A sustained economic recovery across central and eastern Europe (CEE) is unlikely to be anytime soon, but once it is initiated it will have positive implications on the investment market activity, according to Aberdeen Property Investors.

Although modest growth has returned to emerging Europe, gross domestic product (GDP) is unlikely to exceed 2% in 2010 and will see moderate growth in 2011 of 3.5%, significantly down on the 6% growth rate between 2003 and 2008.

Inflation is not expected to be an issue in the region with only modest interest rate rises expected in Poland and the Czech Republic near the end of 2010, whilst they are expected to fall a bit further in Russia and Hungary.

Dr Thomas Beyerle, head of global research at Aberdeen Property Investors, said: ‘ As stability returns, the continued lack of demand and new vacant space will see prime rental values fall by an average of approximately -6% in both the office and retail property sectors during 2010. In 2011, the turning point in the present rental cycle is anticipated to be reached, with 2012 likely to see a return to positive rental growth in all sectors.’

Office vacancy rates in the region are heading towards peak levels, with St.Petersburg in Russia particularly badly hit as a quarter of office space is lying empty. However Zagreb is bucking this trend with demand stable and achieving an increase of +2% in 2009.

Moscow has seen a -47% fall in prime rents with Budapest and Warsaw seeing an average decrease of -20% in prime locations. Bucharest, Prague and Zagreb meanwhile have only had rental falls of -6-8% as occupier demand remained constant throughout 2009. Secondary locations proved more stable than prime in both the key Russian markets.

The report stated: ‘The current high yields available in the property sector are now an attractive feature for investors. Relative to Government bond yields, property offers a higher income return, further increasing property’s attraction. Poland especially should profit from its unique position as one of the few crisis resistant countries within Europe, having not entered into a technical recession.

‘One of the stumbling blocks for the property market remains the banking sector, as the majority of active credit institutions and affiliates are western European banks which are currently reassessing their exposure to property.’