In the last few years it has become increasingly difficult for investors wishing to buy property in Western Europe to find a suitable location without the aid of deep pockets or a substantial amount of good luck. Prices have risen consistently and often dramatically in countries such as the UK and France. All of which has led to a knock-on effect in neighbouring countries as eager buyers snap up bargains. But if your dreams of an idyllic holiday cottage or commuter friendly home-from-home seem to be ever spiralling away from affordability, it could be that a view to the east would work for you.

This year the ‘eastern eight’, the former communist countries of the Czech Republic, Hungary, Poland, Estonia, Lithuania, Latvia, Slovenia and Slovakia, joined the EU, together with Cyprus and Malta. And with Bulgaria, Turkey, Romania and Croatia waiting in the wings, some analysts are predicting the biggest property boom Europe has seen for years.

European economic overview

While there is much debate and controversy over how to converge the economies of the new members, and how to manage the differing priorities of 25 states, there are certain broad macro-economic trends that favour the emerging property markets in Eastern Europe.

Steady economic growth is the first and obvious objective. While the East lags behind in wealth terms, their economies are moving in the right direction, and with European integration now a reality, foreign direct investment (FDI) towards these economies will run into billions.

Poland for example is expected to receive US$18 billion every year for the next four years. The European Central Bank (ECB) says it is confident that “the latest indicators of output and demand remain consistent with ongoing growth in real economic activity”. This should drive house prices up as GDP levels across Europe continue to rise. The desire for growth is however, tempered by the ongoing policy of keeping inflation under control. And though high oil prices are expected to exert some pressure in the short term, the EU is on track to keeping inflation below two per cent as far ahead as 2006. Happily for investors, this low inflation is coupled with a continuing forecast of low interest rates – a must for inspiring long-term confidence in a developing property market.

So, for potential investors there is an upbeat, yet relatively stable forecast for the future of the new EU zones, and it is this set of economic criteria that other potential members are working towards. Furthermore, the constraints and rules of the EU should also inspire confidence in these new markets.

The eastern eight

Of all the new EU members, Poland has the largest population, geographical size and arguably strongest potential for long-term growth. The economy grew at a healthy 3.6 per cent in 2003, and this is expected to rise to 4.5 per cent in 2004. Also, despite having already attracted an estimated US$62 billion in foreign investment, inflation is low, as are interest rates and corporate taxes. The effect of this on the property market has been dramatic.

Last year, according to real estate company Ober-Haus, prices for residential property in the capital rose by more than 25 per cent to a citywide average of Euros 872 per square metre. It is not only luxury apartments that are now in demand, as there is an emerging middle-class market in need of suitable properties. Aside from the investment opportunities presented by the country’s highly educated, yet relatively lower paid, workforce and its close proximity to Germany, there are also towns such as Krakow that are cheaper than Warsaw and are steeped in history with Renaissance mansions, churches, Gothic cathedrals and a medieval central square.

In the Czech Republic there is talk of simplifying (or even just removing) the legislation allowing EU citizens to buy local property. This would help make an already healthy market look even more attractive. Local banks are now offering more flexible loans over longer periods, and investment is on the increase. Estimates on capital growth varies from anywhere between 10 and 30 per cent and rents are also expected to rise by 10 to 15 per cent.

Moving further east, countries such as Estonia and Lithuania are a good bet for longer term investments. Although one of the poorest EU states, Lithuania posted an 8.9 per cent growth in GDP last year and the year before, 6.7 per cent. Like Estonia, it has its fair share of economic challenges ahead, but both have high aspirations. Estonia sees itself as a conduit between the east and west, and has a favourable tax regime, a rapidly opening economy and a burgeoning middle class whose wages, although again low by western European standards, are on the rise and are therefore creating an expanding property market.

Candidate countries

Also in the queue for EU membership are Bulgaria, Turkey, Croatia and Romania. There is growth potential in these markets too, as they seek to harmonise their economic activities with the rest of the EU. Consider the case of Croatia, which has already met the economic and political criteria for membership, and has set itself the target of joining the EU by 2007. Prices have already risen 20 to 30 per cent over the past two years, and the trend is set to continue. Demand too is on the increase from the resurgent tourist industry, which has tripled between 1999 and 2003, yet is still only at a third of its pre-war levels. And clocking in at a mere two hours travel time from western Europe or five hours from Dubai, with a growing number of scheduled flights on offer, Croatia is in a prime location. But let’s not get solely bogged down in economics or practicalities. It is a country that offers 1,400 miles of unspoiled coastline and a staggering 1,165 idyllic islands, which makes it a serious yet affordable alternative to the more traditional Mediterranean hot spots in France and Spain.

Bulgaria is also an increasingly attractive proposition for many of the same reasons. It too hopes to join the EU in 2007, has a stable currency linked to the Euro and a cheap housing market that grew at 30 per cent last year. Indeed, developers are expecting a return on capital of 100 per cent within three years – and even that figure may rise should any of the budget airlines begin scheduling flights. Add this to the fact that the Black Sea boasts 220km of sandy beaches and enjoys 1,700 hours of sunshine from May to October, but also offers skiing in other parts of the country, and you have the beginnings of a highly promising market.

Re-housing demand

After 1945, housing in Europe consisted of hastily thrown together pre-fab buildings that were a cheap but temporary solution for housing a continent ravaged by war. However, the faltering economies in the east meant this type of building was the norm until the Berlin wall finally tumbled in the early 1990’s. Consequently, these buildings are literally crumbling away and it is estimated that an astonishing 24 million people (around a third of the eastern European population) will be looking to rent or buy new property over the next 20 years. It is to be expected that EU property taxes and investment schemes will favour efforts to fulfil this huge demand

Examples from Ireland and Spain

It would appear then, that there is enormous potential in the new and potentially new European markets. As economies open up and integrate, the scope and the ease of investment change dramatically. Some analysts point to the examples of Ireland and Spain 20 years ago as justification for an upbeat analysis of the new Euro zones. Neither was seen as a particularly attractive investment area, yet European integration and foreign investment helped create a similar set of circumstances to those mentioned in this article. The result was year on year double-digit growth. Spain has seen a whopping 42-fold increase and Ireland a 27-fold increase. Or expressed differently, a AED13,400 investment in Spain in 1980 would today be worth (in real terms) a more than handsome AED366,490.

The risk factor

Before cashing in the family silver, it is worth bearing in mind that no investment is risk or hassle free of course. All the countries have differing property laws, which are still evolving. In Croatia purchase permissions can take from six months to a year to finalise and the administration costs can add another ten per cent to the deal. The Czech Republic levies taxes of over 20 per cent on profits from any purchase, as well as a transfer tax.

Most of Eastern Europe is also still less geared up to overseas purchases than the west. There are scare stories of buyers who visit their homes to find them occupied by other ‘owners’. One other point to note is that serious haggling over the rent from tenants is something that can be expected in certain areas of the east. As with any investment, good research, a measure of caution and good luck are the keys to a happy and profitable outcome.

Cut off from its western neighbours for almost 50 years, Eastern Europe is nevertheless part of the rich historical tapestry of an ancient continent. It is part of the dream of closer European integration that these different cultures will share their common values, as well as abide by certain political and economic principles. As this vision unfolds, it will become increasingly logical to think beyond the more established markets of Europe, and look towards the east as a great investment or a place to call home.