The credit crunch was caused by banks.

So, it follows that what banks do and what they say can tell us a lot about what's been happening since the crisis began almost a year ago - and where we're headed.

After all they're the ones that have taken the biggest kicking and surely must have learned a lesson or two along the way. They certainly know where they've had losses and made profits.

So, where the banks take their biggest hits and where their profits hold up must be of keen interest to property investors looking for some evidence of growth potential in a very uncertain world.

Calling short term potential now seems to be the most popular media game - is it gold, is it oil, will bonds replace commodities, which ever increasing property market is the next uber hotspot?

But this was a day a day when banking goliath HSBC - generally seen as a rather old fashioned kind of bank with a diverse business and lots of capital - reminded us of the extent of the ongoing credit crunch.

HSBC was one of the first banks to be bitten hard by its involvement in sub prime lending in the US and is still suffering in the States.

But while HSBC profits have taken a huge hit during the first half of 2008, two things are worth noting - one, despite profits falling by 28%, it still made a profit of some $10 billion, and, two, that while its chairman Stephen Green believes things may get worse before getting better, he also sees bargain buying opportunities for those with the cash.

In other words, there will be bargains to buy - but where they are bought, as always, will be key.

He also noted the huge inflationary pressures now affecting much of Asia, which has been such an important growth region for the bank. Many now see this inflation and the higher interest rates that will be necessary to rein it in as bringing about a significant slowing of many Asian economies, including the one that matters most by far - China's.

The knock on effect on commodity producing economies could be dramatic.

Take a look in the Australian press to see the amount of angst about the economic outlook there now is Down Under - a country that has boomed on commodity sales - with the PM warning of a hard landing for the economy, a slump in housing approvals, weak retail spending, and consumer and business pessimism. And the first fall in house prices since 2005.

So that sums things up for the US, where it all began - and by implication we can include the UK, which is simply a smaller version of the US model of credit fuelled growth.

It also sets off a warning light on Asia and, by turn, for those economies that have experienced strong commodities-driven economic growth.

So, where are banks telling us about that IS holding up and has excellent growth prospects based on fundamentals?

Here it's worth looking at the far less widely reported half yearly results of Bank Austria, part of the giant UniCredit Group. Within UniCredit Group, Bank Austria is responsible for the banking network in Central and Eastern Europe.

Here are the headlines:

• Bank Austria made first-half profits of over €1 billion
• Central Eastern Europe is the key growth driver of those profits: pre-tax profits up by 36%
• Net interest income and net fees and commissions grow by 16% to a combined €3.3 billion.
• The bank achieved significantly better results in the second quarter of 2008, after a lower performance in the three preceding quarters, which were affected by the credit crisis that has been smouldering for the past twelve months.
• Profit before tax for the second quarter was 14% higher than in the same period of the previous year.

Here's what Erich Hampel, Bank Austria's Chief Executive Officer said: ".... the market environment remains difficult.......In this environment, our results for the first six months nearly matched the very good performance achieved in the same period of the previous year.......... Our business in Central and Eastern Europe continues to grow strongly."

The bank said: "Strong growth in CEE and the large business potential available there leads to an increasing need for additional branches and employees.

"Responding to needs in the local markets, Bank Austria will therefore take on 11,000 new employees in the region and open about 1,200 additional branches in CEE by 2010."

Expansion will focus on Turkey, Russia, Romania and Ukraine with a total of 900 new branches in these countries.

In the first half of 2008, more than 220 new branches were opened in CEE, a further 280 new branches will be added by the end of 2008.

Does all this mean that CEE won't be hit by the credit crunch?

Of course not!

But, when figuring out where to place long term property investment bets, it is worth keeping in mind how much fundamental potential a region has.

And, perhaps the irony is that it will be the growth of credit (among the still emerging middle classes) in this region that will fuel property markets.

The chances are, however, that it'll continue to be credit of a far more conservative kind than we've been used to over the last decade or so in non CEE countries.

Which is why the CEE is so well set up to gain - tiny mortgage debt penetration and predominantly ultra conservative banks. A great combination, then - as we may have mentioned before! - for great long term potential.

We've decided to revive an old tradition here at Property Secrets - the award for the week's most misleading headline!

We started the contest a few years back - way back, actually - when there seemed to be a never ending flurry of headlines basically predicting the end of the world.

And yet, often, if you were one of the few people who actually read the text, you'd find that the doomsday headline presided over copy that said something rather different.

No one's denying that there are serious economic problems out there: plenty, in fact, from credit squeezes, to rising inflation, probably followed by many of the major economies facing rapid growth slowdown and recession.

And property markets in developed economies look, well, a little sickly right now. Never has our advice to consider property investment as a long term venture been so apposite.

But there is nothing like some ugly numbers to bring out those two ultra-enthusiastic writers, Messers Doomsday and Armageddon.

When things are bad, they like to make out they're catastrophic and, more scarily, that there will be no end, no upturn. It's into the abyss time.

We've been in this territory before, of course. Who can forget that award winning splash in the London Standard in 1999, quoting 'experts' advising everyone in London to sell up and rent NOW!

The Economist, no less, did it, too, in 2003. They used the p/e ratio as used to value equities, applied it to property (misguidedly), and advised everyone to sell and rent too.

Nice one! Great advice! How to lose out on around 100% growth with one lousy decision.

Of course, UK property prices are falling, and fast - no one's denying that. But they are falling on very low volumes because as employment is (so far) still high, people in large numbers are not being forced to sell.

Anyway, that's old news.

Now, media attention will increasingly turn to markets other than the obvious ones of the US, UK, Spain and Ireland, where we know there's a steep slide.

In fact, it already has turned. We spotted a great piece in MoneyWeek. As the headline was, 'Worst is Yet to Come for Eastern Europe', you can imagine it aroused our interest.

Well, it's one way of attracting attention - write a headline that bears no relation to the story.

'After years of strong growth and stronger spending in the ex-communist countries, life is about to get tough for consumers,' said the strap line.

But actually, no. What the article said was that Latvia, Estonia and Lithuania were in for a tough time because of their ultra inflationary wage rises and consumer spending binges. We agree with that.

But these are small states in Eastern Europe. What about the bigger economies - Poland, Czech, Slovakia, Romania and the smaller Bulgaria?

Despite the dire headline, the article surprised us. It agreed with us entirely!

Admittedly, you had to scan to the latter part of the piece to find the commentary on these bigger and far more significant markets, but it was there.

Czech, Poland and Slovakia - "....suffer least from the imbalances and deficits that threaten most of the region, and their growth has largely come from productive investment, rather than overheated, debt-fuelled consumer-spending binge or an asset-price bubble. Growth will slow, but overall effects will be fairly mild."

The worst is yet to come, eh.

What about Romania and Bulgaria? Dire straits? Er, not really...

"The consensus on Bulgaria and Romania sees them slowing from their current 6% growth, but remaining fairly strong."

Which is exactly what we've been saying for months!

The small and clearly over-leveraged economies of Latvia, Lithuania and Estonia, as well as CEE's sick man economy, Hungary, are exceptions.They have a rough time ahead.

But the fact is that no CEE economies will be immune from a general economic slowdown, maybe outright recession, in the more developed countries, especially in Europe. But the key is that the slow down in our key markets - Czech, Slovakia, Poland and Romania - is from a very rapid pace of growth, so the effects will be milder.

They are safe havens for investors then.

But 'CEE offers investment safe haven' doesn't have the drama of "The Worst is Yet to Come' , now, does it?

Feel free to add any of Headlines of the Week you may spot. We may even give a prize for the best one. Free Spanish villa on the costas, anyone?

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.