htm
Budapest Property www.investbudapest.com/
Budapest property www.casalux.hu/eindex.htm
11. POLAND – THE SLEEPING GIANT
Poland stands out among the Eastern Eight simply because it dwarfs the other
countries, in size, population and, some argue, long-term investor potential.
And in terms of attracting foreign investment it stands out once again as the
undisputed leader of the pack (see above). In total it is estimated to have
attracted $62 billion.
Poland chalked up a truly impressive rate of growth during the later part of the
1990s, but it was hit harder than other accession countries by the economic
slowdown in the three years before joining the EU.
This is perhaps because its biggest trading partner, Germany, was so badly hit
by the economic slowdown.
Even so, in the longer term there is no doubt that the Polish government is
committed to attracting more investment, to fulfilling its undertakings as an EU
member and of liberalising its economy.
All this adds up to a very attractive prospect for the business investor and, of
course, therefore, for the property investor.
11.1 Poland - Business & Economic Overview

11.1.1 Polish politics in a nutshell
Poland overrun by Germany and then Soviet Union in WW2
Country becomes a Soviet satellite after WW2 and communist
Labour unrest in 1980 led to the formation of the union Solidarity, which over the
next decade became a strong political force and led to direct Presidential
elections.
Drastic and painful economic reforms undertaken in the 1990s to transform the
country into a predominantly market driven economy.
Solidarity suffered a devastating political blow in the 2001 elections and

subsequently the role of trade unions in Polish politics has shrunk considerably.
In June 2003, 77% of the voters approved of EU membership.
Population 39 million
Land mass 304,465 sq km
Capital city Warsaw
Belarus, Czech Rep, Germany, Lithuania, Russia,
Borders
Slovakia, Ukraine
Temperate with cold, severe winters with heavy
Climate
rain. Mild summers with lots of thunderstorms.
Serious air and water pollution remains a problem
in parts
Notes
Mostly flat with mountains in southern area
Many areas liable to flooding
Zloty (PLN) exchange rate, 2003, approx €1 =

Currency
4.665 PLN.
Unemployment 17.5% (end 2003)
GDP $197.5 billion (2003 estimated)
GDP growth rate 3% (2003 est.)
GDP per head of
$5,104 (2003 est)
population
Natural gas, machinery and transport
equipment, intermediate manufactured goods,
Key exports
other manufactured goods, food and live
animals
Machine building, iron and steel, coal mining,
Key sectors of the
chemicals, shipbuilding, food processing, glass,
economy
drinks, textiles
Value of exports $32.4 billion (2002)
Key export target Germany 33%, Italy 5.7%, France 5%, UK
countries 4.8%, Czech Republic 4.3% (2002)
Machinery and transport equipment 38.2%,

Key imports intermediate manufactured goods 20.8%,
chemicals 14.3%, miscellaneous manufactured
goods 9.5%
Value of imports $43.4 billion (2002)
Main import Germany 29.9%, Italy 8.1%, Russia 7.4%,
partners France 7.2%, Netherlands 5.3% (2002)
Government -6.8 billion $ and rising (2002) estimate for
budget 2003, -7.7 billion $. 3.9% of GDP
Inflation 1.6% (2003 est)
Source: CIA World Factbook; Dresdner Bank
Foreign direct
$4 billion (2003)
investment in
United Kingdom (22.5 %), Netherlands (17.6 %),
Main countries of
USA (14.6 %), France (12.2 %), Germany (9.4
origin
%).
Manufacturing industry (34.3 %), trade and
Main sectors
services (17.4 %) and financial sector (15.7 %).
The average monthly gross wages in 2003 –
• Poland €578
• Germany €2,808
• Pre-2004 EU average €2,335
Source: Eurostat

Source: Eurostat (2000)
From late 1991 until April 2000, Poland adopted a crawling peg currency system.
Under this system the Zloty was linked to a basket of other currencies with the
US Dollar carrying a 45% weighting. Other currencies were the German Mark
(35%), the British pound (10%), the French franc (5%) and the Swiss franc (5%).
At the end of 1998 the plus or minus band within which the currency was allowed
to ‘crawl’ was 12.5%.
From the start of 1999 until April 2000 the basket of currencies was narrowed to
just the Euro (55%) and the US Dollar (45%) and the variation allowed was 15%
before the Central Bank would intervene – buying and selling currencies or
changing interest rates.
From April 2000, the Zloty has been allowed to float freely on the open market.
This can make for a larger degree of volatility.
Since being allowed to float freely the Zloty appreciated by 8% in 2000 and by
10% in 2001 against the Euro. This trend was turned on its head in 2002 when
the currency plummeted against the Euro by 13%.
This trend continued in 2003 – with the Zloty losing around 10% during the first
six months and the pattern of a gradual, although slowing decline, seems to be
the way forward.
Poland has been hit badly by the global economic downturn from 2000. While
other accession countries maintained reasonable (although less dramatic rates of
growth), Poland was the exception.
However, there is reason to believe that it is now in full recovery mode and that
its performance will pick up once again.
Certainly its longer term prospects are excellent. Its sheer scale makes it highly
attractive to business investors.
GDP growth has been firm since 2003, and the OECD expects GDP growth of
4.5% being achieved in 2005, helped in large part by rising domestic consumer
demand.
Poland’s very high level of unemployment is also expected to come down soon,
as more jobs are created.
Political uncertainty has had a downward effect on Poland’s currency while other
accession countries’ currencies have for the most part appreciated against the
Euro. This has, however, made the country’s exports more attractive.
On the plus side – aside from more encouraging economic numbers – Poland
has displayed since its emancipation from communism a deep determination to
create a free market economy. And in this it has undoubtedly led the way among
the accession countries.
It has a proud heritage of driving economic and political reform in the region,
leading the way with its tough economic measures in the early 90s to bring about
an economic transformation.
This appetite to tackle economic woes is what has made it the most attractive
destination for foreign investors’ money. That and the size of its market of 39
million people!
Even so, Poland does have a lot of problems. Many of them are caused by its
sheer size relative to the other Eastern Eight.
Despite making great strides since reform began in the 90s, the country’s legacy
of heavy industry and the part unions have played in politics, its reform task is
harder than for most of the other accession countries.
It urgently needs to:
• bring down its levels of unemployment
• vastly reduce the state sector
• reduce the imbalance between government income and expenditure
• reduce bureaucracy hampering business
Some reforms are relatively easy – for example reducing the unnecessary
bureaucracy that holds up business development.
In the past many small businesses were required to submit tax returns on a
monthly basis. They will now be able to send in returns annually.
Other changes will be more difficult and will only come at a price.
The government has set itself the target of reducing state ownership of industry,
from around 30% two years ago to 15% in 2005. Target areas are the coal, oil,
gas and steel industries.
Such privatisation, inevitably, will not come about without a strong political will
and many observers believe such transition may lead to serious civil disruption. A
taste of this occurred in the first part of 2002 when reforms to loosen employee
protection caused large-scale demonstrations on the streets of Warsaw.
The country also suffers from very poor infrastructure and needs more and better
roads. The government has vowed to build 500kms of motorway by the end of
2005. Even so, much of the funding for this construction will come from the state.
The IMF has warned that Poland’s apparent recovery will only be sustained in
the longer term if the government tackles the big fiscal shortfall – i.e., cuts its
spending in relation to its income.
It recommends that privatisation is speeded up and that interest rate policy

remain tight – in other words high interest rates – to contain inflation.
Economy Minister Jerzy Hausner's reform plan aims to cut the government’s
deficit, and involves spending cuts of around $8.3 billion by 2007.
Workers in the sectors most affected – mostly heavy industries and health – are
opposed and demonstrations have resulted.
Whether the package goes ahead or not, it is clear that the government has an
appetite to attack the budget deficit and that it is highly likely this will put it on a
collision course with workers.
There is then a risk of a certain amount of political and economic uncertainty

ahead, which could have an adverse effect on investment and business
sentiment. Property prices would also suffer.
However, if measures are successful, Poland will have once again proved that it
is more than capable of swallowing bitter pills to achieve necessary reforms.
This would be highly popular with business investors.
The Heritage Foundation ranks Poland in 66th position globally for the level of
openness of its market – just below the Philippines and Uganda.
Only Slovakia has a lower ranking than Poland out of the Eastern Eight. Poland
scores a 2.9 overall, which equates to a ‘mostly free’ economy.
While there is a great deal of praise for the efforts made since the fall of
communism, especially in the banking sector, which is now almost completely
privatised and with around 75% of the sector owned by foreign companies.
Where Poland does less well is for its high level of government spending relative
to GDP.
Private property is well protected in the country though, and the risk of
expropriation is low.
However, the US Department of State has noted that
‘Many investors, foreign and domestic, complain about the

slowness of the judicial system…. investors often voice concern
about frequent or unexpected issuance of or changes in laws and
regulations.’
In short, red tape can be a problem.
The other big problem in Poland is fairly blatant corruption.
In fact, according to rankings compiled by Nationmaster.com, Poland is placed in

the number one position globally when it comes to reports of people victimised by
bribery or corruption. Incidentally it also tops the list for reports of robbery
victims.
The black market thrives in Poland, of that there is no doubt. And corruption is a
way of life.
Any unwary foreign investor is wise to keep his eyes open and take sound advice
from reputable sources.
The Transparency International Corruption Perceptions Index 2003 places

Poland at the bottom of all the Eastern Eight countries and in 64th position
globally of 133 countries. Poland scores 3.6 out of a possible totally corruption-
free score of 10.
To put this in perspective, Poland ranks alongside Mexico and only one place up
from China.
Whether the average property investor will actually find Poland noticeably more
corrupt than many of the other Eastern Eight countries is debatable.
However, it is as well to be aware not only of the country’s reputation, but also
what amounts to a way of life for many people – removing unexpected barriers to
business with a backhander is often what makes the place tick.
Basically, it appears as though the economy may well be on the mend. That’s
good news for property investors.
Nevertheless, the difficulties facing the government as it continues the reform

process are formidable.
These difficulties, which have certainly had an effect on foreign investment in the
country, are likely to hold back property prices in the short term.
What is more important, however, is the state of the economies in Western

