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Slovakia Investment Property Newsletter
April 2008 - Issue # 41
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Welcome to the new issue of your Slovakia newsletter. This
month we take a detailed look at the January 2009 euro
adoption and the benefits and disadvantages the single
currency will bring to Slovakia.

As usual, if you've missed any of our previous newsletter
issues, they are available for you here:

www.slovakiainvestmentproperty.com/newsletters.php

In this issue you will find:

1. EC Approves Slovakia's Application for Euro
2. The Euro - Pros and Cons for Slovakia
3. Tell Us What You Think!

===================== MUST READ NEWS ====================

1) EC Approves Slovakia's Application for Euro

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On 7 May the European Commission (EC) approved Slovakia's
application to adopt the euro on 1 January 2009.

This move was expected since the country has met the
Maastricht criteria on interest rates, budget deficit and
inflation.

"Slovakia has achieved a high degree of sustainable economic
convergence and is ready to adopt the euro on Jan. 1," said
Joaquin Almunia, the commission's top economic official.

Slovakia will become the 16th country using the euro as its
currency. It is the second former Soviet bloc country to
join the eurozone (Slovenia did it earlier this year).

The euro adoption will complete an aggressive transformation
that brought Slovakia from being one of Eastern Europe's
laggards to its star performer in less than a decade.

No other countries are expected to qualify for euro membership
in the short term. The previously strongest hopefuls Estonia,
Latvia and Lithuania are now battling very high inflation
rates while Poland, Hungary and the Czech Republic are also
unlikely to meet the Maastricht criteria any time soon. Both
the EC and the ECB (European Central Bank) stressed how far
other countries have yet to go before they can join the euro.

* * *

Slovakia has one of world's lowest property taxes (including
taxes on registration, purchase and possession).

The ratio of property taxes to GDP was, according to a recent
report, at 1.9% for OECD countries. The UK topped the list
with 4.4%, followed by France (3.5%), Canada (3.4%), Luxemburg
(3.3%), the US (3.1%) and Spain (3%). Mexico had the lowest
ratio (0.3%), followed by the Czech Republic (0.4%) and
Slovakia (0.5%).

* * *

On 28 April the Slovak koruna reached a new peak of 32.2 SKK/EUR.

* * *

In 2007 Slovakia produced 571,071 cars - a massive 93% increase
to 2006. The 105.7 produced cars per 1,000 inhabitants make
Slovakia the world's largest car manufacturer (per capita).
In 2008 the country is to produce 640,000 vehicles (according
to the Automotive Industry Association of Slovakia). The total
turnover of the automotive industry was SKK 628 billion (19.44
billion euros) - a 40% increase y/y.

* * *

IBM is planning to transfer its centre for Central Eastern
Europe, Austria and Switzerland from Vienna to Bratislava.
(IBM already employs 2,600 people in Bratislava.)

* * *

Sony has stated a serious interest in further large scale
investments in Slovakia, including a logistics and distribution
centre to provide deliveries to Slovakia and most of Europe.

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2) The Euro - Pros and Cons for Slovakia

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In early May Slovakia got the go-ahead from the European
Commission to join the eurozone on 1 January 2009. So,
good bye koruna, welcome euro!

But, what impact is the single currency likely to have on
the Slovak population, businesses, economic development,
and importantly, local property prices?

Now, first things first...

The conversion rate for SKK into euro has not yet been
decided. At the current market rate of just above 32 SKK/EUR
the koruna is significantly stronger than the previously set
central parity of 35.44 SKK/EUR. It is expected that the
final conversion rate will be more closely aligned with
the current market level.

The Euro and its many advantages for Slovakia
----------------------------------------------

Domestic and foreign analysts agree that the euro adoption
will be beneficial to Slovak citizens as well as businesses.

The most obvious benefit will be reduction of transaction
costs (on trades in euros) and removal of exchange rate
risks - all good news for GDP growth. (Currently the transaction
and administration costs on trades in euro are approx 0.36%
of GDP - according to the country's central bank (National
Bank of Slovakia, NBS) - which will be saved after Jan 2009.

Slovakia's foreign trade turnover is over 160% of GDP and
more than 80% of this is trade with the EU (in euros). So
the advantages here are obvious.

Euro adoption should also bring lower cost of capital for
businesses and individuals and hence stimulate investment.
Although interest rates in Slovakia are already quite low,
there is still potential for reduction by 1% or so.

Apart from the obvious direct benefits of the euro, there
are many - much wider - indirect ones.

Economists forecast a growth in foreign direct investment
(FDI) and foreign trade, which in turn contribute to higher
GDP growth and fast rising prosperity of Slovak population.

