Modeling and forecasting office investment markets in Central and Eastern Europe

Property markets in Central and Eastern Europe experienced turbulent developments since the collapse of the Soviet Union and the ensuing abolition of communism in the Central and Eastern European region. This paper examines the evolution of office investment markets in Prague, Budapest, Warsaw, and Bucharest by using a range of quantitative approaches including regression based times series analyses. The findings of the paper indicate that property market fundamentals play an important role in emerging markets, as office investment yields in Prague, Budapest and Warsaw are shown to be related to inflation rates, interest rates and rental growth. This sharply contrasts with common beliefs that while property investment yields in mature property markets are driven by property market fundamentals such as rental growth and interest rates, emerging markets are predominantly driven by incidents. Furthermore, we show that Central and Eastern European office investment markets are affected by the so-called ‘wall of money’ which has been flooding property investment markets and led to a global yield compression. Especially when comparing developments between Prague, Budapest and Warsaw versus Bucharest, the staggering effects of the global appetite for property investments on property investment markets become apparent