Residential Opportunities in Eastern Europe

Article excerpt

Since the collapse of the Soviet Union and the accompanying social and political upheaval in its former member countries, housing markets have been in the process of conversion from state to private ownership. Across the board, rental stock is in poor condition--dilapidated, poorly constructed, and inefficiently operated--capital is short, and private property management services and expertise are desperately needed.

At the root of many of the region's problems is the sluggish progression of housing privatization, a trend that began with the revolutions but has had varying degrees of success.

"Every country is different in terms of how much ownership is private," says Carol Rabenhorst, senior legal advisor with the Urban Institute, a not-for-profit think tank in Washington, D.C. "But everywhere in Eastern Europe, buildings that were built, owned, and operated by the state are being converted to ownership by the tenants or a tenant corporation. The buildings are in bad shape--and they don't have the expertise to manage them."

Indeed, despite the sweeping changes that have taken place, "the governments of Eastern Europe face huge problems with privatization," says Michael Beyard, senior director of research and international services at the Urban Land Institute in Washington, D.C.

Last year, Beyard was part of a group that studied the situation in Slovakia for ULI and the U.S. Agency for International Development, an arm of the State Department established to foster economic growth in developing countries.

Another group that has received USAID dollars is the Eastern European Real Property Foundation, which was established two years ago under the auspices of the National Association of REALTORS(R) but now operates as an independent company. EERPF has studied the markets in seven Central and Eastern European countries and provided Western-style expertise to real estate interests there.

The bulk of the housing in the former Soviet bloc consists of multifamily, multi-story monoliths, relates Norman Flynn, EERPF's president. "Before reform, people regarded housing as a right of citizenship, and they paid an average of only 9 percent of their income for rent, which included maintenance, repairs, heat, everything. For all intents and purposes, you were guaranteed practically free housing--for life."

Because of this culture, there exists a lingering malaise among consumers--a feeling that's diametrically opposed to the free-market mentality in the housing markets in Western countries.

"There's no association between what [housing] people use and what they pay," Beyard relates. "And it's very difficult to introduce that new discipline."

Under the old socialist system, all of the rental housing stock was owned by the state, and one monolithic agency ran the apartment businesses in each country. The private version of that system, Beyard says, is fundamentally the same in many cases. "Property management is very ground-level," he relates. "And in many areas, private management simply doesn't exist because there's still one big company managing all of the housing."

The powers that be in Eastern Europe are not philosophically opposed to converting to a decentralized system Beyard contends; it's just that in many cases there are not yet enough laws on the books to allow a market-based economy to flourish. Government officials and private business people definitely understand the need to set up regulations--on zoning, building standards, rents, and other important areas. But many politicians are wary of putting any more pressure on a restless population and a still unsteady economic and political system, so sufficient legislation is not yet in place in many countries.

For example, many governments are attempting to set up Western-style taxes that will help offset their own enormous expenses and cash shortfalls, Flynn relates. But, in many cases, the fear of having to pay real estate taxes merely serves as another reason not to buy one's rental apartment, he says. …