Europe, especially Germany, the main trading partner.
If these economies pick up then the tough decisions and adjustments ahead for
Poland will be made easier as trade will pick up and so will inward investment.
11.2 Poland - Property Market Potential
One of the first things to note about the property market is that it is centred
around Warsaw. Krakow has become increasingly interesting to investors in the
last few years, but there is still a heavy concentration of interest around the
capital.
Domestically, while Poles have relatively high earnings compared to other

citizens of the Eastern Eight countries, they have not yet embraced the idea of
taking on debt.
For this reason, they tend to have high disposable incomes and low credit
commitments – meaning the mortgage market in Poland is not especially
developed.
This will undoubtedly change as European banks and other lenders seek to tap
the massive potential of the biggest new joiners in the EU.
Like several other accession countries, there are restrictions for foreigners
looking to own property in the country. In reality, however, these restrictions are
not especially daunting (see section 11.3)
Yet there is little doubt that while they don’t seriously impede a purchase, they do
act as a psychological barrier for many buyers.
And this is basically the idea – to stop foreign money flooding into the domestic
market and pricing Poles out of the market before their purchasing power is
sufficient to join in.
Their eventual removal - five years after EU membership for EU citizens - will
undoubtedly act as a boost to the market.
11.2.1 Traps for the unwary in the Polish property market
There are a number of considerations that should be made before jumping into
the property market – many of them unique to Poland.
Land and mortgage books
These are the Bibles of real estate in Poland. What is entered here goes.
They are kept by regional courts and record the legal interests in all real estate.
More than this, however, under the law these books can grant certain powerful
legal rights and no property should be bought without having a notary or lawyer
check the book entry for the property.
Even if it appears that a seller has a legal title to a property, where there is no
book entry it is very unwise to consider buying the property.
This is especially the case where state owned property is concerned because it
is possible that this was confiscated without any due legal process. This could
lead to restitution claims.
Perpetual Usufruct
A bit of a mouthful, but this is pretty much the same as a 99-year lease, but it
gives its owner more rights than a regular long lease.
Usually, a Perpetual Usufruct starts off life as an agreement between the state
(the owner of a property) and the buyer.
This agreement states the allowed uses of the property, annual ‘ground rent’
payments, the time frame in which any property may be built and so on.
This agreement can be transferred and any buyer is bound by its restrictions.
Even if any building work has already been done, restrictions may be in force as
to the use of the building.
This is why the original Perpetual Usufruct should be inspected carefully by a

professional. Any breach can result in court action to nullify the original
agreement.
An owner or bearer of a Perpetual Usufruct is responsible for any pollution within

the property, even if it is the fault of the previous owner.
Zoning
Zoning laws are in effect the local master plan for an area. They set down
restrictions and development plans. They should always be studied by a
professional before making any decision to buy real estate or land to develop.
11.2.2 Why Warsaw?
Here you will avoid the high levels of unemployment found elsewhere in the
country and which are likely to persist and to depress property prices.
Warsaw is seeing increased migration following EU accession as more

investment money enters the capital and better-paid jobs are created.
Overcrowding – Warsaw has one of the highest levels of density per property in
Europe.
Slowdown in the economy in the last two/three years has led to fewer new builds,
so reducing supply.
Emerging middle class will gravitate to the capital first for jobs and lifestyle.
Young population – large number of Poles now in the 20-something age bracket
will soon be looking for accommodation – again the capital is likely to be the first
choice for young people.
Better access to lawyers, accountants and other professionals connected with

the complex field of property buying in Poland.
11.2.3 Where and what to buy in Warsaw
Choose the smartest locations that will appeal to aspiring professional Poles and
ex-pats – these will be the easiest places to rent.
These include: the centre of Warsaw, Upper Mokotów, Ochota, Old Zoliborz,
Saska Kêpa, Wilanow, Sródmiescie, Ursynów-Kabaty.
The average rental price for the centre of Warsaw is around €12 per sqm.
Buy modern, well-appointed apartments around 50 sq m in quiet and green

residential areas, with two and three bedrooms
11.2.4 Avoid the top end…unless you can find a real bargain
There is a glut of top-end apartments on the market and prices have been static
or falling for a couple of years.
So, avoid the luxury end of the market unless you are prepared to make vastly
reduced offers on asking prices and walk away if you’re turned down.
In the longer term demand for luxury apartments is likely to revive, however, as
more professionals and especially ex-pats relocate to the city.
Here is an approximate price guide for new or newly renovated apartments in

Warsaw –
Prices are in € per sqm

Two rooms Three rooms Four rooms
Warsaw 1,000 -2,300 1,100- 2,200 1,100- 2,400
centre
Suburbs 620-890 595-850 600-800
11.2.5 How to know if you are paying the right price
Here’s the kind of formula you should apply to check you’re paying the right price
bearing in mind that expected 10%+ yield.
Check that your prospective purchase property will provide the right yield on your
investment
Buy a 70 sq m, two-bedroom apartment for €1,500 per sqm
€1500 x 70 sq m = €105,000
10% yield = €10,500 per annum
10,500 / 12 = €875 per month
So, if your prospective property will not achieve a MINIMUM rent of €875 per
month, then the chances are that the purchase price is too high.
Key Tip
Since 1997, new regulations govern the work of estate agents in Poland.
Penalties for agents, brokers and property managers who act in breach of
the Property Management Act are severe.
Check any practitioner you deal with has a licence – a register is

maintained by the President of the Office of Housing and Urban
Development.
11.3 Poland - How the Property Market works
Buying property in Poland used to be fairly problematic, or at least bureaucratic.

It still can be bureaucratic, but it’s now a lot less difficult.
Things were made easier in 2001, as the government negotiated to join the EU:
attempts were made to bring matters more in line with EU norms.
Now that Poland is a fully fledged member of the EU, there have been further
changes, but not all restrictions have been lifted.
After five years of EU membership, all barriers to acquiring real estate are
supposed to disappear for EU citizens. All restrictions on the purchase of
agricultural land will disappear after 12 years.
There is likely to be some resistance to this within Poland as the subject of

foreigners buying real estate is something of a political hot potato.
As the law currently stands, EU citizens can freely buy property as an investment
without any consent from the Polish government.
The new law, which came into force on May 1 2004 when Poland joined the EU,
does not change the restrictions on agricultural land, however. And a permit is
still required for the purchase of farmland, woodland or a holiday house.
A permit applies to a specific property and is therefore a hindrance if you want to

shop around and move quickly once the right property is located.
To alleviate this, the Ministry will issue a so-called Permit Promise, which is
usually valid for six months and lays out the conditions on which full permit will
be granted. A promise is basically an undertaking that a permit will be issued
unless circumstances alter in the meantime.
It’s worth noting that each purchase of a property will require a permit, and if you
are buying shares in a company that owns a property, you will still need a permit.
The application process will need to be completed with assistance – the
documents must be completed in Polish and translated. Most estate agents can
make the arrangements and the total cost should be under €500.
Other barriers to buying
Anyone considering buying real estate in Poland should also be aware of the
small, but vocal and very real opposition in the country to the idea of foreigners
buying property and especially land.
A lot of this probably dates back to Poland’s long history of being invaded and
treated with disdain by its neighbours.
The political group Samoobrona as well as Polish farmers and many on the right
wing of Polish politics have been especially strident in their predictions that EU
membership will lead to a vast sell-off of Poland’s assets to foreign capital.
Foreign investment in business is one thing, but it is simply not true that foreign
buyers of real estate will find themselves welcome everywhere.
Certainly, on the whole, the welcome is not as warm as in the Czech Republic
and Hungary.
Another negative factor is crime. While, say Prague and Hungary are no more
dangerous than any other big city, Warsaw is in quite a different league.
We’ve already mentioned corruption, but organised crime has also taken hold
and is part of the scene. Warsaw has one of the highest crime rates in Eastern
Europe and car-jacking and street robberies are commonplace.
What about taxes?
The general principle is that foreigners pay the same taxes as Poles, with some
exceptions.
Here’s a breakdown of the most common taxes. The most appealing, to a

foreign investor, is probably Capital Gains.
Tax Details
Corporate income 27% 19% in 2004
Progressive scale of 19%, 30% and the
Personal income top rate is 40% on earnings over
approximately $14,500.
Varies between 3, 7 and 22%. The top
Value Added
rate is the most common.
Tax Details
Rates vary according to the commune
Rates also differ depending on type,
location and use of the property.
As a guide -
Property tax • Residential building €0.08 psm
• Commercial building €2.89 psm
• Plot for commercial purposes
€0.09 psm
• (Some local authorities allow a
reduction of up to 50%)
Property transfer 5% of the market value of the property
Land tax See property tax
Capital gains on real Treated as income and taxed on the
estate same scale
Capital repatriation none
Private owners have to declare rent earned on a property as income and pay a
tax rate according to the amount. In practice, this will almost always put them in
the 40% tax bracket.
Both loan interest and improvements are tax deductible for both corporate and
individual owners.
Note: Poland has tax treaties with over 60 nations, including the UK and the US,
to prevent double taxation.
Other costs
Expect to pay around 8% of the purchase price to buy a property – this will
include the agent’s fee, between 2.5 and 3%, plus the fee for the notary, stamp
duty and so forth.
Obtaining a permit to buy, if necessary, will be liable to stamp duty of

approximately €300 in the case of an individual and €450 in the case of a
company.
Taxes
The buyer of a property is liable to any back taxes remaining unpaid by the seller
that came about through business conducted at the premises, up to the value of
the property.
To prevent this, it is possible to demand from the seller a certificate from the
government stating that no taxes are due, in which case the seller will be exempt
from any liability.
This is a problem in Poland and one that the investor should be wary of.
There is no legislation governing the restitution of private property.
Anyone claiming restitution of a property seized during the communists’ rule in

Poland has to go to court throwing the status of a property into a kind of no-
man’s land. It is vital, then, to have property titles thoroughly checked.
11.4 Poland - Property Finance
It is possible to obtain a loan in Poland for properties that are considered readily
saleable.
The loan to value ratio will vary according to the type of property, but will
generally be between 70 and 80%. Borrowing in most major currencies is also
possible – PLN, Sterling, US Dollars, Swiss Francs and Euros.
The loan rate will generally be similar to rates in the UK, probably around 6% and
up. USD rates are even lower.
Key Tip
As a rule, borrow money in the same currency you’re expecting the

rent to be paid in.
11.5 Poland - Investment Verdict
There are off-putting aspects to investing in Poland, of that there is no doubt.
Warsaw is not a city with the welcome for foreign investors that Prague or
Budapest have. It is also some way behind these two cities when it comes to
aesthetic appeal.
The economy undoubtedly has need of further restructuring and this may be
painful and disruptive in the short, even medium term. It is also likely to meet
some political resistance.
And yet, Poland offers the largest potential of all the accession countries. It is
simply the biggest market.
While the property market grew hugely in the 90s – some estimates say by 500%
both in terms of price rises and number of transactions – many analysts believe
that the real growth is yet to come.
Much of the boom is thought to have been fuelled by Polish émigrés returning to
their homeland either to invest or settle – the Polish population in the US alone is
estimated to be some 6 million people.
Dozens of multinationals already have a presence in Warsaw and more will

certainly follow.
The population is young and the domestic mortgage market has still to develop.
When it does, and the emerging middle class becomes more established – it is
certain to bring about strong upward pressure on property prices.
The number of mortgage loans is already on the increase, but remain along way
behind the potential size of the market.
Mortgage loans outstanding total less than 2% of the country’s GDP, a tiny
amount when compared with the average in Western Europe of 48%.
As such, Warsaw to a great extent and a handful of smaller cities such as

Poznañ, Gdañsk, Kraków, Wrocaw, Katowice/Silesia must be great long-term
investment bets.
But for the time being it is Warsaw where the best investments will be made.
11.6 Poland - Property Links

11.6.1 Real Estate Agents
Site URL
Adam Nowaczyk, Anna Real www.anna.com.pl/
Estate, Poznan
Bioropiotra republika.pl/biuropiotra/
Chemind, Wroclaw www.mikrozet.wroc.pl/~chemind/
Extra Invest Real Estate, www.extra.com.pl/
Szczecin
Interpromo Real Estate Lower www.wroclaw.com/wrocreal.htm
Silesia, Gdansk and Poznan
Krzysztof Sapielak, Poltegor- www.poltegor-eng.com.pl/eng/
engineering Ltd., Wroclaw
Pawel Sztejter, REAS www.reas.pl/
Konsulting, Warszawa
Site URL
Puche and Partner GmbH, www.puche.com/
Zielona Gora
Realnosc, Cracow www.kki.krakow.pl/realnosc/realang.htm
Szmidt Real Estate, Gdynia, www.szmidt.pl/30000000.html
Poland
11.6.2 Others
Site URL
Ministry of Economy www.mg.gov.pl/
Ministry of Finance www.mofnet.gov.pl/
Ministry of Foreign Affairs www.msz.gov.pl/
Polish Official Statistics www.stat.gov.pl/
12. ESTONIA – THE HONG KONG OF EAST EUROPE?
There are a number of factors that make tiny Estonia stand out among the
Eastern Eight.
But what is truly astounding is the extent to which it has managed to turn around
its economy from a Soviet, centrally run monolith into a vibrant, free market in
little more than a decade.
In a school report assessment of each of the accession countries, Estonia would

definitely be at the top of the class, pretty much with straight A’s in all subjects.
It continually won the highest accolades from the EU during its regular
inspections of the accession countries prior to its joining.
And the IMF has called Estonia ‘an outstanding performer among the transition
economies’ and has singled out its commitment to creating a market-driven
economy with minimal government interference as well as building institutions
and a legal framework of high quality.
In many ways, the country's small size and population is both a plus and a minus
– it makes change management easier to effect, but it also makes the country
wholly dependent on its neighbours and trading partners for its success.
It is because of this that the Estonian government has opened up its economy
and turned with whole-hearted commitment to its place in the European Union.
12.1 Estonia - Business & Economic Overview

