by Steve Desmond, Investment Director, Property Secrets

Something very interesting is going on in the Slovakia property market.

Last year, the average price psm of real estate in Slovakia rose to Sk37,306 - a 24% increase on the previous year.

In Q4 of 2007 average prices rose at the highest rate for the entire year - 32.5%. These are figures from the National Bank of Slovakia, by the way.

Slovakia property is on the rise then.

And not just that, we are now at what appears to be the start of a steep growth curve.

Sometimes the reasons for suddenly accelerated property price growth can be unclear, or at least one overriding reason is often debatable.

In the case of Slovakia property, that is not the case - the reasons are so obvious we can all see them. And I think they've been fairly well explained on the PS website here.

To quote Bill Clinton's '92 election campaign catchphrase, it's 'The economy, stupid!'

Basically, I don't think anyone can argue with the fact that Slovakia's economy is a fantastic success story - not just in terms of superb growth - over 14% GDP growth in the last quarter of 2007 and the best in Europe - but also - again as has been pointed out earlier - because it's export led growth coupled with manageable inflation.

I'm just back from the country and I can tell you there's a buzz about the place, especially in the capital, Bratislava.

New Ireland

As an Irishman, the place reminds me very much of my home country as it started its Celtic Tiger era - and many of the same ingredients that powered Ireland's extraordinary economic transformation - basically from an economic Sunday leaguer to the Premier League and one of Europe's strongest economies - are to be found now in Slovakia.

The parallels don't stop there. This is a country so long over-shadowed by its neighbour, the Czech Republic.

So, in many ways, also I can see parallels between these two countries and the UK and Ireland. With Czech (like the UK with regard to Ireland), so long the dominant economy.

(And Czechs even make jokes at the expense of Slovaks! Need I say more?)

But, more seriously, just as it did with Ireland, it is the introduction of fiscal levers, like low taxes, that are driving Slovakian growth and attracting huge levels of FDI.

And, just as was the case in Ireland, Slovakia has a well-educated workforce that is also cheap.

So, a cheap and skilled labour force, a 19% flat tax for business and individuals, no dividend taxes, relaxed labour laws and a great geographical location, all bear an uncanny resemblance to the factors that brought the millions of FDI dollars, pounds and euros into Ireland.

The fact that during communist times almost all the big state-owned manufacturing industry was in the Slovak part of the old Czechoslovakia has meant that it has taken time for Slovakia to turn around from a centrally run economy to a competitive, market-driven one.

It's taken time, but the Slovak authorities have been smart enough to make the best use of the population's most obvious skills. Those old manufacturing industries that produced such things as steel and heavy machinery required a highly skilled labour force.

Engines of growth

A labour force then superbly equipped to be quickly and easily retrained to make steel in a more competitive environment AND, of course, to make CARS. Car by the hundreds of thousands.

This place is not called the Detroit of Europe for nothing! Indeed, in a few years the place will be producing a great deal more cars per head of population than Detroit ....or any place else in the world!

This management of FDI and of economic housekeeping is now really starting to pay dividends with GDP growth, more jobs and increasing affluence - and, naturally, increasing demand pressure on the real estate market.

All this and membership of the Eurozone on the way at the end of this year makes for a pretty unbeatable combination for anyone considering Slovakian property investment.

My view is that here we have a great example of New Europe supporting Old Europe. In my view Slovakia is one of the economies that is actually helping to support the strength of the euro.

Property market

But when we look specifically at the property market from an investment viewpoint, there are some further key factors to consider.

Bratislava is a fascinating example of a city with a stunning historic centre, but which elsewhere is being regenerated on a grand scale.

What struck me when I was there was how wisely this regeneration is being undertaken - the money is being spent on carefully planned reconstruction.

And I think we can see this cautious, careful approach both within the running of the economy and within the Slovaks themselves. Again, this reminds me of the Irish pre boom - conservative and cautious.

And in a period of credit being squeezed, it is those people and economies that demonstrate caution and restraint that will be the winners. Step forward Slovakia.

Debt penetration in this country is so very low and this is the big change that can be seen taking place - Slovakians are only now truly discovering the power of using debt to invest. And there is a great deal of latent consumer energy in this economy - people seem ready now to borrow to buy property.

For an investor, this is terrific news.

Why?

Well, one reason is that because Slovaks have been reluctant to borrow up to now - and because the mortgage products available have been fairly restricted - we have seen restrained property prices.

Low prices

Put more simply, what this means is that in Bratislava, for example, I'd say that you have the lowest property prices of any EU capital. Here you can get good stuff at £1,000 psm!

Now, bear in mind that the nearest capital to Bratislava is Vienna, a mere 30-odd miles away, and yet prices there are three and four times the level in the Slovak capital.

Add into the equation the fact that a new motorway makes travel between the two capitals an easy commute and you can see just one factor I think is going to drive Bratislava property prices.

The fact that the Schengen agreement is now in force and means there is effectively no border between Slovakia and Austria only adds to this attraction.

A couple of years, perhaps 18 months ago, PS stopped doing deals in Slovakia essentially for three reasons:

1. We couldn't see the anticipated price growth happening - I think we were ahead of the game to an extent
2. The rental market was limited
3. The finance for foreigners was very poor - around 50% LTV

So, it didn't turn out to be the hottest market on the scene, that's for sure.

But the fact that it has been slow to build growth momentum now stands in its favour. This is not a market driven by speculation, banks have been conservative in their lending, only gradually raising the availability of credit - and this has suppressed prices and the amount of investors in the market.

Finance turned on its head

Those finance products, though, have completely changed. In fact, we have investors who bought PS deals when 50% LTV was available who will see developments closing when 90% is available.

So, as those data for the end of 2007 show, and as the economic indicators show, there is an alignment of factors in Slovakia right now that for a serious property investor make this a right here and right now kind of market.

And, finally, to go back to the Irish parallel - bear in mind that it took a few years before anyone really started to notice the Irish Celtic Tiger was growling - from 1990 the economy grew at just over 5%. But it was from '96 to 2000 that it really roared - GDP growth went through the roof, growing at well over 9% a year.

Slovakia, to me, has all factors in place to replicate this boom period.

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