Labour shortage and rising costs in construction are problems developers in CEE have had to learn to live with over the past years. Dr. Zoltán Nádasdy MRICS, Partner, Head of CEE Real Estate Investments Group at Noerr talked to Property Forum about the legal challenges investors and developers face on the Hungarian, Romanian and Polish markets.
What kind of services are clients mostly looking for in a booming market like this?
All sectors of the real estate are hot. Accordingly, firms expand their operations, need more space and investors try to fulfil the growing demand. Legal advisory services are needed for all parts of such projects: for securing financing, acquiring new development lands, construction, rental and operational services. And of course, in case of exits and buy-ins: investment and M&A related legal advisory.
What are the main concerns investors share with you when evaluating new investment opportunities in the region?
A downturn or crisis is expected to come in the near future. The first signs are already visible in certain market segments, which is a circumstance that causes investors to act more cautiously. Brexit is another concern, but at the same time, it is also an opportunity, for example, to deal with the relocation of production/distribution capacities to CEE markets where the workforce and overall costs are still lower. In Romania, one of the concerns is, for the foreign institutional investors at least, that there are not enough big real estate products/portfolios on the market and that the real estate market is not mature enough. On the other hand, we have witnessed in the last couple of years an increasing interest of both Romanian developers and Romanian investors in the local real estate market which is a healthy sign for this industry. We refer to the largest real estate transaction of last year: DIY Group Dedeman acquiring the office project The Bridge from Forte Partners. Poland has been benefiting from its mature market status but the workforce pressure is more and more palpable and new investors try and find locations where this would still not be a great concern. On the other hand, relative political stability with the ruling party expected to win the next elections with a comfortable majority in October this year, the still robust economic growth and, for the first time in 30 years, a balanced fiscal budget for 2020, allows for a scent of optimism.
In your opinion, what are the biggest risks industrial/logistics developers need to face today?
The first negative trends have already reached the automotive sector. In Hungary, together with the entire supplier chain, this is a large part of the industrial/logistics market. In the short term, cost pressure and less demand for expansion is expected. The same applies to Romania, where the shortage of labour force is to be added to the mix, causing investors in the automotive sector at least to look at other countries. For now, the labour shortage in Poland is not the problem in large part to a large influx of immigrants, particularly from Ukraine. Depending upon developments in Western Europe, in particular, opening up of the labour markets there, it could over time become a concern in Poland, too. An issue of some concern is delays in payments on the market, which can cause severe financial problems to otherwise healthy businesses. This, however, has been addressed under a newly enacted legislation that is expected to alleviate the problem. Otherwise Poland, albeit the biggest country by size in the region, is very much a part of it and less demand on expansion could take its toll there as well.
Developers have had to deal with labour shortage and rising costs in construction for several years now. How are your clients coping with the situation?
This is not a country-specific, rather an overall industrial problem of all CEE countries. Projects, unfortunately, need to face up with delays and the competition on the clients’ side is less intense, which leads ultimately to an overall price increase. It is also much harder to push through legal positions for the protection of the client, compared to the past, which also means reaming legal risks for the clients. On the financing side, labour shortage leads to increasing time buffers in the construction period elongating the period until repayment starts. To cover the risk of rising costs, banks require stronger sponsor support for cost overrun. For both reasons, banks consider the reliability of the sponsor as much as the project itself. Labour shortage triggering an increase of the wages of the construction workers leads to significant delays of real estate developments in Romania and in some particular cases also to the insolvency of some construction companies. Labour force pressure in Poland has triggered a considerable rise in wages across the construction sector. For the time being, however, this has not translated into a major roadblock for the on-going construction boom.
What are the legal challenges market players working with contaminated property need to face?
In CEE, before the ‘90s it was not on the priority list of production facilities to avoid environmental pollution, for example. Developments made as brown- or greenfield accordingly may bring about environmental topics that need to be solved. As opposed to some countries where by purchasing a land, the new owner automatically inherits the liability for the environmental contamination, this is not the case in Hungary, where there is only a legal assumption that the owner has caused the pollution, but if it can be evidenced that is not the case, the decontamination works shall be carried out by the actual polluter or (if it is no longer available) by the Hungarian State. Also in Romania, the polluter pays principle is applicable and stipulated as such by the law. In Poland, the responsibility for contamination is dependent on the time of its occurrence, with different rules applying to pollution from before and after 30 April 2007. For the former, the liability for the contamination is associated with the current holder of the land unless he proves otherwise whereas, for the latter, i.e. under the new regulation, the polluter pays principle applies.
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