The sovereign debt crisis in the euro-zone is bound to weigh heavily on the outlook for Emerging Europe property, moderating, if not reversing any hopes for an occupier and investment market led recovery, according to analysts at Capital Economics (CE) who with the single exception of Turkey think that the recent gains in Emerging European commercial property values could be reversed in due course.

In common with much of Western Europe, capital values of commercial property increased slightly in most Emerging European property markets in Q1 2010. Turkey and Russia have seen the steepest rebounds, with values up by 5% and 4.5% respectively from their lows. Modest gains of between 1% and 2% have been observed in Poland and the Czech Republic. By contrast, reflecting their relatively weak economies, capital values in Hungary and Romania are still falling.

The recovery in Emerging Europe has been driven primarily by falling yields, most notably in Russia and Poland and CE say they are not convinced that a sustained recovery in Emerging European capital values is underway.

CE say that the deepening sovereign debt crisis in the euro-zone has caused risk appetite amongst investors to fall and suspect this will put upwards pressure on the risk premiums attached to Emerging European property markets.

The outlook for rental values in Emerging Europe remains generally weak despite most economies in the region having emerged from recession although Turkey is on course for a strong near-term bounce. But, elsewhere, sub-potential GDP growth over the next year or two is unlikely to drive a strong recovery in occupier demand. As such CE expects that rental values have further to fall almost everywhere in the region, especially in Hungary and Romania. Turkey is the exception, reflecting its stronger economy, where rental values have shown genuine signs of a sustained recovery and have now risen by more than 4% since their low in Q1 2009.

Overall their view is that capital values may reverse their recent gains over the rest of 2010 with Hungary and Romania seeing the steepest falls, of between 5% and 7%, while Turkey could buck the general trend, with modest capital value growth.