12.1.1 Estonian politics in a nutshell
• After centuries of domination by foreign powers, Estonia became

independent in 1918;
• It was subsumed by its giant Soviet Union neighbour during WW2 and had
to wait until 1991 to become independent again;
• Invited to join Nato in 2002;
• Parliamentary elections in the spring of 2003 created a conservative

coalition committed to continued reform.
Population 1.4 m
45,226 sq km, which includes more than 1,500
Land mass
off-shore islands
Capital city Tallinn
Borders Latvia and Russia
Coastal influences – wet, moderately cold winters
Climate
and cool summers
The air in parts of the north east of the country is
badly polluted with sulphur dioxide from power
plants.
Notes
Stretches of seawater are badly polluted.
All levels of pollutants have fallen dramatically in

the last few years.
Estonian Kroon (EEK)

Currency
€1 = 15.6 Kroon
4.5%, but 10% in the north-eastern region where
most Soviet-style heavy industries were located.
Unemployment
Unemployment has shown dramatic falls in the last
few years.
GDP $8.4 billion
GDP growth
6% 2003 est.
rate
GDP per head
$6,000
of population
Machinery and equipment, wood and paper ,
Key exports textiles, food products, furniture metals, chemical
products
Engineering, electronics, wood and wood products,
Key sectors of
textile, information technology, telecommunications.
the economy
Service industry makes up 65.6% of the economy
Value of
$3.4 billion (2002)
exports
Key export
Finland 19.2%, Sweden 13.2%, UK 10.6%, Latvia
target
7.4%, Germany 7.2% (2002)
countries
machinery and equipment, chemical products,
Key imports
textiles, foodstuffs, transportation equipment
Value of
$4.4 billion (2002)
imports
Main import Russia 26.6%, Finland 18.9%, Germany 9.2%,
partners Sweden 8.2% (2002)
Government - 0.8 billion $ in 2002, estimate 0.9 billion $ for 2003
budget and rising
Inflation 3.7% 2002
Foreign direct $500 million in 2003 (est.)
investment $355.6 million in 2002
Sweden, Finland, (28.7 %), USA (9.6 %),
Main countries Netherlands (3.9 %), Norway (3 %), Denmark (2.9
of origin %), Germany (2.4 %), United Kingdom (1.9 %).
(2002)
Financial sector (27.9%), transport and
communications (24 %), wholesale and retail trade
Main sectors
(16.8 %), real estate (15.7 %) and production
industry (15.4 %).
Source: CIA World Factbook; Dresdner Bank, Bank of Estonia
• Estonia €443
• EU average €2,335
Source: Eurostat

Source: Eurostat, Statistical Office of Estonia
It is worth noting that the average salary in Estonia is on a steep upward trend –
rising by 8.8% in 2003.
The Estonian Kroon is pegged to the Euro – but in a rather interesting manner.
The Central Bank uses a currency board to maintain control over the exchange
rate – in exactly the same way as Hong Kong’s monetary authority does.
Lithuania uses the same mechanism.
A currency board policy fixes the exchange rate and it only allows a very small
movement from this fixed rate.
The significant fact about a currency board is that for it to be effective the Central
Bank must have sufficient reserves of foreign currency to match its own currency
– or very nearly so.
In Estonia’s case, it has foreign reserves to match 90% of Kroons in circulation.
The board works by automatically selling or buying currency as the local currency
comes under pressure or becomes too strong.
By being able to match like for like, it is almost impossible for speculators to
break the peg because as they attack the money by selling the local currency, so
the bank will buy.
There are, however, two disadvantages to the currency board:
It means that a country is dependent on another’s fiscal policy. In this case,
Estonia’s own fiscal policy must reflect that of the Eurozone, regardless of local
need.
It also means that a country must maintain vast levels of foreign reserves.
Because a currency board means that a country basically gives up any fiscal
independence, it makes it highly dependent on the performance of the economy
of the currency it is linked with – in this case the Eurozone.
However, a currency board does in theory make for a very sound exchange
system and shows a willingness to practice highly disciplined fiscal policy.
It completely prevents the government from simply printing money and therefore
acts as an effective brake on inflation.
As an investor, you know exactly what your Kroons will be worth when you want
to exchange them.
Estonia’s GDP growth rate has maintained a healthy rate of growth despite the
recent sluggish to standstill performance within the EU.
This has been mainly attributed to domestic demand, as exports have been
obstinately sluggish.
Particularly noteworthy is the decline in unemployment from highs of double

figures as recently as three years ago.
The government remains committed to creating an open economy, possibly the

most open in the region, as well as creating an environment that is conducive
and attractive to business.
A strong banking and finance sector has developed, in parallel with, and because
of, an attractive tax regime for business.
Estonia is well poised to become the conduit between Eastern and Western
Europe, the same role Hong Kong has performed for so long between the West
and China’s mainland. Like Hong Kong, it is essentially a duty-free country.
Tiny Estonia, with its liberal business environment, borders the huge market of
Russia, the market of enormous potential within the EU, Poland, with the
economically sophisticated Scandinavian countries to the north.
The effects of FDI and EU money will undoubtedly fuel the growth of an
aspirational Estonian middle class, eager to catch up with its Western
counterparts.
Surveys indicate that 39% of Estonians say they are Internet users and 25% of
Estonians conduct their everyday banking via Internet.
Salaries and GDP are advancing rapidly and there is a strong sense that Estonia
is racing to take its place alongside richer fellow members of the EU.
Estonia is likely to be among the first wave of countries to join the Eurozone.
The government and the EU have agreed that the currency board system is
acceptable as a transition between the Kroon and the Euro.
12.1.7 Problem areas for the economy
The northeast of the country remains a black spot for investment and
unemployment and will take some time to make the transition from heavy
industry to the service and finance centre Estonia seems determined to become.
A growing economic divide is rapidly developing also between the capital and the
rest of the country.
This is the area in which Estonia really shines. It has, without any doubt, the
freest and most open economy of all the Eastern Eight. This makes it a very
exciting investment prospect both for business, particularly finance and banking
organisations, as well as the smaller, private investor.
The Estonian administration realised early on that the tiny country would only
thrive with massive inflow of foreign investments, so it went about creating an
environment conducive to this.
The Heritage Foundation places Estonia in 6th position globally, right up there
with such famously open economies as Hong Kong, New Zealand and
Luxembourg. This places it above both the UK and the United States.
The 2004 report says: ‘Today, Estonia has the most advanced information
infrastructure among the formerly communist Eastern European states…..
‘One of Eastern Europe’s most free-market–oriented economies. Tight budgetary

policies, foreign trade liberalisation, and extensive privatisation are the core of
structural reform.’
On property rights and the law, the report says,
‘Estonia has made significant progress toward establishing an

independent judiciary and protecting private property rights.
‘The US Department of State reports that “Estonia’s efforts to

create a modern, western legal system from the remnants of the
Soviet system is a work in progress.… Estonia’s judiciary is
independent and insulated from government influence.’
Estonia has an open society, but nevertheless still has some problems with
corruption.
Of the eight countries, the Transparency International Corruption Perceptions

Index places Estonia in second place with a score of 5.5, just below Slovenia.
The EU has found corruption to be a problem in the country in terms of:
• Weak law enforcement

• Ineffective anti-corruption institutions
• Corruption in local government
• Corruption in public procurement
• Petty corruption has also been identified within the police and customs
officials
12.2 Estonia - Property Market Potential
The market of interest to investors is that in Tallinn, the capital. In previous years
the city and suburbs have experienced spectacular gains of up to around 30%.
Supply to a certain extent has now moved closer to demand and those kind of
gains are not expected to be repeated in the near future.
Capital growth of between 10% and 15%, perhaps up to 20% is the scenario
most widely predicted. Still very attractive.
New apartments, centrally located rose around 12% in 2003. By the summer of
2003 they reached a level of €900 and €1,900 per sqm, according to Ober-Haus
Real Estate Company.
Prices of older flats in the centre of the Tallinn rose by around 8% to between
€600 and €1,100 per sqm.
Rental yields are also quite attractive – around 8% for new apartments in the city
centre.
But it is widely predicted that rents will come down as the popularity of owning a
property rather than renting one continues to grow in Estonia.
Interest rates have come down dramatically in Estonia and the mortgage market
is continuing to grow. Rates are now down under 5% with maximum credit
periods of 30 years. Loans on offer will now cover up to 90% of a property’s
valuation.
Even so, there is a lot of growth to come in the domestic mortgage market.
Outstanding mortgages in the country total around 6% of GDP, which is around
three times the level in Poland, but still tiny when compared to the average of
48% in Western Europe.
The combination of low interest rates and high salary inflation is likely to fuel
demand for mortgages even further in the next few years. This in turn seems
certain to drive up prices.
Ober-Haus real estate records that developers built 1,100 new units in 2002, and
sold 1,020 in the same period. Another 1,400 units were completed in 2003 and
the same number in 2004.
The agency estimates that Tallinn can absorb up to 2,000 units per year and that
demand for the next two years at least will exceed supply.
12.3 Estonia - How the Property Market Works
As you might expect from the freest economy among the Eastern Eight there are
few restrictions on foreigners buying property in Estonia.
This is a country that seems entirely unfazed by foreign ownership of pretty much
any kind – 75% of banks are now foreign-owned.
Foreigners can buy and sell residential property freely in Estonia. Land can also
be bought, but permission must first be obtained from the local authority. This is
not usually a problem.
There are also restrictions affecting property and land on Estonia’s 1,500 off-
shore islands.
12.3.1 What about taxes and other costs?
The tax system, as you might expect from such an open economy, is quite liberal
and straightforward.
The law allows companies to escape all taxation on profits that are not distributed
– this is to encourage reinvesting. But the no-tax rule applies even if the profits
are simply retained.
There’s no capital gains tax on property, any profit is treated as though it were
income. You therefore pay 26%, although the government is committed to
bringing down this figure to 20%.
Tax Details
26% on distributed profits. Reinvested
Corporate income
profits are tax free until 2009
Personal income A flat rate of 26%
Value Added 18% standard rate
Estonia has a property tax only on land,
Property tax which is from 1 to 2%, depending on the
area of the rateable value of the land.
A fee of 0.075% of sale price to register the
Property transfer
property in the registry.
Capital gains on real Treated as income and taxed at 26%.
estate Loan payments are deductible.
Capital repatriation No restrictions after tax
Double taxation treaties with many countries including the UK and US.
12.3.2 Other costs
You can expect to pay estate agents around 6%, even up to 8% of the purchase
price of a property, and they’ll be charging the seller as well.
Generally, it is well worthwhile driving a hard bargain over this fee.
A notary fee of 0.1% of the sale price of the property.
Lawyer’s fees (a necessary extra), are on top.
12.3.3 The best way to buy - how to set up a company in Estonia
As we can see from the above categories, corporate taxation is the most
appealing as there is no profit tax until profits are distributed. In other words
reinvested profits are not taxable if the company is registered in Estonia.
Basically, if you own a property and rent it out it is far more efficient to do so
through the formation of a company, which will allow many deductions against
tax. Company taxation is the flat 26%.
12.3.4 How to establish a new company
Firstly, a foundation agreement must be established. The government advises

the following:
That a bank account in Estonia is opened and a foundation agreement is set up -

which is simply a statement of the company’s name and other details such as the
names and personal details of the founders and the amount of share capital, etc.
There are different types of company but a plc – private limited company has to
offer share capital of at least (approx) €2,700.
The company must be registered in the Commercial Register within six months of
the foundation agreement being established. This normally takes only around
two weeks.
Different fees will apply depending on the type of company, but a plc involves
0.2% of the nominal share value, with the minimum being €192.
The golden rule is – hire an accountant and a lawyer.
This is a non-issue in Estonia. There are no pending disputes or restitution

cases. Communal property has been returned to religious organisations, all
private claimants before the deadline have been able to reclaim their property.
Heirless property passes to the local authority which is entitled to sell it.
12.4 Estonia - Property Finance
Generally speaking, it is not possible to get finance for property purchase in

