Detente & Development

By Warson, Albert | Mortgage Banking, October 1990 | Go to article overview

Detente & Development


Warson, Albert, Mortgage Banking


Detente & Development

Relaxed relations between East and West have spawned a whole host of commercial developments in the heart of Communist Europe. Even the Soviets are welcoming one of capitalism's best exports--savvy developers.

The mere idea of General Motors moving into Communist party headquarters in Budapest, even a year ago, would have seemed patently absurd.

Today, that would have been entirely possible, had Hungary's parliamentarians not decided to use the vacated, high-rise building on the Danube as an annex to their Parliament building next door.

General Motors--the quintessential icon of capitalism--is doing business in Hungary, and that building, given its prominence, would have made sense for the corporation in terms of its location. Other party organizations, now disbanded, have freed up yet more office space for western financiers, consultants and businesses flocking to Hungary--the most accessible of all the Eastern European markets. Even with these new-found office vacancies, the inventory being opened up for new tenants is hardly North American-style office space. So, with Hungary, Poland and Czechoslovakia opening the doors to one of the last, untapped, free market frontiers, the potential for importing western business infrastructure is enticing. But it doesn't stop there. The Soviet Union, in fact, has attracted the lion's share of real estate development interest from the west, because of its massive size and the depth of its need for office development to accommodate foreign businesses and their resident staff.

Breaking down barriers

Theoretically, ownership of private property in the three Eastern European countries is no longer an issue, although legal complications with title documentation can still arise.

Poland has made its zloty currency convertible, but only within its own borders, as a free-floating currency pegged to the U.S dollar. Hungary and Czechoslovakia are a year or two away from an internationally convertible currency. The Soviet Union's ruble is regarded as at least five years away from convertibility.

Repatriation of profit remains the wild card in the investment deck. Resourceful western enterprises are hedging their bets by creating businesses that generate U.S. dollars, yen, francs and other hard currencies, or through joint ventures that facilitate barter and counter-trade arrangements. The playing field is definitely uneven; the one constant is an unsatisfied appetite for western investment, technology and business skill.

Opportunities for office/high-tech business centers, hotels, resorts, shopping centers and luxury residential development in Hungary, Poland, Czechoslovakia, Russia and the Ukraine have a gold rush glitter to them. East Germany doesn't really count any more; it is about to vanish as an identifiable national entity.

Western European banks, hotel management firms, developers and construction firms have long been tilling those European fields. North American and Asian enterprises are also coming to the table, but more slowly and circumspectly.

To understand this financing/development environment, look at this basic equation. First, most of the projects are joint ventures on land invariably held by the state. Second, design and construction is by western firms with hard-currency users in mind. Third, profit can be repatriated, in full or in part, and under more alluring terms as the rules are changed to encourage that investment.

Two Toronto businessmen have skillfully maneuvered their companies into the Eastern bloc market. Andrew Sarlos, a Toronto investment counsellor, has been the driving force behind the $80 million (U.S.) closed-end investment--First Hungary Fund. More recently, he has been behind the creation of the merchant banking operation Central European Development Corporation of New York. Albert Reichmann, chairman of Toronto-based Olympia & York Developments Limited (O&Y), is on the board and an investor in both of Sarlos' enterprises. …

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