Globalization is spreading, international corporations are making their mark, and new markets are emerging all over the world. Notably, Eastern Europe has experienced tremendous growth in real estate investment in the past decade, a trend acted upon by many members of The Counselors of Real Estate. In the past five years, the number of members accepting assignments in foreign countries has increased by 25%.

A combination of growth in the capital and corporate markets is a favorable climate for globalization, says Mark Bates, CRE, president of Providence, R.I.-based Bates & McDonough. Corporations are seeking new markets for products and efficient locations to produce products. Capital markets are providing the fuel for growth (money).

Norm Flynn, CRE, president of Madison, Wis.-based Norman D. Flynn Associates, says that international corporations have had a growing influence in Eastern European markets, especially over the past eight years. He says that the Polish and Czech Republics are now fairly westernized. It was not until 1997 that the first McDonald's opened in Kiev, and now there are seven in the Ukraine, says Flynn.

The presence of international corporations provides demand for first-class office space and some housing accommodations, according to Howard Gelbtuch, CRE, principal of New York-based Greenwich Realty Advisors.

Risk factors Investing in real estate in emerging markets brings about a whole new category of risk factors but with the potential for greater returns. Many unique factors constitute risk when investing in Eastern Europe including: a need to find competent, trustworthy local partners; lack of a legal framework for property rights; government instability and corruption; and lack of transparency.

Finding a competent local partner can be a risky and difficult task, but one that is important in emerging markets. Such partners should be both trustworthy and knowledgeable, rather than take your money and leave you in the cold, says Flynn. Legal advice is not openly available there, but some competent expatriates and English speaking attorneys can help.

Much of the risk comes in the form of existing property rights laws, repossession rights and process and political stability vs. market risk. Here in the United States, we have a defined method of ensuring title and making sureyour rights are protected, but in emerging markets your rights are not protected, says Flynn. If you sell a property, you may not have all the rights to do it. The legal framework is the weakest. That makes most investors leery.

John Hentschel, CRE, president of Baltimore-based Hentschel Real Estate Services, recently made a trip to assess the Granery Island property in Gdansk, Poland, with the CRE Consulting Corps. Poland's economy is expanding, creating opportunities for profit, says Hentschel. While many are participating in the prosperity, others appear to be left out, raising concerns over the potential for political instability.

Widespread corruption can also be a new factor to investors going into emerging markets. As you move east, there is more corruption, says Flynn.

Meanwhile, transparency cannot be accomplished without government participation. In Eastern Europe, a strong reluctance to reveal transactional data has carried over from the days of the centrally planned society, says Bates.

Gelbtuch is not optimistic that transparency will occur in his lifetime. He believes that legislation cannot overcome cultural issues that restrict the flow of information among owners, appraisers, and counselors.

Today's opportunities While some Eastern European markets are built up, there still is some opportunity in emerging markets for the speculative real estate investor. As investors move further east, the investment yields are higher, and the risk is greater.

Any place in Eastern Russia and sectors of the Ukraine still have opportunities for investment, says Flynn.

According to Gelbtuch, contrarian investors who successfully acquired U.S. real estate during the early 1990s who want to duplicate those returns today must invest overseas. Investment banks and opportunistic funds are most active in the emerging markets, whereas more traditional lenders seeking to diversify their portfolios, such as insurance companies, are more active in the well-established countries.

John Hentschel's five techniques used while assessing and managing risk when there is not adequate supporting data in the United States or overseas:

* Develop multiple assumptions and compute expected values for each, employing probability analysis;

* Increase the hurdle rates required for capital commitment;

* Decrease the payback threshold for capital commitment;

* Give preference to build-to-suit projects or increased pre-leasing requirements for capital commitment;

* Rely on internal working capital rather than institutional funding, which may be driven by loftier strategies or objectives.