Estonia unless you are officially resident. This situation is highly likely to change,
however.
Some banks do give a guardedly positive response to inquiries from foreigners,

but it is clearly not a market that is developed.
This has a severe dampening effect on the appeal of the market, and yet, it might
well be worth buying now through re-mortgaging an existing property and then
mortgaging in Estonia when loans are more readily available.
On the whole it appears that many Estonian banks are unprepared for inquiries
and respond that every case will be decided on its merits.
In other words it is possible to get a loan and be non-resident…sometimes.
Either way, in general, you will not be able to borrow more than 75% of the value
of the property if it is under five years old and not more than 70% if it is older.
The law does not allow lending above an 80% loan to value ratio.
If you’re a non-resident, you will have to work quite hard to persuade the bank of
your impeccable financial credentials.
Things are starting to change, however, and as most Estonian banks are now
owned by big Swedish financial organisations the pace of change can be
expected to increase.
12.5 Estonia - Investment Verdict
Most of the above paints a pretty positive picture of Estonia. It isn’t all so.
Bear in mind that between the spring of 1998 and spring 1999, real estate prices
went down by up to 20%, except in one or two isolated pockets.
This was mainly due to economic factors outside the country having a profound
effect – in this case it was the Russian currency crisis.
Even though Estonia has turned its trade direction around and relies far less on
Russia and far more on the EU, it was still severely affected.
This is the price Estonia can pay by being so small and so open an economy that
relies on trade and creating attractive conditions for inward investment. If an
economic storm blows up around it, it can get badly buffeted.
By the spring of 2001, the economy – and the real estate market – had recovered
and prices stabilised at their pre-fall level.
In the long term, Estonia is a country that seems to know where it is headed. Its
economy has a clear character – open, low taxes, business-friendly – and as
such it is likely to be a winner in attracting increasing amounts of investment
capital. This will drive up property prices.
But what else makes Estonia stand out?
Its currency policy makes wild fluctuations virtually impossible, it has a well-
educated (but still relatively cheap) workforce, English is widely spoken and most
business dealings are in English, it has a simple and relatively low tax system.
As a member of the EU, Estonia – along with other Baltic states such as Latvia –
is well-placed to take up the role of conduit between Eastern and Western
Europe. Estonia borders the three markets of Scandinavia, Poland and Russia.
Estonia has become and will continue to develop as an international transit

centre – the eastern-most EU state bordering Russia.
As with other Eastern Eight countries, the strong emergence of a young,

relatively affluent and aspirational middle class in the country will drive up
demand for good quality yet affordable housing.
To this end the availability of domestic credit – mortgages – will be vital.
And in Estonia the availability of mortgage credit has grown rapidly. Interest
rates have plunged from 13% in 1997 to under 4% in 2003.
Just as vital is the willingness of lenders to increase loan to value ratios. In

Estonia it is now possible to borrow up to 95% of a property’s value.
These two changes – a lowering of interest rates and a rise in loan to value ratios
– mean that the Estonian real estate market increasingly resembles that in
Western Europe.
Steady price growth can be expected over the next few years, especially in
Tallinn – double digits, certainly, but probably not the growth seen post-
communism when lack of supply sent prices soaring by up to 30%.
This all adds up to a very attractive target for the property investor.
Key Tip
Parnu, known as the summer capital of Estonia, is worth looking at for

an investment. This vacation area has always been popular, but
increasing affluence is likely to put a premium on leisure and the
accommodation that goes with it.
12.6 Estonia – Links

12.6.1 Legal
Site URL
Baltic Legal Updates – Sorainen www.sorainen.ee/
Law Offices
12.6.2 Tax
Site URL
TaxUp.com www.TaxUp.com
12.6.3 Others
Site URL
Tourist Board www.visitestonia.com/
Estonia search portal www.ee/www/welcome.html
Site URL
Baltic Sea States SME www.balticmarket.org/
Information Site
Estonia at a Glance www.vm.ee/eng/estoday/1999/01brief.html
Estonian Economy www.vm.ee/eng/kat_198/
Economy Reviews www.fin.ee/pages.php/011808
Ministry of Economic Affairs www.mkm.ee/eng/
and Communications
Ministry of Finance www.fin.ee/?lang=en
Ministry of Foreign Affairs www.vm.ee/eng
Statistical Office of Estonia www.stat.ee/index.aw/set_lang_id=2
Enterprise Estonia www.investinestonia.com/
Estonian Trade Promotion www.export.ee/index_eng.php
Agency
Estonian Trade Council www.etc.ee/en/
Estonian Chamber of www.koda.ee/e_index_en.html
Commerce and Industry
12.6.4 Property agents
Site URL
Arco vara www.arcovara.ee/
FKSM Real estate development www.fksm.ee/
Kinnisvaraepert www.kve.ee/
M.S.I. Group www.msigrupp.ee/
Ober-haus www.ober-haus.com/
Tolaram Group (real estate www.tolaram.ee/realestate/
development)
UusMaa www.uusmaa.ee/english_index.html
12.6.5 Loan providers
Site URL
Hansabank www.hansa.ee/en/
Eesti Ühispank www.eyp.ee
Sampo Bank www.sampo.ee/eng/
Nordea Bank www.nordea.ee/eng
Krediidipank www.krediidipank.ee
Balti-American Enterprise Fund www.balaef.ee
13. LITHUANIA – THE HIDDEN GEM
So far the countries we’ve looked at are reasonably familiar to an averagely

informed person. For most people things generally become a little hazier when
we reach Estonia. By the time Lithuania comes along, they’re lost.
And yet Lithuania has a great deal to offer investors, both private and corporate.
Certainly, it is one of the post-Soviet success story countries.
It’s the biggest by some way of the Baltic three (Estonia, Latvia and Lithuania),
but it is selling itself as an investment location in the same way as Estonia –
emphasising its role as a link between Europe and the CIS.
While stressing how cheap it is to do business in the country, it wants the world
to know that it is looking towards the future by developing e-commerce and a
knowledge-based economy.
While it may feel less secure to make an investment in Lithuania than in, say, the
Czech Republic, it is arguable that it really is no less safe. Lithuania is nowadays
a very stable country, politically and economically.
13.1 Lithuania - Business & Economic Overview
13.1.1 Lithuanian politics in a nutshell
• In March 1990, Lithuania became independent
• It joined the UN in 1991
• The last Russian troops left in August 1993
• In 1996 a pro-business coalition comes to power
• 1998 - Becomes associate member of the EU
• 2001 - Lithuania joins World Trade Organisation
• 2003 January 5 - former businessman, professional pilot and the leader of

the Liberal Democratic Party, Rolandas Paksas elected President
• 2003 - 91% of Lithuanians vote in favour of EU membership

Capital city Vilnius
Borders Belarus, Latvia, Poland, Russia
Wet, moderate winters with below-freezing
Climate
temperatures, and pleasant warm summers.
A lot of land near old military bases contaminated by
Notes oil and chemicals.
Litas (LTL)
Currency
€1 = 3.45 LTL
This has been a massive problem in Lithuania, but
Unemployment
the rate is now down to around 10%
GDP $29.2 billion 2002
GDP growth Estimated to be around 8% in 2003, the fastest
rate growing in Europe
GDP per head
$8,400 (2002)
of population
Machine tools, electric motors, white goods, oil
refining, shipbuilding (small ships), furniture making,
Key sectors of
textiles, food processing, fertilisers, agricultural
the economy
machinery, optical equipment, electronic
components, computers, amber
Mineral products 23%, textiles and clothing 16%,
Key exports machinery and equipment 11%, chemicals 6%,
wood and wood products 5%, foodstuffs 5% (2001)
Value of
$7.2 billion
exports
Key export UK 13.5%, Russia 12.1%, Germany 10.3%, Latvia
target 9.6%, Denmark 5%, Sweden 4.2%, France 4.1%,
countries Estonia 3.8%
Mineral products 21%, machinery and equipment
Key imports 17%, transport equipment 11%, chemicals 9%,
textiles and clothing 9%, metals 5% (2001)
Value of
$6.8 billion f.o.b. (2002 est.)
imports
Main import Russia 24.1%, Germany 20.3%, Italy 5.9%, Poland
partners 4.3% (2002)
Government -1.2% of GDP in 2002, small surplus possible in
budget 2003
Inflation 0.8%
Foreign direct
$700 million 2003 (est.)
investment
Main countries Denmark (18 %), Sweden (16.1 %), Estonia (10 %),
of origin Germany (9.2 %), USA (8.3 %).
Manufacturing industry, financial sector,
Main sectors
telecommunications and IT-sector.
• Lithuania €332
• EU average in Western Europe €2,335
Source: Eurostat
Hourly labour cost in industry
€2.71
and services
Pre-2004 EU member states’
€22.70
average
€402
employee
Pre-2004 EU member states’
€3.169
average
Source: Eurostat
Labour costs in Lithuania are the second-cheapest among the Eastern Eight,
second only to Latvia.
Like the currency policy in Estonia, Lithuania also operates a currency board – a
harsh regime that dictates a high degree of fiscal discipline on the government
and Central Bank.
The board works by automatically selling or buying currency as the local currency
comes under pressure or becomes too strong.
Lithuania’s currency, the Litas is currently pegged to the Euro at a rate of 3.4528
to €1.
By being able to match like for like, it is almost impossible for speculators to
break the peg because as they attack the money by selling the local currency, so
the bank will buy.
There are, however, two disadvantages to the currency board:
It means that a country is dependent on another’s fiscal policy. In this case,

Lithuania’s own fiscal policy must reflect that of the Eurozone, regardless of local
need.
It also means that a country must maintain levels of foreign reserves to match
note for note the amount of domestic currency in circulation.
Because a currency board means that a country basically gives up any fiscal
independence it makes it highly dependent on the performance of the economy
of the currency it is linked with – in this case the Eurozone.
In Lithuania’s case (and Estonia’s for that matter), this is hardly relevant, as both
countries want to adopt the Euro in 2007 anyway.
A currency board does in theory make for a very sound exchange system and
shows a willingness to practice highly disciplined fiscal policy.
It completely prevents the government from simply printing money and therefore
acts as an effective brake on inflation – note Lithuania’s very low rate of inflation.
As an investor, you know exactly what your Litas will be worth when you want to
exchange them.
Lithuania’s prime minister has confidently predicted Lithuania can maintain its
title as the fastest-growing economy in Europe.
This may or may not turn out to be accurate when all the calculations are in. But
it hardly matters. The fact is that Lithuania has a very impressive economic
performance.
It has almost completely shed the vestiges of a centrally controlled economy and
more than 80% of GDP is now produced by the private sector.
As with Estonia, the economy remains vulnerable to the strengths and

weaknesses of its big neighbour, Russia.
The 1998 Russian currency crisis had a profound effect on the economy, sending
it into a downturn. The biggest effect was on the jobs market – unemployment
rapidly increased to 14% and kept going. In 2001, the rate reached its highest
point - 17.4%. It is now around 10%.
Trade with Russia has revived somewhat in the last couple of years.
The government’s current account deficit has been brought down dramatically
too, from 11% just four years ago to a deficit of 1.2% of GDP in 2002.
13.1.7 Economic problems ahead?
All in all, it has to be said that once-sleepy and largely unnoticed, little Lithuania
is something of a star performer.
It is, of course, as an open and relatively small economy, very susceptible to

external shocks, particularly slowdowns in the EU and in Russia.
In the future, however, the economy is likely to rely less on export-driven growth
and more on domestic demand as salaries grow and a more consumer-oriented
society develops. This is excellent news for the property market.
Second to Estonia in the Heritage Foundation’s rankings, Lithuania has an

overall placement of 22nd globally.
Its scores are dragged down by criticism of a weak judiciary and, while it is
relatively easy to set up a business, there is too much red tape governing its
operation.
The Transparency International Corruption Perceptions Index 2003 ranks

