The impact of the crisis that started in the US sub-prime mortgage market has subsequently rippled through financial markets and institutions around the world.

Few people now doubt that the negative effects will leave any location's economy completely untouched. For some it may mean recession - even, perhaps, a depression. The pundits are almost as divided as ever, although more now seem to be in the Bear camp than ever before.

Probably a result between extremes is still the most likely outcome. Some economies will be harder hit than others and the length of the slowdown will be indeterminate.

But what is (almost) certain - judging by events in the past - is that when recovery comes, it will come rapidly and very probably as unevenly as the slowdown.

Key then for property investors is to be well-placed to take advantage of that recovery and to be invested in those markets that are most likely to emerge the strongest.

That's why a new report on European attractiveness to business investors makes extremely interesting reading and throws into sharp focus some insights into which economies will be winners in the future - and where property markets are therefore most likely to perform the best.

And, as interesting as the headline results are - which markets business investors favour - the reasons they select those they do is equally relevant when we try to spot those key FDI magnets of the future ourselves.

Future property buyers

And this is important because this is where the jobs will be created and the new middle classes (future property buyers) will be most active.

Ernst & Young's 2008 European attractiveness Survey questioned 834 decision-makers about how competitive Europe is on a global scale in terms of FDI, and which countries within Europe are doing well, how they see the attractions of alternative business locations, and the criteria that drive their perceptions.

What is perhaps most striking about the report is that despite the received wisdom, and the undoubtedly large investments going into India and China, "Europe's multinationals still rely on proximity and take advantage of competitive, modern locations in Eastern Europe's renovated cities such as Prague, Budapest, Warsaw, Bucharest or Lodz."

As oil reaches record price levels and shows no sign of falling significantly without a huge fall off in economic activity globally, that proximity factor carries an even larger premium than ever.

And, as the report notes: "India, often thought of as a direct competitor, or even a threat to the future viability of back-office operations in developed economies, is struggling to gain ground, falling back to third place in our 2008 ranking.

"Aside from China, Central and Eastern Europe are frequently cited as manufacturing location favorites (17%), and Western Europe wins a surprising third place.

"Europe's dynamism comes from its Eastern borders...and beyond. Central and Eastern Europe, including Russia and its satellites, attracts 28% of the projects and a heavyweight 58% of FDI job creation."


The new near markets

Interestingly, new near markets appear to coming onto business investors' radar screens.

"Patterns are changing fast. The main growth is going to Russia, whilst Turkey and the Ukraine are proving increasingly successful in attracting investment, In a slow year, last year's stars - Poland and Romania - are catching fewer labour intensive investments.''

The significance of this is threefold. While it's interesting that new markets are coming on stream, the fact that investment into them is primarily labour intensive investment indicates they are being chosen for reasons of cheap labour. That tends to be the initial investment phase.

And while it opens up a market, through cheap manufacturing, nowhere (not even China) can maintain its attractiveness based entirely on cheap labour indefinitely.

Eventually, any country in this category is a victim of its own success - as wages grow, they erode this labour cost edge.

So, it's no bad thing that labour intensive investment is moving away from Romania and Poland - both of which are focusing more and more on knowledge-based activities.

In Romania the huge success in the IT industry is a marker of this; similarly, high-end aviation and associated manufacturing is taking place in Poland.

Investment benefits take time

Even so, once that manufacturing investment goes in, whether it's labour intensive or not, it is not uncommon that the full economic benefits to the recipient country aren't seen for several years.

Plants take time to build, production processes gear up to capacity over many months. Jobs are added slowly.

The effects of car manufacturing investment in Slovakia - firmly in the high value manufacturing category - have only really been felt in the last year or two, and this is a good example of this investment effect delay.

In turn, the Slovakian economy is now one of the great CEE success stories, its current star performer, and the property market in Bratislava one of the most attractive right now.

"The results show a remarkable shift. ....... The most important driving force for foreign direct investors is to access new markets. And as Europe's economy slows, they are increasingly looking to thriving economies and competitiveness elsewhere.

"Today, business leaders see the investment world as multi-polar, with destinations such as China, India, Russia, and the Middle East, which enters the top ten ranking for the first time, now strong rivals to the traditional dominance of Europe and the US."

Even so, the top five countries for attracting FDI projects in 2007 remained the same - but Central and Eastern Europe countries rose quickly.

Who attracted what?

Countries and their total share of global FDI

US 12.5% (falling)
UK 11.1% (up)
France 8% (up)
Netherlands 6.8% (up)
China 4.4% (down)
Hong Kong 3.5% (up)
Russia 3.2% (up)
Germany 2.9% (down)
Brazil 2.4% (up)
Singapore 2.4% (up)
India 1.0% (down)

Continental Europe - 42% (down 1%)

The UK topped the job-creation ranking.

Europe is quite clearly still an active player, but less a dominant power.

"For the first time, Europe loses its historical, exclusive attractiveness leadership in our 2008 survey. Traditional FDI heavyweights (Europe and the US account for 58% of global GDP) now share the field with fast-growing global challengers."

