Risks in International Real Estate Investment: The Case of Central and Eastern Europe

Abstract

International real estate diversification provides significant benefits which are inevitably associated with considerable risks and costs. This requires a thorough analysis of options in order to take account of substantial uncertainty and foreignness implied by international investment per se, as well as the real estate market risks inherent in foreign countries. These factors are intensified by economic distresses and make real estate investors use more discretion in their operations abroad. A similar situation has been observed in Central and Eastern Europe (CEE) after the events of 2008. In the face of downturn, market players have become cautious about investing in this region and shifted their investments away from many once booming markets. In other words, the crisis resulted in an increased perception of risk and a change towards more selective investment strategies in CEE, with international investors unprepared to take high country risks even though property risks may be low. Hence, relatively more importance is attached to country risks vs. property specifics and gains when making investment decisions. Among numerous academic papers on real estate investment risks and decision-making factors in the international context, there are only few undertaken for the CEE countries. This study has been motivated by the perceived shortage of research on real estate markets and investment decision-making factors in CEE, as well as the need for understanding these aspects in order to ensure sound investments in the region. It aims to identify major risks of investing in real estate, with a particular focus on selected CEE countries. The study reviews in the first instance the existing publications on international real estate investment and summarizes common risks and factors affecting relevant decision-making. The complexity of country risk as a composite risk and its components are addressed by creating a country risk framework. Further, real estate investment trends and issues in the CEE markets are discussed, with specific investment risks for the CEE region identified. Finally, the importance of the factors influencing investment decision-making, as perceived by international investors in the region, is studied through a questionnaire survey.Altogether this exploratory research contributes to the understanding of barriers and risks of international real estate investment while assisting investors in improving their perception of opportunities and implications associated with property investments in the CEE region.