Lithuania in 4th place behind Slovenia, Estonia and Hungary out of the Eastern
Eight and 41st place globally.
Public administration is one area singled out for concern by the Open Society.
As with all the Eastern Eight, it seems that a level of corruption can be expected
– at least until society becomes affluent enough to decide such practices are not
economically necessary.
13.2 Lithuania - Property Market Potential
The property market really began in Lithuania in 1991 when the government
passed a law allowing people to buy their state-owned flats.
Since then, apart from the black spots in the economy’s growth mentioned
above, property prices have risen fairly relentlessly – by about 100% in the last
decade.
There was a blip in the market by what we might call an exceptional item – that
was when the Soviet army left the country in 1993 and left behind many vacant
apartments.
For the foreign investor, Vilnius, the capital is probably the best focus. Here
agents are more likely to speak English and may have dealt with foreign
investors previously.
Like Estonia and Latvia, Lithuania has a well-established property system with
efficient registration of ownership of property and land.
Most predictions are that the residential market in Lithuania will assume far
greater importance to developers in the next few years – as it will in the two other
Baltic States.
The main reason for this is increasing demand and a lack of good quality housing
stock.
Renovation is likely to become big business.
Mortgages, as a percentage of GDP are the lower in Lithuania than in any of the
other Baltic States - about 1.4% of GDP, which works out to be under €100 per
capita. The mortgage market has very large potential and is likely to grow with
increasing affluence.
13.3 Lithuania - How the Property Market Works
There are no restrictions on foreigners buying property in Lithuania, only land

purchase.
But a new law introduced in 2002 allows EU citizens who are establishing a
business in the country to also buy land. Land can also be bought by an
individual but only with permission from the local authority.
Agricultural land will be excluded for seven years after Lithuania joins the EU.
Tax Details
Corporate
15%
income/profits tax
Personal income 15% for non-residents on property income.
Value Added 18%
Property tax 1% of book value
Property transfer 1-3% depending on the value of the property
Land tax 1.5% of book value
Capital gains on real
15%
estate
Capital repatriation none
Most property that can be returned to valid claimants has been returned.
Approximately $500m worth of restitution claims remain, however, and will have
to be settled either by compensation or by handing over alternative premises.
The government has set itself the target of settling all claims by 2011.
The deadline for restitution claims passed at the end of 2001.
13.4 Lithuania - Finance Availability
Obtaining finance from lending sources in Lithuania is non-existent for foreigners

unless they have first obtained residency.
It is hard to see how this state of affairs can continue for long. Increased
competition in the domestic mortgage market will likely result in availability of
more flexible loans.
As things stand, however, finance for property purchase must come from your
home country – extremely difficult – or from the re-mortgage of a main residence.
Either that or a property can be bought with capital in the expectation that within
a few years a mortgage will be obtainable.
This lack of available finance both within the country and outside is undoubtedly
a severe disincentive for the private investor, at least in the short term.
13.5 Lithuania - Investment Verdict
Despite the lack of available finance for an investment in Lithuania, there are
good reasons to see the market in an extremely positive light.
It is undoubtedly at a lower base than most of the other accession countries, and
yet the country’s economy is growing fastest.
As yet, the aspirational middle-class has yet to emerge in a way that has a
profound effect on the property market. But, if current trends continue, a
profound effect will be felt within just a few years.
Property prices then will soar.
Lithuania also looks set to be one of the first countries into the Eurozone. This
will have a marked effect on lenders’ attitudes to the residential property market,
as well as encouraging interest from more buyers.
For those prepared to take a slightly longer view of their property investment,
Lithuania could well be a terrific choice.
You will certainly find willing and English-speaking estate agents to help you
enter the market – just not many of them.
Prices
In 2002, sales of land parcels for family houses in Vilnius went up by 9.5%.
The average price was €19.48 per sqm. Compared to 2001, that’s an increase of
23%.
According to leading estate agents Ober-Haus, prices of new apartments have

more recently been rising by 5 - 10% a year.
New units in the city centre cost from €650 to €1000 per sqm. New units in the
suburbs cost €600 to €800 per sqm.
Yields have generally been falling for the last few years as rents have not kept
pace with real estate price rises, but yields of between 8 and 14% are still
achievable with new, central apartments.
The monthly rent for a nicely furnished, 60-75 sqm flat in the centre of the city will
achieve between €500 and €700 per month.
The most popular area for new modern apartments remains the Zimunai suburb
of Vilnius.
Most experts agree that conditions are in place to drive prices considerably
higher. The per capita living area in Lithuania is 22 sqm – half the average of
Western Europe.
In the family home area of the market the biggest demand, say Ober-haus, is for
120-200 sq m properties. Within the city, such properties cost from €110,000 to
€140,000. In the suburbs prices fall quite dramatically - €55,000 to €110,000.
The areas most in demand are Antakalnis, Turniðkës, Valakampiai, Gudeliai,

Baltupiai and Jeruzalë. The prices there start from €300,000 for 200-300 sqm
houses.
The market is being fuelled by growing mortgage lending. But, as mentioned

earlier, the mortgage market is still in its infancy in Lithuania, representing only
1.5% of GDP compared to the Western European average of around 48%.
With interest rates down to 4.5%, Ober-Haus predicts some €940 of increased
lending coming into the market in the next few years.
The bottom line is that Lithuania has all the right ingredients for excellent growth.
Prices still lag a long way behind the Czech Republic and Hungary, and even
some way behind Estonia.
And yet Lithuania is a bit of an unknown quantity to many people and it still
represents risk to many investors. This is really a false perception. The economy
is well-managed, business likes the conditions and the workforce is young and
well educated.
An even stronger, more demanding middle class is certain to emerge in the next
few years.
If you get in now, you will be getting in early.
13.6 Lithuania - Links
Site URL
Central Mortgage Office www.lhr.lt/LimoE/e_main.htm
General Information www.online.lt/
Laws and regulations www.lrs.lt/
Doing Business in Lithuania www.lpvp.lt/book
Investing in Lithuania www.lda.lt/
Travel Info www.travel.lt/
Video views of Vilnius www.onvideo.lt/
State Land Cadastre www.kada.lt/
13.6.1 Agents
Site URL
Oberhaus oberhaus.lv.halo.ee/en/first
Regional listings of sales www.alytusregion.com/property.phtml
14. LATVIA – THE JEWEL IN THE BALTIC CROWN
Does Latvia – sandwiched between Estonia to the north and Lithuania to the
south – really merit the jewel in the crown title?
Well, for property investors, the answer is unhesitatingly, YES!

In fact, it’s quite possibly the outstanding Baltic country from an investment
viewpoint.
In a short while we’ll look at why this is so. But first let’s learn something about
the country and take a look at its economic and political state of health.
14.1 Latvia - Business & Economic Overview
14.1.1 Latvian politics in a nutshell
The Republic of Latvia was established as a parliamentary democracy in 1918,

and elected four Saeimas (parliaments) before the onset of World War II.
At that time it had a standard of living comparable at that time to Finland and
Denmark.
The Soviet Union occupied Latvia in 1940.
In 1990, while still under Soviet rule, Latvians elected a majority of pro-
independence deputies to the Soviet parliamentary body.
The Soviet government in Moscow refused to recognise a declaration of

independence and in 1991 attempted to overthrow the elected parliament.
Massive peaceful demonstrations halted Moscow’s attempts to bring Latvia to

heel.
On March 3 1991, 87% of all residents took part in a referendum on

independence. 73% voted in favour, even though ethnic Latvians made up only
some 53% of the population.
In 1991 Latvia declared full independence following the collapse of the Soviet
Union. Elections were held the following year.
67% of Latvians voted for EU membership in 2003 – one point higher than
Estonia but still one of the least enthusiastic votes in favour of joining the EU.
Population 2,348,784
Capital city Riga
Borders Belarus, Estonia, Lithuania, Russia
Climate Maritime with wet and cool winters
Main environmental problem is improvement of
quality of drinking water and treatment of
sewerage.
Notes
Latvia has committed to implementing all EU
environment directives by 2010.
Currency Latvian Lat (LVL)

Unemployment 7.5%
GDP $9.6 billion
GDP growth rate 5.5%
GDP per head of
$4,121
population
Vehicle manufacture, synthetic fibres, agricultural
machinery, fertilisers, washing machines, radios,
Key industries
electronics, pharmaceuticals, processed foods,
textiles.
Key commodity wood and wood products, machinery and
exports equipment, metals, textiles, foodstuffs
UK 21.6%, Sweden 13.1%, Germany 12.5%, US
Key export target
6.4%, Lithuania 5.9%, Russia 4.6%, Estonia
countries
4.2%, Denmark 4% (2002)
machinery and equipment, chemicals, fuels,
Key imports
vehicles
Value of imports $3.9 billion. (2002 est.)
Germany 17.9%, Russia 15.1%, Finland 6.6%,
Main import
Lithuania 6.4%, Sweden 5.5%, Italy 4.8%,
partners
Estonia 4.8% (2002)
Government
-$0.8 billion
budget
Inflation 2.5%
Foreign direct $400 million 2003 (est)
investment $445 in 2002
Germany (12.6 %), Sweden (12.4 %), Denmark
Main countries of (10.7 %), Finland (6.7 %), USA (8.9 %), Norway
origin (6.4 %), Estonia (6.2 %), Russia (5 %),
Netherlands (4.7 %), United Kingdom (4.1 %).
Real estate (20.7 %), wholesale and retail trade
(19.4 %), financial sector (16.5 %), manufacturing
Main sectors
industry, especially textile industry (16 %),
transport and communications (14.1 %).
• Latvia €266
• Western European average €2,335
Source: Eurostat
Hourly labour cost in industry