But, much more significantly, the economic landscape of Old Europe, the survey shows, is rapidly changing, with the transformation undoubtedly more advanced in the UK.

What is being seen is a huge shift of manufacturing, a great deal of it high end manufacturing, from western Europe, eastwards.

The survey describes this as the two faces of Europe.

"....is showing two faces to global investors, and this makes it resilient. While Western Europe's potential attractiveness declines, Central European countries including new European Union members, and frontier countries, such as Russia and the Ukraine, continue to gain interest.

"Europe retains a considerable power of attraction and is ranked among the top three business locations by 75% of respondents.

"But investors seem also to be sending a strong message that their main interest lies in younger, more dynamic and competitive markets. This eastward transition, while evident in our attractiveness surveys since 2004, has become particularly marked over the past two years."

Where is the decline taking place in Western Europe?

Traditional industries.

In 2007, 30,527 industrial job creations were 'missing.' Four sectors are responsible for 60% of them: logistics, automotive, pharmaceuticals and industrial equipment.

"Together, these four sectors provided 31% of total FDI job creation in Western Europe in 2006. Their share dropped to 23% in 2007.

"New jobs in the logistics sector, the top industrial job contributor in Western Europe in 2006, fell by 84%, from 11,292 jobs to just 1,792 in 2007. The automotive sector, which used to rank second in industrial job creation, provided 2,865 fewer jobs, a 35% fall.

"Industrial equipment jobs were down 60% (2,730 fewer jobs), while pharmaceuticals industry hires decreased by 66% (3,413 fewer jobs)."

Job migration

So, where are these jobs migrating to?

The answer is clear.

"Central and Eastern Europe attracts 28% of the projects and captures 58% of all jobs created. In 2007, investment projects into Central and Eastern Europe grew by 15%, despite a 7% fall in job creation (against 29% fewer jobs in Western Europe and 18% fewer across the continent).

"While Western Europe continues to attract new FDI projects (72% of total European inward investment projects), more new jobs were created in Central and Eastern Europe.

"Indeed, 58% of jobs created in Europe were directed to Central and Eastern Europe."

The Czech Republic maintained its place, despite attracting 27% fewer projects. It moved from fourth to third place in the job creation table despite creating 14% fewer jobs than last year.

Russia leapt to fourth position for jobs created (+85%) and moved from 13th to 8th for number of projects (+60%).

Poland and Romania maintained their position in terms of number of projects. In terms of job creation, Poland fell to second, creating 41% fewer jobs than last year.

Slovenia saw the biggest growth in terms of job creation (multiplied by five) and jumped to 15th position in the ranking.

"How to" invest is becoming more important than "how much" for investors considering sustainable location options.

Survey respondents pay more attention to political and legal stability (54%) and telecoms infrastructure (51%) than labour costs (47%).

This places those countries of CEE that are either in or lining up as serious contenders to join the EU as those countries that will have lasting appeal to business investors.

Future focus

Those CEE countries that focus on infrastructure development, including telecoms, will be the winners in attracting new business. Those countries and regions that fail to see this requirement will have to increasingly rely on cheap labour to make themselves attractive - a far weaker strategy long term.

But the message is clear - the great migration of capital investment into central and Eastern Europe may be interrupted somewhat by the current aversion to investment risk, but the flow looks to be unstoppable longer term.

This then is where the new jobs and a new, growing spending power will continue to emerge - and dynamic property markets in turn.

Short term affordability issues among domestic buyers in some of those property markets may well cause a slow down in accelerated price growth along the way, but to focus on this would be a big mistake.


It would miss the huge potential for future growth that exists as productivity grows and wages rise fast. Just as importantly, we need also to stay focused on the tiny percentage of mortgage lending that still exists in most of these markets - a vital measure of potential growth.

A footnote on the UK

Amid all the gloom about UK Inc and the gloom forecast by some who seem to see the end of any kind of growth in the UK's housing market, it's perhaps worth bearing in mind that the country is still the star performer in terms of FDI. Its track record is really nothing less than outstanding.

The Ernst & Young Survey points out that "The UK is the undisputed leader of the European FDI competition.

"The country tops our 2007 ranking both in number of projects and jobs created. FDI projects into the UK grew by 4%. Although its market share was slightly down, the UK holds the largest-ever lead over its European competitors (19.2% market share in number of projects, ahead of France in second place with 14.6%).

"The country's performance is mainly due to its commanding share of service activities (24% of total service investment into Europe), especially in Greater London (52% of UK service investment). The UK dominates Europe's inward FDI in software (30%), business services (26%), and financial services (28%)."

But, along with this success, comes a rider - a very strong economic linkage with the US. Obviously, it's not necessarily a bad thing to be coupled with the world's dominant economy, but it does mean that the old adage (with a slight variation) applies - when the US sneezes, the UK catches cold.

In addition, the areas in which the UK is strongest at attracting inward investment are the very areas that will be hit first (and perhaps hardest) in a credit crunch induced economic downturn.

But, equally, it can be argued that as the US was first into the big slowdown that started in 2007, it will be the first out of it - including its property market.

That could well bode well for UK inc in the coming months and even - dare we suggest - the UK's housing market.