EasternEurope: One of the first property groups to set up in the Czech Republic is expanding its interests in many central European countries now headed for EU membership. Robert Anderson reports

Property investors have been piling into the new member countries of the European Union for several years, prior to their formal entry this May.

But few have been focused on central Europe for as long as Orco Property Group. It remains the only company listed on a western European stock exchange that invests purely in this region.

Jean-Francois Ott, the French chief executive who controls the company with his partners, moved to Prague shortly after the fall of communism.

He began developing apartments and offices in 1991 after his expatriate friends complained they had nowhere to live or work of the quality they were used to.

At first he converted mansion blocks in the capital's leafy Vinohrady district into luxury apartments and offices, but in 1999 he began diversifying into hotels and extended the company's reach from the Czech Republic into Hungary and Poland.

Now Orco is expanding farther afield, and has begun developing mid-market dwellings and new office projects.To finance its expansion Orco made an initial public offering on Euronext in 2000, and has so far raised a total of €40 million. "I wanted to go regional, so I decided to go public," says Mr Ott. In an innovative move in 2002, Mr Ott founded the €50 million Endurance Fund in partnership with Invesco of the US to benefit from the increased interest of institutional funds in the region.

"I saw funds buying our products," says Mr Ott. "I thought we should do that, too." He estimates that Orco and its partners now have €350 million to spend.

Orco believes the residential, office and hotel businesses of this region will grow strongly after EU entry, providing the company with both increased turnover and capital gains on its assets.

Office rents are stable in Prague as new build and demand remain strong, while residential property values have soared ahead of EU entry, and the hotel market is just emerging from the September 11th doldrums. "Hotels are not a sexy market right now," Mr Ott says. "But when it's bad, it's good for people like me who want to buy."

By diversifying into new businesses and countries, Orco spreads risk, gains synergies and can take advantage of new opportunities.

Typically, Orco uses its extended-stay hotel brand MaMaison Residences to grab its first foothold in new markets, before moving into office and residential development. In offices, Orco remains centred on Prague's Vinohrady district, rather than the outskirts where many new office buildings have been built. It is now developing a new complex, the €53 million Luxembourg Plaza in Vinohrady, which will contain 22,500 sq m (242,190 sq ft) of offices plus a 160-room hotel that will be leased by the Marriott group.

In hotels, its Orco Hotel Collection boutique chain and MaMaison Residences operate in Budapest and Prague. This year an Orco Hotel Collection will open in Warsaw and MaMaisons in Bratislava and Bucharest.

The group plans to expand the MaMaison idea to Moscow, Kiev, Belgrade and Sofia to follow foreign investors as they start to open up new markets in the Balkans and the former Soviet Union.

The European Bank for Reconstruction and Development backed this concept last year by committing €10 million for a 35 per cent stake in MaMaison.

In residential, Orco made a leap forward in January by acquiring Czech residential property company IPB Real for €18.5 million. This catapulted Orco out of its Vinohrady luxury niche into serving mid-market customers. Orco already plans a development of 1,500 flats on an 85,000 sq m (914,930 sq ft) parcel of its 40-hectare land bank.

With IPB Real, Orco is the largest residential builder in the Czech Republic. Orco estimates IPB Real provides a pipeline of €200 million turnover over seven years and a potential €4 million profits in 2004 alone. Buying IPB Real allows Orco to tap into the growing expectations of middle class Czechs. "The Czech middle class are getting better jobs and are wanting to move into something new," Mr Ott says.

Orco is now looking to move into the mid-market segment in Poland and Slovakia. This would reposition Orco from a Czech-based property group into a pan-Central European one. (Financial Times Service)