€2.42
and services
Member states’ average €22.70
€374
employee
Source: Eurostat
Labour costs are the cheapest of all the Eastern Eight countries.
Since 1994 Latvia has practised an exchange rate policy based on special
drawing rights (SDR). This is in effect a lump sum of money provided to Latvia
by the International Monetary Fund to supplement its own reserves of foreign
currency.
This bank of money enables the Latvian Central Bank to intervene on world
markets and buy its own currency in order to maintain a stable exchange rate.
The SDR is made up of a basket of currencies determined by the IMF. It reviews

the weighting of each currency every few years. At the moment, the weighting is
US$ (44%), € (31%), Yen (14%) and £ (11%).
Latvia’s Central Bank then fixes the Lat against this basket of currencies and
allows a deviation of just 1% either way before it intervenes to bring the currency
back in line.
The Lat rose by 13% against the Euro and in 2000 and 2001 it rose in value
against the Euro by 2% and 3.6%.
More recently, however, it has entered a decline against the Euro, which has
been largely due to the falling value of the dollar and sterling against the Euro
(both currencies are in Latvia’s exchange basket).
The big advantage of the SDP system of currency fixing is that it very effectively
prevents excessive government spending – and excessive government spending
is a problem for many of the Eastern Eight countries.
In fact, unless it is brought under control in some countries it will inhibit FDI and
delay entry into the Eurozone.
14.1.6 Economic overview and prospects
Like its Baltic state neighbours, Latvia was badly hit by the Russian financial
crisis in 1998. Since then the economy has recovered strongly, mainly (like both
Estonia and Lithuania), by re-orientating its economy towards the EU rather than
Russia.
Privatisation is almost complete in the country, but the government still controls
or holds large stakes in a number of companies.
Nevertheless, Latvia has the dubious distinction of being, by most measures, the
poorest country in the Eastern Eight, after Lithuania.
The Irish model of stupendous growth following EU membership has perhaps

been overdone in recent years – nevertheless it is worth pointing out that when
Ireland joined the EU it was the poorest member. Even a decade ago it was its
fourth-poorest. Now it is one of the richest.
This is Latvia’s challenge. And, of course, the fact that prices are at basement
level indicates a potential golden opportunity for the investor. The question is:
are the right ingredients present to signal a boom in economic growth?
One excellent positive indicator of how well the economy will develop can be
seen if the pattern of FDI in Latvia is examined.
According to Alf Vanags, director of the Baltic International Centre for Economic
Policy Studies (BICEPS), most of the existing FDI is what he calls the horizontal
type. This means ‘multi-plant foreign enterprises seeking to reproduce another
plant for the Latvian market.’
Examples are financial services, telecoms, retailing and hotels.
This kind of investment differs greatly – and shows a commitment to the growth
potential of a country – to what Mr Vanags calls ‘vertical’ investment.
This is simply where companies have invested in the cheapest production centre.
And, as we said before, the countries that will grow and continue to see an
increase in wealth long term, will be those that most rapidly and effectively move
away from selling themselves simply as cheap sources of labour and cheap
places to do business.
Cultural and language links make Latvia an ideal place for Russia to use as an
entry point to the EU, which means targeting investments in the country.
The challenge for Latvia will be to continue to create an economy geared towards
making business and investment easy, and tax and red-tape friendly.
According to the Heritage Foundation rankings, Latvia comes third amongst the
Eastern Eight behind Estonia and Lithuania.
Red tape, a weak judiciary and a thriving grey market are where Latvia is let
down most.
Nevertheless, there are few restrictions on foreigners doing business in Latvia –

with notable exceptions such as banks, airlines, broadcasting and insurance.
Restrictions on the ownership of real estate were pretty comprehensively done

away with in 1996.
The Transparency International Corruption Perceptions Index 2003 ranks Latvia

in 57th place globally, just below the Czech Republic and on a par with Jamaica.
That puts it in 6th place out of the Eastern Eight.
Globally this is modestly better than just a couple of years earlier and is evidence
that attempts to combat graft are having an effect. In 2001 Latvia was ranked in
59th place.
Even so, the problem appears to be considerably worse than in, say, Estonia and
Lithuania.
Public administration has been picked up by various reports and by the EU as an

area of concern for petty corruption.
Cronyism and the taking of outright bribes in business transactions have also
been noted.
14.2 Latvia - Property Market Potential
For many investors, the idea of buying property in Latvia as an individual,

perhaps like the idea of investing in Lithuania, is the equivalent of skiing off-piste:
a bit of a leap into the unknown, a little dangerous, but with a potentially thrilling
payback.
The facts are really rather different.
The payback is potentially accurate, but the risks are less than might be
imagined.
Latvia is actually a pretty stable investment country with laws designed to open
the real estate market to foreigners.
The most common complaint heard is that there is a lack of information about the
property market.
This is changing with a considerable increase in the number of active real estate
agents on the scene.
The property market still centres on Riga, Riga district and Jumala. This is where
price rises have been most dramatic.
Restrictions on foreigners buying land remain, but they are few and involve, for
the most part, obscure circumstances or specific areas.
The main restriction involves agricultural land and forestry.
The big advantage of the market is actually the lack of restrictions on foreigners
buying, the availability of finance and the fact that Latvia still represents great
value for money.
The suburbs of Riga showed spectacular growth during 2003 – Ober-Haus

reports gains of 30-40%!
Prices in the centre of Riga grew at a respectable 7-15%.
Ober-Haus reports that prices of older apartments in the suburbs vary between
€350-€600 per sqm. Sellers of old apartments tend to stick to the old habit of
quoting prices in US$, while sellers of new apartments now quote in LVL.
Outstanding mortgage loans in Latvia total only some 2.6% of annual GDP,
which means the market has huge room to grow.
Ober-haus property agency – one of the most active in the region - predicts
over €650 million of increased lending coming to the Latvian housing market over
the next couple of years.
There are essentially three areas to the rental market, all of which are mainly
aimed at expatriates.
The Old Town (€8-€10 per sqm monthly), the Silent Centre (€7-€9 per sqm
monthly), and the City centre for €6-€8 per sqm monthly.
The average residential investment yield is around 10% to 12%.
And the strongest demand, according to Ober-Haus, is for one and two-bedroom
apartments, of between 60-75 sqm, costing between €800 and €1,000 per month
to rent.
14.3 Latvia - How the Property Market Works
Like Estonia, Latvia has one of the most open property markets. All foreigners
are free to acquire real estate and even land if permission is obtained first.
Unlike many of the other Eastern Eight countries, there is actually a

disadvantage to buying through a company, and that disadvantage comes in the
shape of a 25% capital gains tax on property when you sell as a company. If you
hold your property as an individual for 12 months then there is no capital gains
tax (see 12.3.1)
Furthermore a company is obliged to charge VAT on rental income over €15,000

per year.
Individual investors declare rent as ordinary income and are taxed accordingly at
the standard rate of 25% a year.
Loan interest and improvements are tax deductible.
There is no capital gains tax for private investors if they hold their property for
more than one year, otherwise they pay 25% of any capital gain.
Latvia also has a tax of 25% of any payment to a territory designated a tax
haven.
Investing in real estate through the establishment of a private company is of

course possible – but direct investment has the huge advantage of being exempt
from capital gains if the property in question is held for a year.
Tax Details
Corporate rents on real estate 15%
Personal income 25%
Value Added 18%
Property tax 1% of value of land and buildings
Stamp duty varies between 0.5%
Property transfer and 3% of the value of the property
and is capped at LVL 50,000.
Land tax See property tax
Tax Details
None for individuals if property is
Capital gains on real estate
held for more than a year
None, subject to condition about tax
Capital repatriation
havens mentioned above.
14.3.2 Other costs
A notary fee will be a flat rate, usually around €400 and, of course, the standard
percentage fee to the estate agent, paid by both buyer and seller – probably
around 5%. Always try and bargain over this.
If the agent boasts that there is ‘no fee’ you can be assured it’s included in the
price of the property!
Virtually all private and communal property restitution problems in Latvia have
been resolved.
Latvian law allows property and land illegally confiscated from original owners to
be returned and this is regardless of the nationality of the claimant.
In cases where it’s impractical to return a property, compensation can be paid.
But this is not a problem the real estate investor is now likely to encounter in
Latvia.
14.4 Latvia - Finance Availability
The Rietumu Bank (mortgage.rietumu.com) for example, will provide mortgage

loans to non-residents at rates of around 5%.
The actual rate depends, as the bank states:
‘The rate depends on the quality of the mortgaged property, its

price, location, term of the loan and sources of income of the
applicant.’
The maximum loan period on offer is 20 years and the loan to value ratio can be
up to 85% of the market value.
14.5 Latvia - Investment Verdict
OK, so it doesn’t have the familiarity of Prague or Budapest. It hasn’t yet been
sold as a super-open, potentially booming economy like Estonia. And, along with
Lithuania, it might be the poorest new kid on the block.
But, if you put aside these facts for a moment and look at the key elements, how
can anyone overlook Latvia?
Let’s summarise those element in the different categories:
Economy
• 5%- 6% GDP growth
• Stable currency
• Government spending under control
• Super low wages means basement level opportunities
• Relatively low unemployment
Property market
• Excellent prospects for capital growth - some suburbs of Riga, the

capital, prices have gone up by 30-40% in a single year
• Prices up by 15% a year in the city centre.
• 10-12% yield on 60-75 sqm two bed apartments
• Finance available at reasonable rates and with good LVR for reasonable
payback periods.
Tax
• Simple system
• Low rate of 25% on rental returns
• No capital gains
It’s the Latvian government’s avowed intent to raise the population’s standard of
living and Latvia is likely to see massive injections of EU cash to make this
happen.
Economic growth in 2004 was around 7% - phenomenal growth!
Latvian real estate – retail, offices and industrial – remains the most popular
target of FDI (over 20%).
In just about every way the market is at basement level. If you believe the
evidence adds up to an administration that can maintain fiscal discipline and
devotion to a free market, it can only be a matter of time until Latvia starts to
catch up.
14.6 Latvia – Links
14.6.1 Finance and economy
Site URL
Bank of Latvia www.bank.lv/
Parex Bank www.parex.lv/1/
Paritate Bank www.paritate.lv/
Rietumu Bank www.rietumu.lv/lvl.nsf
Rigas Komercbamka PLC www.rkb.lv/
Trust Commercial Bank www.tkb.lv/
14.6.2 Estate Agents
Site URL
Apartments/Land www.ltn.lv/~ilmarsm/apartm.htm
Bizzz.com Global Real www.bizzz.com/photoads7/viewads.html
Estate
Latvia: Real Estate www.mac.doc.gov/eebic/countryr/latvia/market
Market /estate.htm
Magda Ltd. - Real www.magda.biz.lv/english/index.htm
Estate Agency
Real Estate Database in www.jums.lv/
Latvia
Real Estate in Kurzeme, www.kurland.lv/index.php?lang=eng
Latvia
Real Estate In Latvia www.binet.lv/english/estate/realest.htm
Real Estate www.pimps.com/latvia/
Opportunities in Latvia
Realty.lv www.realty.lv/eng/
Sirta, SIA www.sirta.lv/
Domuss www.domuss.lv/index.html
14.6.3 Other Links
Site URL
The Latvian Institute www.latinst.lv/li_eng_facts.htm
President of the Republic of www.president.lv/index.php
Latvia
Parliament (Saeima) of the www.saeima.lv
Republic of Latvia
Cabinet of Ministers of the www.mk.gov.lv/index.php/en
Republic of Latvia
Ministry of Finance www.fm.gov.lv/page.php?id=8
Ministry of Economics www.lem.gov.lv/En/
Ministry of Foreign Affairs www.am.gov.lv/en/
Financial and Capital Market www.fktk.lv/en/
Commission
Central Statistical Bureau of www.csb.lv
Latvia
Latvian Development Agency www.lda.gov.lv/
Riga Stock Exchange www.rfb.lv
Latvian Privatization Agency www.lpa.bkc.lv/
Credit Institutions in the www.fktk.lv/market/credit/banks/
Republic of Latvia
15. SLOVAKIA – OUT FROM THE SHADOWS
Long overshadowed by its more affluent neighbour and erstwhile national

partner, The Czech Republic, Slovakia is finally emerging as an attractive
investment and tourist destination.
With Slovakian airline Sky Europe, the first low cost airline in Central and Eastern
Europe, now flying to Bratislava from many European destinations, the country’s
tourist trade seems certain to grow.
Slovakia, which peacefully separated from the Czech Republic in 1993, was
saddled with many Soviet-style heavy industrial plants and transforming its
economy into a market-driven, modern, forward-looking EU candidate has not
been without cost.
The most notable burden is extremely high unemployment.
Now, however, Slovakia is starting to bring about changes to attract more foreign
investment, tourism and, specifically, investment in car manufacturing – some
10% of Europe’s cars are now manufactured within 180 km of Bratislava.
Volkswagen is one of the biggest investors and has switched production of the
Seat Ibiza from Spain to Slovakia – cheaper production costs and less-unionised
labour are believed to have been key factors.
VW has actually become the country’s largest single private employer – some
9,300 people work at the company’s Bratislava plant, which makes the Golf, Polo
and Touareg. Porsche also makes parts in Slovakia.
15.1 Slovakia - Business & Economic Overview

15.1.1 Slovakian politics in a nutshell
• In 1918 the Slovaks joined the closely related Czechs to form

Czechoslovakia
• After WW2 Czechoslovakia became a communist state under the rule of

the Soviets
• Soviet rule collapsed in the 1989
• The country was invited to join NATO in 2002
• In May 2003 Slovakians took part in a dramatic referendum to join the EU

– there was a turnout of only 52%, 2% more than the minimum. But 96%
voted yes.

