Real Estate Investment Risks in Central and Eastern Europe

Decision making for international real estate investment requires a thorough analysis of options in order to take into account a substantial uncertainty and foreignness implied by international investment per se, as well as the real estate market risks inherent in foreign countries. These factors are intensified by economic distresses and make real estate investors use more discretion in their operations abroad. A similar situation can currently be observed in Central and Eastern Europe (CEE). Before the crisis, it saw active international real estate investments owing to higher expected returns and surging economic growth in the emerging and quickly developing real estate markets. Through the appearance of the downturn, however, many business players have become cautious about investing in this region. In other words, the crisis resulted in an increased perception of risk and a change towards more selective investment strategies in CEE, with international investors unprepared to take high country risks even though property risks may be low. Hence relatively more importance is attached to country risks vs. property specifics and gains when making investment decisions. Despite a growing body of publications on real estate investment risks and decision making factors in the international context, limited research has been undertaken on the CEE countries in this respect.This study aims to identify, structure and compare major risks of investing in real estate, with a particular focus on selected CEE countries, in order to see if they are high enough to hinder further investments. It reviews in the first instance the existing publications on international real estate investment and summarizes common risks and factors affecting relevant decision making. Real estate investment trends and issues in the CEE markets are discussed, with specific investment risks for the CEE region identified. Finally, importance of the factors influencing investment decision making, as perceived by international investors in the region, is studied through a questionnaire survey. Altogether this explorative research paper contributes to the understanding of barriers and risks of international real estate investment while assisting the investors in improving their perception of opportunities and implications associated with real estate investments in the CEE region.