Hungary ranks no. 1 for commercial real estate in Europe.

Based on its strong commercial real estate market, Hungary is the number one country of the 13 emerging countries in Europe, according to EmergingEurope, a report by Cushman & Wakefield.

Just behind Hungary are the Czech Republic and Poland.

"These Central European countries have performed well, given their early moves to carry out economic reform, their recent good growth and growing appeal to investors and international business," said David Hutchings, Cushman & Wakefield's Head of European Research.

The country ranking in the Emerging Europe report takes into consideration some 50 different political, economic and real estate related factors. The opportunities and risks vary significantly from country to country.

"Investors seeking high-risk returns are likely to be more attracted by countries further down the ranking, such as Russia and Turkey. But before deciding to invest in these countries, businesses need to understand how these markets operate," said Hutchings.

Regarding the role of real estate, the report states: "The availability of modern real estate--whether for offices, retail or industrial--is a catalyst to attract businesses to these emerging countries. Where space of the right quality is not available, economic development will be slowed."

Emerging Europe looks at the real estate potential of 13 emerging countries, including the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia--all due to join the EU in 2004. Bulgaria, Romania, and possibly Croatia, are due to join the EU in 2007; Turkey, a candidate country, has not yet started membership talks; and Russia, the region's biggest country with a population of 143 million, has a partnership and co-operation agreement with the EU.

"The eastward expansion of the EU will potentially benefit all of Europe--not just the faster-growing emerging markets," said Hutchings. "A larger, more accessible and more liquid market for trade and investment will open up new opportunities for businesses.

"The winners, however, may be at a regional or city level, rather than a country level. Areas with no comparative advantage will need to compete on cost. But set them against global competition for low-cost production, such as China, and this is unlikely to be sustainable in the longer term."

This will be the fifth and biggest expansion of the EU. The last was in 1995, with the joining of Austria, Finland and Sweden. More parallels, however, can be drawn with the southward expansion of the EU, to take in Spain, Portugal and Greece, which took place in the 1980s.

The 12 new members joining the existing 15 will see the EU's population grow by more than a quarter to 484 million, 70 percent more than the population of the United States. However, these countries will add only 5-6% to the EU's gross domestic product, making the total EU economy about the same size as that of the US.

On the economic impact of accession, the report says: "An economic 'big bang' is unlikely when these countries join the EU--in any case, most are already out-performing the existing EU countries. Nonetheless, lower wage costs and higher returns than elsewhere in the EU will attract greater numbers of companies and investors over time."

"Perceptions of these markets as less advanced and more prone to corruption and bureaucratic delay will persist for some time," said Hutchings.

"Many, however, have skilled workforces and a growing entrepreneurial business base, which is competing with incoming businesses."

Key points from the report include:

Retail: a total 36 million SF of new shopping center space is due to be finished in Emerging Europe over the next two years. "Consumers in the region have lapped up new retailing concepts such as modern shopping centers and out-of-town retail parks," Hutchings says. "The development of the next generation of retail space will remain a catalyst to attract foreign retailers and the new breed of domestic player."

Offices: "Future growth in the demand for office space is likely to be gradual as many companies have already set themselves up in their preferred markets. But we may see some boost to short-term demand, especially perhaps from public bodies, such as the EU itself, and lobbying and trade organizations," says the report.

Industrial: "The removal of trade barriers post accession will encourage more distribution and freight companies to relocate into the region and establish pan-European networks."

Investment: Interest from institutional investors is expected to grow further over the next two years as accession reduces the risks associated with emerging markets, says the report. Yield levels are expected to edge down further, particularly as some countries get closer to adopting the Euro. However, activity will be restricted by the lack of suitable product to buy.

Emerging Europe Ratings for strength in commercial property

1. Hungary

2. Czech Republic

3. Poland

4. Estonia

5. Slovakia

6. Slovenia

7. Lithuania

8. Russia

9. Latvia

10. Bulgaria

11. Turkey

12. Romania

13. Croatia