Land
48,845 sq km
mass
Capital
Bratislava
city
Austria 91 km, Czech Republic 215 km, Hungary 677
Borders
km, Poland 444 km, Ukraine 97 km
Climate Continental - cool summers, cold, cloudy, humid winters
Air pollution from metallurgical plants presents human
health risks
Notes
Acid rain damaging forests
Slovak koruna (SKK)

Currency
$1 = 32.78 skk
Unemployment Around 20%
GDP $67.3 billion (2002)
GDP growth rate 4.4% (2002)
GDP per head of
$5,689
population
Metal and metal products; food and beverages;
electricity, gas, coke, oil, nuclear fuel; chemicals
Key industries and manmade fibres; machinery; paper and
printing; transport vehicles; textiles; electrical
and optical apparatus; rubber products
Machinery and transport equipment,
Key commodity
intermediate manufactured goods,
exports
miscellaneous manufactured goods, chemicals
Value of exports $12.9 billion
Germany 30.1%, Czech Republic 16.4%,
Key export target
Austria 10.7%, Italy 7.2%, Poland 5.7%,
countries
Hungary 4.6% (2002)
machinery and transport equipment,
Key imports intermediate manufactured goods, fuels,
chemicals, miscellaneous manufactured goods
Germany 24.8%, Czech Republic 16%, Russia
Main import
13.5%, Austria 7%, Italy 6.4%, France 4%
partners
(2002
Government
-1.9 billion $
budget
Inflation 8.7 (2003)
Foreign direct $3.8 billion (2002)
investment $2 billion (2003) est.
Main countries of Germany (47.4 %), France (37.6 %), Austria (5
origin %), United Kingdom (4.1 %).
Energy sector, especially electricity utilities
Main sectors (82.5 %), financial sector (10.7 %), wholesale
and retail trade (3.8 %).
• Slovakia €326
Source: Eurostat

Source: Eurostat
Until the end of 1998 Slovakia’s currency was linked to a basket of currencies,
made up of the German Mark and the US Dollar. It then switched to a managed
float regime.
This is when the currency is allowed to float freely but the Central Bank will
intervene if it is felt that the rate is not in the economic interests of the country. It
will also intervene to create stability.
The managed float system demands large currency reserves.
The Koruna has remained fairly stable against the ECU and the Euro, except for
a patch midway through 2002 when it lost 5% of its value.
15.1.6 Economic overview and prospects
Slovakia has done remarkably well in making the economic transition from old,
Soviet-style to a modern integrated model.
Certainly, Slovakia had far more problem industrial plants that the Czech
Republic and this has led to very high levels of unemployment. The level was
still 15% in 2003 and is the economy’s big weakness.
Most privatisations are now completed and the banking and finance sector has
an especially strong foreign presence.
Cutting government spending remains a priority along with bringing down
unemployment.
Up to now, FDI has been relatively low. But the current government seems
aware that FDI is the key to raising the standard of living for Slovakians and is
intent on bringing about conditions to encourage investors – low tax and
simplified bureaucracy.
This and attacking high government spending and unacceptably high levels of
unemployment are the priorities.
To this end, 2004 marked the start of a gamble for Slovakia – a complete
overhaul of the tax system in order to turn the country into something of a tax
haven.
The problem with its new 19%-suits-all tax rate is that, although it will appeal to
business and individuals very well, it will also hit many products that were
previously VAT-exempt, or at least subject to less than 19%.
Anecdotally, however, it seems that the experiment may well pay off - it is
reported that some firms in neighbouring Austria and the Czech Republic are
already considering relocating their headquarters to Slovakia in order to take
advantage of the favourable tax regime.
According to the Heritage Foundation rankings, Slovakia’s economy is in 34th

place for 2004 and classified as ‘mostly free’. It praises the current government
for liberalising prices, reducing taxes, accelerating privatisation, and beginning to
restructure the banking sector.
The Transparency International Corruption Perceptions Index 2003 ranks

Slovakia in 59th place globally and 7th out of eight of the Eastern Eight countries.
59th place puts Slovakia on a par with Colombia and El Salvador.
Various reports have noted problems with the judiciary, a lack of an effective anti-
corruption strategy, a prevalence of tolerance of corrupt practices.
15.2 Slovakia - Property Market Potential
Interest in the Slovak market for investors, centres around Bratislava, the capita.
And it is here that a combination of a lack of supply and imminent EU entry have
driven up prices by some 10 to 15% in the last couple of years.
Most property on the market, however, is substandard, according to Laurie
Farmer, managing director of Spiller Farmer real estate consultancy. And it is of
no value for investment purposes.
The centre of Bratislava, the capital, is where the most dramatic growth has
been, and the price differential between property in the centre and the rest of the
capital is evidence of this.
Average prices across all types of property in Bratislava are in the region of €853
per sqm. In the centre, however, prices range from €1,500 to €3,000 per sqm.
The average, in fact, is not particularly helpful to the investor because it simply
reflects the very poor stock on the market.
Rental levels have steadied for two-bedroom apartments that can be classed as
investment quality, according to Laurie Farmer. Prices vary from €1,500 per
month to €2,500.
There appears to be no simple relationship between rents and the size of

apartments. Quality is all.
Good quality apartments in the centre of town stay on the market for no more
than one or two weeks before being sold, which has created a lot of demand
from developers to source suitable development sites.
The Western European average number of dwellings per 1,000 people is 450. In
Slovakia the figure is 310.
It has been calculated that in order to reach catch up, around 600,000 flats or
houses would need to be built. The Slovak Statistics Office reports that the
average yearly increase is some 1.2 dwellings per 1,000 people, a level well
below that necessary to close the gap.
This means that there will be a lack of supply of good quality accommodation at
least for several years yet, so driving up prices.
A good tip for investors is to look at buying in areas around Bratislava that are
within commuting distance. Here prices are on the rise, but are still extremely
cheap.
One and two-bedroom flats in Pezinok and Modra, which are within an easy
commute of Bratislava, now cost nearly as much as similar apartments in
Bratislava.
Apartment prices rose rapidly in Trnava – also an easy commute to Bratislava –

after the announcement of a €700m car plant to be built there by Peugeot Citroen
and which will create some 10,000 jobs.
15.2.1 How to buy and finance
EU citizens can purchase real estate freely as individuals.
Non-EU citizens still need to buy through a company. The company-purchasing

process is actually quite simple and estate agents will complete the exercise for
buyers with minimal fuss.
15.3 Slovakia - How the Property Market works
EU citizens can now buy real estate directly as individuals, unlike the
situation in many of the other Eastern Eight countries, where restrictions
still exist despite membership of the EU.
For anyone without EU citizenship, the process of buying is still quite

straightforward. You form a Slovak company.
The two most common options are a limited liability company ("s.r.o.") and a joint
stock company ("a.s.").
Individual investors almost always go for the s.r.o. because it can exist with a
single shareholder and it is very simple to operate.
There is a clear determination on the part of the government to simplify the tax
system – and to lower the rate of taxation.
The Ministry of Finance in 2004 made the highest level of income tax and
corporate tax 19%.
Some are starting to ask whether Slovakia is on its way to becoming the tax
haven of Central Europe.
Tax Details
Corporate taxes 19%
Personal income 19%
Value Added 19%
Under new legislation local authorities
will apply a co-efficient to the market
value – rather than the cadastral value
– of a property. Currently SKK1 per
Property tax
sqm, but this can be increased by
100% by the local authority. This
figure is then multiplied by a co-
efficient (4.5 in Bratislava)
Property transfer 3% flat rate
None – tax applies to building on the
Land tax
land
Capital gains on real estate Treated as income – in effect 19%
Capital repatriation None
Slovakia, while still joined with Czechoslovakia was a pioneer in property

restitution – laws were passed in 1990 and 1991 for the restitution of Jewish and
non-Jewish properties occupied by the communist regime.
Certain issues remain, but they are unlikely to affect the property investor.
15.4 Slovakia - Finance Availability
Banks tend to be conservative, but lending to non-resident foreigners does take

place. Better deals are likely to come shortly, as they are in most of the new
member countries.
Currently, loan to value ratios vary from bank to bank, but buyers are unlikely to
do better that 70% unless they plan to live in the property they are buying. Loans
are usually set for between 10 and 25 years.
15.5 Slovakia - Investment Verdict
Slovakia might be known as the great experiment!
If the tax measures launched by the government in 2004, on the eve of EU

membership, pay off, then Slovakia could well prove to be one of the best
investment targets out of the eight countries making up the accession countries.
Possibly.
The country has a great many economic and social problems, not least of which
is unemployment, well in excess of 20% in some areas.
The government certainly seems aware that FDI is the key to addressing these
problems.
But because of these problems the only real area of interest to the property
investor is Bratislava – here prices continue to grow mainly because of poor
housing stock and the capital’s inability to meet demand.
For the time being, Slovakia is making a great deal of making itself cheap – as a
tax regime and as a place to do business. Building itself up as a car-
manufacturing centre is an interesting development.
The government plays on the fact that wages are up to 50% less than in the
Czech Republic or Poland and Hungary.
But this kind of approach is not sustainable longer term because there will always
be cheaper alternatives on the horizon.
However, a combination of low taxes, a very highly educated workforce – which

is also cheap due to high unemployment – could pay off for Slovakia. But the
jury is still out.
15.6 Slovakia - Links
Site URL
Slovak Government site www.government.gov.sk/
Slovak Spectator www.slovakspectator.sk/
Business Journal Slovakia www.bjs.sk/real_est.html
National Assoc of estate Agents www.narks-real.sk/default_en.htm
in Slovakia
ING bank Slovakia www.ingfn.sk/
15.6.1 Estate agencies
Site URL
Spiller Farmer (Home Direct, www.spillerfarmer.sk/
residential)
Rexim www.rexim.sk/eng_rexim.php
Real Estate Slovakia www.realestate.sk/
SSDZ www.ssdz.sk/
Donex www.donex.sk/scripts/default.asp
Comprehensive real estate www.greenpages.sk/catg_real.html
agency listings
16. SLOVENIA – THE ODD MAN OUT
Slovenia really is the odd man out of the Eastern Eight.
In so many ways it refuses to be placed within the same investment template as

the other countries.
If you look at the Czech Republic or Latvia as investment targets, you can be
pretty sure that both have basement level bargains on offer (in Prague’s case,
perhaps a little less so).
But Slovenia is not in the same league.
If rapid capital growth fuelled by large amounts of FDI and quickly advancing
GDP is your aim, then Slovenia is not the place for you. It’s simply too affluent
already.
Indeed, there’s long been a certain feeling of inevitability about the EU in

Slovenia. The EU referendum tells the story. 89.9% Yes from a turnout of 60%.
A few years ago it could have gone one of two ways – Slovenia could have
turned itself a tax haven, independent and tiny – an Andorra or Monaco.
But being part of a wider Europe has always appeared to be Slovenia’s future.
The country has always had a reputation as a trading region, and even as part of
Yugoslavia it produced 25% of the country’s GDP with just 8% of its wealth.
From 1965 it was the only Yugoslav state that was given permission by Belgrade
to do business with non-socialist countries – it borders Italy and Austria.
Its per capita wealth exceeds the Czech Republic’s, Hungary’s and Poland’s.
In 1991 when the economy was still under the state-controlled system, there
were 3,000 businesses in the country. Today there are 62,000.
16.1 Slovenia - Business & Economic Overview