NBS expects Slovakia's trade with eurozone members to
gradually increase (in the long run) by up to 90% after
euro adoption. FDI will be boosted in many ways - thanks
to the perception of higher stability of Slovakia due to
the euro, investors savings on transaction costs as well
as elimination of exchange risks.

According to NBS the total increase of GDP (in the long
term, over 20 years) thanks to growth of international
trade and rising FDI as a result of euro adoption should
amount to 7-20%. The euro is estimated to contribute to
economic growth by 0.7% (of GDP) annually on average -
at stronger rate in the first few years after joining the
euro and to a lesser extent in the later years.

...and the disadvantages
-------------------------

The euro changeover costs for businesses and the state are
expected to come to about 0.3% of GDP. This is a one-off
cost and hence negligible when compared to the permanent
savings resulting from adopting the single currency.

While some consumers are worried about possible price
increases after conversion into euro, according to
Eurostat (EU's statistics office) the impact of euro
on price increases in the current 15 members of the eurozone
was very low at approx 0.2%. The strong competition amid
Slovakia's retailers should also prevent any mark-ups or
rounding up.

The most important disadvantage of the euro adoption will
be the loss of independent monetary policy. The NBS will
no longer be able to use interest rates to respond to
external shocks. However, the more synchronized the Slovak
economy gets with the eurozone, the less significant should
this become. Also, fiscal policy will be even more important
for the stabilization of the economy after monetary policy
loses its independence. (Slovak fiscal policy in recent
years has been very successful and it's imperative that
it continues on this path.)

Higher inflation is also likely to be a result of the
euro, according to NBS. The bank estimates the inflation in
Slovakia for several years after euro adoption to be approx
1.5% higher than the eurozone's average inflation.

With strong economic growth and rising living standards
will come a rise in price levels - especially in services
(where the price difference with the eurozone is greater
than in goods). Without the possibility of use of interest
rates and exchange rates, higher inflation will be the only
way to catch up in price levels.

Higher inflation will likely cause a decrease of the value
of savings, although this should be only marginal and will,
in part, be offset by lower interest on credit. Still, as
Slovak households are net savers (rather than debtors as
in many western countries), this is some reason for concern.
That said, even today (and in the past years) real interest
rates on savings in Slovakia have been negative (after inflation).
In any case fast growing wages will also enable Slovaks to
accumulate higher savings.

Economists are unanimous that for Slovakia the advantages
of the euro are much more significant than the disadvantages.

What about the impact on property values?
------------------------------------------

The question many investors are asking is what impact the
euro will have on the growth in property prices in Slovakia.

Well, most experts seem to expect an accelerated rise in
property prices imminently after euro adoption. In truth,
there is little that would indicate this to be a sure thing
- at least in the very short term.

As with other goods, it may be more a matter of perception
of the general public that euro brings increased prices.
As proven by statistics, the rounding up effect in the 15
countries that adopted the single currency was negligible.

A possible hike in property prices might, however, come as
a result of somewhat miscalculated expectations of the
sellers - refusing to sell their property for its market
value in the months prior to euro adoption, in expectation
of strongly increased values after January 2009.

Slovakia has seen a similar situation in the six months or
so prior to the country's EU entry. Sellers, expecting a
strong appreciation imminently after the May 2004 EU entry,
were holding onto their flats to sell after May. The resulting
extremely low supply of properties on the market and the
usual strong demand from buyers have caused prices to
shoot up prior to May 2004.

As the market stabilized and many more properties were offered
for sale, prices returned close to the normal pre-May values.
It is possible that the euro adoption will cause a similar
euforia among property owners and sellers. However, any out
of order price hike purely due to the introduction of the
new currency should be just a short term anomaly.

The medium to long term benefits for property prices are
of course a whole different matter. The advantages here are
the same as the benefits of the euro for the entire Slovak
economy.

This vote of confidence will bring a new influx of foreign
direct investment into Slovakia, increased confidence of
international investors and even higher growth. And all that
is certainly excellent news for the property market as well.

After all, we have all seen what happened in Ireland or
Spain after they joined the eurozone.

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3) Tell Us What You Think!

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We would love to hear what you think of this issue of our
newsletter. We hope you find the information useful and
wish you best success in your investment activities.
And of course, if you have any suggestions for upcoming
issues that you'd like to share with us, please send them!

Just e-mail us at: contact@slovakiainvestmentproperty.com

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We are looking forward to seeing you next month. In the
meantime, if you have any questions or would like to
request further information, please contact us at
info@slovakiainvestmentproperty.com or at
+44 (0)207 152 4014.

Best of success,

Petra Gajdosikova
Managing Director
Slovakia Investment Property
www.slovakiainvestmentproperty.com

Slovakia Investment Property is a trading name of
Alpha Real Estate Investments Limited