Investors with cash are starting to hunt for bargains in the distressed economies of Central and Eastern Europe
Opportunity often blossoms out of disaster, and no investor wants to look back on the fallout from the global financial crisis as the missed opportunity of a lifetime.
In Central and Eastern Europe, with real estate prices and stock markets down—the Prague Stock Exchange has lost 31 percent of its value since July 2008—and many fundamentally healthy businesses hurting for financing to survive the downturn, now seems like the time to look for that opportunity. Business people and investment experts are quick to caution that the foundering economies of emerging Europe may yet hit bottom, but they also largely agree that the prudent, well-capitalized investor (it's hard to get a loan these days) could, as Jo Weaver of the marketing firm JWA Prague put it, "make some real killings."
Where to look? Larger players such as private equity firms should pay attention to the growing number of distressed companies in the region.
"In the last four or five months we have seen an increase in the number of bankrupt companies or companies that are having financial difficulties but have a good, healthy core business," said Margareta Krizova of the Central European Advisory Group, a legal and investment consultancy. "I think there is a real opportunity [here]."
Indeed, the crisis has spread from the financial to the corporate sector, sharply undercutting output in the last quarter of 2008 and in early 2009 with disastrous results for businesses, the European Bank for Reconstruction and Development (EBRD) reported in May. The Czech Republic, for instance, has seen a record number of bankruptcies this year.
Most at risk are small, export-based manufacturers with less than 20 million euros in annual turnover, according to Krizova. With credit markets tightening throughout the region, these companies "start to have cash-flow problems if they lose one or two customers" despite being fundamentally sound businesses, she said.
Automotive and metallurgical companies are especially hurting. Auto manufacturing is big business in Slovakia and the Czech Republic, but falling demand for these cars in Western Europe—and Germany in particular—is sending shock waves down the entire supply chain. Investors could snap up those companies already facing bankruptcy at fire sale prices, Krizova said, nurse them through the recession, and wind up owning thriving, if small, businesses a couple of years from now.
For large and small investors alike, real estate looks promising. Commercial property prices in capitals from Prague all the way to Moscow are down double digits year-on-year, and regional yields—or the return on investment—average around 10 percent now and will likely continue north, according to a recent analysis by global real estate services firm CB Richard Ellis. Jos Tromp, the firm's head of research and consulting in Central and Eastern Europe, said Warsaw and Prague are the most stable markets, but that Budapest, where office space is 33 percent cheaper today than a year ago, "could be the potentially interesting opportunity" of 2009 though it presents a much higher risk, with Hungary's economy still rebuilding from near implosion late last year.
Residential real estate could also be a winner in the Czech Republic. Prices of flats increased 18 percent there in 2008, but the market is expected to reverse course this year, with prices falling as much as 20 percent, according to data from the Regional Information Institute.
Equities are, as usual, tricky. The Prague Stock Exchange is sagging while the Warsaw Stock Exchange seems to be rebounding after a tough 12 months. Ales Michl, a portfolio strategist at Raiffeisenbank in the Czech Republic, said markets remain volatile. Either you must time your purchases perfectly, he joked, or be smart—make regular, long-term investments in blue-chip stocks such as Czech electricity giant CEZ (CEZP.PR) or Spanish telecoms group Telefonica 02 (TEF).
Timing, though, is of course critical. With looming concern that rising volumes of bad loans could undermine New Europe's banks and foment a second financial crisis, as EBRD President Thomas Mirow warned 24 July, investors should be cautious. But they should also be strategizing—because others already are. JWA Prague's Weaver said that after six months of radio silence from potential investors this year—an unprecedented drought for a company that in a normal year does 10 to 15 business pitches a month between January and June—the lines are abuzz again, with multinationals and local companies seeking advice on entering or expanding in the Czech market.
In emerging Europe, as important as the when and where to invest is the how. Despite many countries' business-friendly rhetoric, all have formidable bureaucracies that, when it comes to transparency, vary only in their degree of opacity. If you have experience in Western Europe, don't assume business is done the same way east of the former Iron Curtain. Protect yourself and, most of all, be flexible. Good luck.