16.1.1 Slovenian politics in a nutshell
The Slovenian people joined the Serbs and Croats following WW1 and formed a
new nation, named Yugoslavia in 1929.
Following WW2 Slovenia became a republic of communist Yugoslavia.
The Slovenians - tired of Serbian political rule - gained independence in 1991

after a 10-day war.
Slovenia was invited to join NATO in 2002 – a referendum voted 66% in favour.
Unlike the other seven accession countries, Slovenia is positioned to be a net

contributor to the EU.
It now enjoys the highest per capita income in Central and Eastern Europe.
Population 2 million
Land
20,273 sq km
mass
Capital
Ljubljana
city
Austria 330 km, Croatia 670 km, Italy 232 km, Hungary
Borders
102 km
Mediterranean climate on the coast;, mild to hot
Climate
summers and cold winters in the valleys to the east
Sava River polluted with domestic and industrial waste
pollution of coastal waters with heavy metals and toxic
Notes chemicals
forest damage near Koper from acid rain
Tolar (SIT)
Currency
Jan 2003 €1 = 237.2 tolar
Unemployment 6.6% (2003)
GDP $26.9 billion (2002) est.
GDP growth rate 3.3% est.
GDP per head of
€16,990 (2002)
population
Manufactured goods, machinery and
Key exports
transport equipment, chemicals, food
Iron and aluminium products, lead and zinc
smelting, electronics (including military
Key industries electronics), trucks, electric power
equipment, wood products, textiles,
chemicals, machine tools
Germany 23.9%, Italy 12.7%, Austria 9.5%,
Key export target
Croatia 8%, France 7.4%, Bosnia and
countries
Herzegovina 4.4% (2002)
Machinery and transport equipment,
Key imports manufactured goods, chemicals, fuels and
lubricants, food
Value of imports $11.1 billion (2002)
Germany 20%, Italy 19%, Austria 11.3%,
Main import partners
France 10.5% (2002)
Government budget $0.1 billion (2003) est.
Inflation 7.5% (2002) 6.5% (2003) est.
Foreign direct
$1.9 billion (2002) $0.9 billion (2003) est.
investment
Main countries of Belgium, UK, Austria, Germany, Italy,
origin France.
Financial sector, telecommunications, food
Main sectors
processing and textile industry.
Source: CIA World Factbook; Dresdner Bank, Eurostat
• Slovenia €1,060
Source: Eurostat
Hourly labour cost in industry and services €9
Monthly labour cost per employee €1,291
Source: Eurostat
It is worth noting that the monthly cost of an employee in Slovenia is higher than
in Portugal and nearly twice that of Poland, the next most expensive accession
country.
Slovenia operates a managed float regime in which the Central Bank intervenes
by buying or selling if it thinks the exchange rate is not as it would like.
Since the mid 90s up until the end of 2002, the Tolar depreciated by 32% against
the Ecu/€. However, since this time the Tolar rate has been more stable.
Relatively affluent Slovenia is likely to be one of the first countries into the
Eurozone in 2007.
Its GDP purchasing power is actually higher than Greece’s and close to
Portugal’s.
The country’s unemployment rate is lower than that of Germany, and it is unlikely
to be on the receiving end of EU funds.
The economy has grown solidly since independence, averaging annual growth of
4.3%. Its GDP per head – just under €17,000 per annum – is approximately 70%
of the Western European average.
Public debt stands at just 25.8% of GDP and unemployment is in decline,

currently at around 6.4%.
Higher-than-desirable inflation remains a problem (7.5% in 2002).
The slowness of the banking and finance sectors to privatise did attract some
criticism from the EU, but new legislation in 2002 allows for more competition in
the insurance and banking sectors.
Initially Slovenia lagged behind in attracting foreign investment. FDI totalled only
about 1% of GDP. But, more recently, more foreign investments have taken
place and the level has risen to 2% of GDP.
Some 59% of Slovenia’s exports are to countries that were in the EU prior to
2004, and 68% of its imports come from those countries.
Slovenia is something of an entrepot between the West and South-Eastern

Europe and it is well on the way to catching up with some of the more
economically advanced countries within the EU.
In some cases and in some respects it has already overtaken some countries.
Slovenia is ranked in 6th position out of the Eastern Eight countries by the
Heritage Foundation. Its report states that for a long time successive Slovenian
administrations have not seen the need for radical reform because of the
country’s relatively high standard of living.
And it adds that ‘For a number of years, the sale of key assets to foreigners has
encountered widespread hostility.’
It points out that foreign investment has been modest due to the smallness of the
market and the amount of red tape encountered.
The report also highlights the country’s high rate of tax - 50%. The average
taxpayer is charged 35%.
The Transparency International Corruption Perceptions Index 2003 places

Slovenia in 29th position globally, ahead of Estonia (33rd) and way ahead of the
next country on the list, Hungary in 40th place.
Areas of concern that have been highlighted in the past are a lack of a clear anti-
corruption strategy, too much conflict of interest in business and weak law
enforcement.
Relatively speaking, however, Slovenia is a clean country and certainly deserves

its ranking ahead of the other seven eastern accession countries.
16.2 Slovenia - Property Market Potential
Previous restrictions of foreigners buying real estate in Slovenia have been

scrapped. Anyone from an EU country can buy real estate with very few
restrictions.
The only restriction is the principle of reciprocity between the buyer’s country and
Slovenia. But even this restriction no longer applies to EU citizens, now that the
country is part of the EU.
16.2.1 State of the market
Property prices in the country as a whole are static or falling.
But in Ljubljana, Bled and along the Adriatic coast, prices are still on the increase
at around a steady 10% per year for the last three/four years.
In Ljubljana prices vary from around €1,600 per sqm for old houses, possibly in
need of some restoration, to €5,000 per sqm for the best properties near the
centre of the city.
Rents are around €8 per sqm per month for a house and €10 per sqm for an
apartment near the centre.
Yields are around 6-8% per annum.
16.3 Slovenia - How the Property Market Works
The market, while it began opening up to foreign investment prior to EU

accession, is not especially foreigner-friendly.
Processes are slow and taxation is high – at least for individuals buying direct.
The best way of buying is still through a Slovenian registered company – this is
easily the most tax-efficient way of buying.
16.3.1 Taxes and other costs?
Tax Details
17 to 50% depending on level
of income. Paid monthly on
Personal income estimated basis and the
difference paid or owed at the
end of the tax year.
Value Added 20%
Only payable on properties of
Property tax
over 160 sqm
5%, but full VAT on new
Property transfer
properties
Capital gains on real estate 30%
Free profit and capital transfer
Capital repatriation
after taxes.
Double taxation treaties with many countries including the UK and US.
Generally speaking, restitution is a non-issue in Slovenia. The country passed

and began implementing a law on the restitution of property of soon after
independence.
Around 70% of claims filed have been resolved.
Almost all Jewish private property claims are resolved and Jewish communal
property claims are complete
16.4 Slovenia - Finance Availability
If you are a foreign non-resident it is difficult to obtain mortgages in Slovenia. In

any case, the loan rates are not acceptable – 8-12%!
The most tax-efficient way of buying real estate in Slovenia is to establish a

company or buy shares in a company holding real estate. Nearly all estate
agents can advise on this relatively simple process.
Buying through a company avoids the hefty tax applicable to new properties, and
expenses can be set against profits.
16.5 Slovenia - Investment Verdict
There seems to be little in this market to be attractive to foreign investors – the

tax system is unfriendly, finance is expensive and capital returns and yields
compare poorly with other Eastern Eight countries.
However, longer term, Slovenia probably does represent an excellent buying

opportunity. Prices in lots of parts of the country are on the slide, which may
represent a good buying opportunity.
Estate agents in the capital suggest the most profit can be made by buying old
houses and renovating.
Ljubljana is unquestionably one of Europe’s most stunning cities with chocolate-

box views around every corner. Tourism is growing, but the country is still not
yet a mainstream destination.
The country is stable, relatively affluent, has modern infrastructure and a skilled
and educated workforce. English is widely spoken by the young and by a vast
number of people in Ljubljana.
In the long term, investment in a property that is easily rentable here could well
be a sound one.
16.6 Slovenia - Links
Site URL
Agency PROPERTY Real www.property.si/index_slo.htm
Estate Ljubljana Slovenia
Bizzz.com Global Real www.bizzz.com/photoads7/viewads.html
Estate
Bonita - Real Estate in www.bonita-z.si/
Slovenia
Cupola, Ljubljana www.cupola.si/
Mega-net-Real Estate, nepremicnine.net/
Slovenia
Real Estate Ljubljana - www.property.si/
Slovenia
Telestan, Real Estate, www.telestan.com/
Slovenia
16.6.1 Banks
Site URL
Abanka d.d. Ljubljana www.abanka.si/
Banka Koper d.d. www.banka-koper.si/
Banka Zasavje d.d. Trbovlje www.banka-zasavje.si/
Factor Banka d.d. www.factorb.si/
Gorenjska Banka, d.d., Kranj www.gbkr.si/
Hypo-Alpe-Adria Bank d.d., www.hypobanka.com/
Ljubljana
Kaerntner Sparkasse Ag, www.kaerntnersparkasse.si/
KLAGENFURT/Celovec
Krekova Banka d.d. www.krekova-banka.si/
Nova Kreditna Banka Maribor d.d. www.nkbm.si/
Nova Ljubljanska Banka d.d., www.nlb.si/
Ljubljana
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East European Property

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East European Property

Copyright JoJaffa Ltd 2005

Part of the Property Secrets Series

Edition 1.0, First Published 2004, Updated 2005

All Rights Reserved

Any other use of materials in this book - including reproduction, modification,

As authors we have endeavoured to deliver information and advice of the highest

For legal reasons, we have been recommended to include the following:

2. Why is East Europe such an exciting investment?

3. The Secret of Success – Choosing the Right

5. Financing your Property Investment in East

6. A Twelve-Step Plan For Successful Property

7. Using the Snap Shot Return Analysis

8. In Which Country Should You Invest? 93

9. The Czech Republic – an Established Investment

10. Hungary – First Among Equals 128

11. Poland – The Sleeping Giant 154

12. Estonia – The Hong Kong of East Europe? 171

13. Lithuania – The Hidden Gem 184

14. Latvia – The Jewel in The Baltic Crown 194

16. Slovenia – The Odd Man Out 216

And those countries are:

Strictly speaking, of course, some of these countries are technically in Central

Just reel off those names again.

Maybe investing in fairly well-established markets such as those of Prague in the

Cheers and good luck

P.S. If you enjoyed this e-book, you might also enjoy:

• Czech Market and Forecast Report

...all available from www.PropertySecrets.net

Don’t let that happen.

• What is all the fuss about?

• What is the unique combination of factors that creates such a great

• How to work out whether this is the market for you.

1.1.1 Section 2 -The Opportunity

Bear in mind that EU accession is only part of the investment

According to US magazine Global Quarterly, a supplement to The Institutional Real

To really exploit investment opportunities it’s essential to be able to understand the

1.1.3 Section 5 - Finance

When capital isn’t available locally, what are your options?

In this section we’ll look at the various financing scenarios.

1.1.5 Section 7 - Using the East European Returns Spreadsheet

In particular, with East European countries you need to make an allowance of

Use this spreadsheet software to run different investment scenarios.

1.1.6 Section 8 - Country by Country comparisons.

• Which countries have the best rental yield prospects?

and much more…

In this chapter you will learn:

• About the East European Eight (see section 2.1)

• Joining the EU means countries have adopted the so-called acquis

• Billions of Euros is being handed out in development funds to the new

• Around a quarter of Latvians, Hungarians and Slovakians do not know that

It is clear that EU membership is a massive stabilising force as well as an economic

Let’s sum up those reasons.

• Foreign investment in these countries has increased since EU membership,

• Most of these countries’ property markets remain relatively undiscovered by

• Most countries have a number of highly attractive locations for tourism

• Restrictions and barriers to foreign ownership of property, where they exist,

• Generally there is a good stock of old, character properties to be restored.

2.3 What is so EXCITING about investing in this region?

Being a trailblazer has the potential for the greatest rewards.

The FOUR key boosts to property markets in the Eastern Eight:

• Anticipation in the run up to EU membership

2.3.1 Maximising the East European investment opportunity