The EU's acceptance of Bulgaria and Romania from the start of 2007 will not have surprised many interested observers.

There were always going to be some serious caveats to membership from the EU, that much had become clear over the last couple of years; but membership was always odds on following the accession of the eight central and eastern European countries in 2004.

Even so, the political mood in the big Western EU member countries has changed since 2004 and the bar to membership for new countries will probably never be set as low again. The issue of migrant workers has already led to an annoucement by most of the big members - including the UK - that numbers of migrants from the two new members allowed into countries will be limited.

Certainly, the conditions set by the EU on the two countries - especially Bulgaria - are significant, and the commission has made it plain there will be sanctions if the two countries do not comply with these demands.

So, if it was the case that everyone expected both countries to be accepted into the EU, does this mean that the big drivers of growth - the providers of big scale foreign direct investment (FDI) have already factored in EU membership, and actual accession won't make a huge difference to investment in these countries?

Well, if the pattern of events in the past is repeated, the interest of big FDI providers accelerates during four specific phases and with increasing intensity as each of these phase is passed.

The four phases of FDI

Phase one is during the candidacy phase, which in Bulgaria and Romania's case has passed. When the countries are known to be in the running to join, interest undertsandably picks up in possible investment.

Why is this, though? For most big business investors it is the stability that EU membership will bring that makes member countries attractive. Economic stability and political stability - economic because new members, like it or not (as in Hungary's current case), have to observe certain fiscal strictures.

These mean that economies can be judged to be more predictable than previously when the politicians had only themselves to answer to and could go on for years hiding the real fiscal situation (Hungary again).

Of course, EU membership does not guarantee all will be well economically and of course politicians can happily carry on with their old ways (Hungary again!), but sooner or later they will have to face reality (Hungary yet again!).

So, for the most part, countries will attempt to exercise fiscal restraint and keep inflation in check, their currency stable and government spending at an affordable level. Business likes all of that.

Phase two is following acceptance - right now. This is simply an intensification of phase one. It is a degree - a large degree - of certainty. This then means there will be more interest from investors.

Phase three is at the point of and immediately following accession. Now we know it's happened, all doubt about membership is removed and the economy is definitely part of the club. Again, this is an intensification of the previous phase.

And phase four (which is by far the most important phase) is in the first decade or so following membership. This is the phase when FDI really picks up and has the greatest impact. This may not be as we might expect, but it is the case, judging by previous experience.

It is perhaps during this period that more cautious investors wait and watch to see if the new member adapts well to the new constraints of EU membership.

If we use the example of Hungary once again - probably any investor, with hindsight, would have hesitated about piling in with large scale investment if they had known about Hungary's current economic problems.

No one, of course, is writing Hungary off, but it is fair to assume that given the knowledge of Hungary's current difficulties, most cautious investors would have selected an alternative investment location.

Increased FDI comes several years following membership

But, whatever the reason, previous experience - with Ireland, the UK, Portugal and Spain - shows that FDI after six to eight years of EU membership was more than double than during the first two years following membership - and that was around three times higher than four to six years before.

So, yes, membership acceptance of these two countries is indeed a massive plus for property investors.

Why does FDI matter? The equation is simple - FDI creates jobs, jobs create higher standards of living and increased aspiration and that means increased demand for housing.

When this increased demand is combined with a limited stock of high quality modern property, prices will inevitably rise. And, as mortgage markets also develop, hugely increasing the money supply, so prices will really start to take off. This is the combination of factors the property investor should look for.

But it is not just any old FDI that is important. While all investment will create jobs, some will help bring about far more sustainable wealth and jobs whose salaries will increase.

What kind of FDI to look for

So, we should not be looking simply for FDI heading for cheap labour pools.

Investors should look for FDI that creates sustainable wealth.

Such as?

Well, if we take Ireland as the classic example of a country that went from, at best, a moderately performing economy to one that roared, we can see what kind of factors might well replicate its performance.

• A country whose economy is small enough to be capable of being transformed by large amounts of FDI. And if it's not a small economy, it must have clearly identifiable areas that are capable of being transformed, like Poland has.
• A benign and attractive tax regime.
• An eager pool of well qualified labour.
• An economy not overly burdened with social expenditure and government debt.
• And a country that is taking active measures to attract FDI into what might generally be known as knowledge-based industries.

Car manufacturing, for example, is very good and can create a great many jobs. But it is probably the industries that cluster around it - industries both connected to it and those that are not and are simply attracted by tech parks and provided infrastructure - that is more significant.

We are talking here about logistics, pharmaceuticals, biotechnology, IT and service related businesses.

In Poland, for example, we have seen the emergence of a strong aviation industry and aviation related business.

This kind of investment is important because it promotes industry that is ultimately high-value and based on skills and know-how that cannot simply be transfered to a cheaper labour pool when a new one emerges.

As for Romania and Bulgaria...

So, where does this leave Romania and Bulgaria?

Well, the EU has certainly highlighted corruption as a problem in Bulgaria and to a lesser extent in Romania.

The EU has set Bulgaria six key tasks and Romania four, all of which it says it will monitor carefully.

Threat of sanctions

They are important tasks and, if either country fails to achieve them, they are likely to suffer considerably, not just from the loss of EU funds, but also from the loss of investor confidence

Bulgaria has been told it must :

• Guarantee judicial independence through its constitution
• Legislate to set up a code for civil procedures
• Put into action a plan to combat organised crime
• Make the judiciary more accountable and professional and efficient
• Carry out impartial investigations into allegations of high-level corruption

Romania must:

• Make magistrates more accountable
• Form an official body to check for conflicts of interest
• Investigate more allegations of high-level corruption
• Further tackle corruption in local government.

Without compliance, both countries could stand to lose not only EU funds, but be excluded from the EU criminal justice system and there would be a refusal to recognise their courts' judgements or their warrants.

And a failure to establish payment agencies for huge EU subsidies could mean the loss of up to 25% EU aid due.

Bulgaria was also given a stiff warning that its aviation standards must improve urgently, or its flights might be banned from EU airports.

'The current situation in both countries still requires the prohibition to trade live pigs, pig meat, and certain pig meat products to the EU after accession,' the commission said.

Despite these short comings, we still believe that both these countries offer extremely exciting prospects for property investors, with Romania in particular.

In the main, the key to successful property investing in both countries will be the biggest cities, starting with Bucharest and Sofia. The capital cities are where, initially, as with the other CEE countries who have newly joined the EU, the growth of the aspirational middle classes will take place.

These cities are likely to see the lion's share of investment and therefore will be where the jobs are at first created and where, inevitably, people will migrate to in search of work.

Later, as we have seen in Poland, Slovakia and the Czech Republic, we will see investment starting to also move out of the capitals and into second tier cities.

For an in-depth look at the potential of both countries, see the Property Secrets Romania Market Report and Forecast, and our Bucharest and Sofia decision makers.

Key facts

• The two Balkan nations have a combined population of 30 million.
• Current per capita wealth is around 35% of the EU average in Romania and 32% in Bulgaria.
• Membership is scheduled to include EU subsidies of €32 billion for Romania and €11 billion for Bulgaria up to 2013.
• The two Black Sea countries will add just 6% to the EU's population, which is now 450 million, and a mere 1% to the EU's GDP.
• Bulgaria's economy grew by 5.5% in 2005 and is growing at over 6% this year.
• Romania's GDP was 4.1% in 2005, but may be almost double that in 2006.
• Both countries have low public sector debt - 27% of GDP in Bulgaria and 20% in Romania.
• Unemployment is 8.74% in Bulgaria and 5.1% in Romania