Austrian groups turn the corner after a year in the doldrums

Vienna Sparkassen Immobilien's 110 million euro (Dh611.2 million) sale last month of an office building in Prague — the largest deal in the Czech capital this year — raised hopes that Austrian real estate groups had turned a corner after a year many would rather forget.

The industry has been transformed over the past decade, as banks have expanded rapidly in central and eastern Europe (CEE) and the liquidity released by the bursting of the tech bubble sought a new home.

But after Lehman Brothers collapsed, Austria's property investments in CEE began to turn sour, as financing risky developments became impossible and existing real estate assets slumped in value.

A bad situation was made worse by two scandals that raised questions about the transparency and management structure of Vienna's publicly traded real estate funds.

In April, Julius Meinl V, a prominent banker, was detained and released on 100 million euro bail in connection with an investigation into allegations of fraud at Meinl European Land, a quoted property group.

Meinl has not been charged and doubts have since been raised about an expert witness relied upon by prosecutors in his case.

The allegations of breach of trust, overchargingfees and fraud made against Meinl came as investors were still reeling from a separate scandal involving Austrian real estate firms Immofinanz and Immoeast.

Their share prices collapsed in 2008 after a dispute over the whereabouts of 512 million euro raised via a bond issue that had gone missing between the two companies and Constantia Privatbank, a closely linked Vienna-based private bank.

Karl Petrikovics, its chief executive, resigned and his bank was bailed out and eventually taken over. He has denied any wrongdoing.

"The scandals made investors concerned about what they had regarded as absolutely safe investments," says Peter Oberlechner, head of the real estate practice at WolfTheiss, a Vienna-based law firm. "This was followed by a real estate crisis and devaluation of real estate assets."

The IATX, an index of Austrian real estate stocks, plummeted by as much as 80 per cent between August 2008 and March 2009, as property groups were forced to book hefty writedowns on their CEE portfolios.

Loan growth in central and eastern Europe had relied heavily on euro-dominated currencies; when local currencies depreciated, borrowers' repayment costs soared.

"Clearly, the bonanza is over for banks, investors, developers and everyone else," says Oberlechner.

Many market participants acknowledge some kind of correction was overdue and lessons must be learned.

Correction overdue

"The financial crisis put the real estate market on its feet — it was on its head before," says Holger Schmidtmayr, a director at Sparkasse Immobilien responsible for the company's CEE portfolio.

"You used to pay more per square metre in Bucharest than in central Hamburg." However, the IATX index has rebounded strongly from a low of 41 in Dec-ember to 146 last month, thanks to a combination of low interest rates and calmer credit markets.

New management has rescued Immoeast from the brink of bankruptcy. The business has been restructured and its development portfolio cut, and the shares have risen from 30 cents to 4.60 euro.

A merger between Immofinanz and Immoeast is due to be completed in the first half of next year. "I think what the company has learned out of the crisis is that you have to lead these companies in a sustainable long-term way and not just look to short-term stock prices and similar things," says Eduard Zehetner, chief executive of Immoeast.

The performance of real estate firms has varied according to their exposure to particular countries — the Czech property market remains far more stable than Ukraine, for example.

— Financial Times