through three main conversion mechanisms within existing stock: (i) sublease of privatized or public rental units by individual private landlords; (ii) restitution to prewar owners or their heirs; and (iii) acquisition by landlords on the active secondary market that emerged from massive privatization.

# _Letting of Privatized or Public Rental Units_

Cash income-poor owners or tenants who let their own unit or individual rooms were the first source of private rental supply during transition and continue to play a significant role in the poorer countries. The higher the rental income relative to employment or retirement income, the more active are these subsistence landlords. A 1999 survey of the rental markets in Sofia and Budapest (Lowe 2003) showed that 60 percent of private landlords in Sofia rented out a dwelling originally intended for their own use, while only 45 percent did so in Budapest. The main reason cited for the difference was that cash income levels of landlords were lower in Sofia than in Budapest. Without detailed analysis one can conjecture that these figures could be representative of the studied countries, with Armenia, Russia, and Serbia having the highest share of subsistence landlords.

# _Restitution of Prewar Property_

It is hardly coincidental, though difficult to substantiate with data, that Poland and Lithuania are the two countries most advanced in the restitution process, featuring the largest formal private rental sectors. Conversion restrictions in both countries generally forced the restituted owners to continue renting to sitting tenants, rather than obtain vacant possession of their buildings.<sup>43</sup> Countries with slow (Romania) or no (Russia) restitution processes have smaller formal private rental sectors.<sup>44</sup>

# _Units Bought on Secondary Market for Renting_

Secondary market acquisitions have become an increasingly relevant source of private small rental supply since the mid-1990s, particularly in the more established markets of Poland and Lithuania, and to a lesser degree also in Romania and Russia. The initial movement of amateur micro-investors who accumulated portfolios by buying out neighbors gave way to a small private rental industry, sometimes with large individual portfolios of apartments scattered in various buildings. Poland also has witnessed the emergence of an active market for entire private apartment rental buildings and a professional landlord and property management industry in the wake of restitutions of prewar apartment rental buildings.

Private investment in rental assets received an additional push around 2000 when the combination of falling interest rates and high residential rental yields in the region created more conducive environment. In Lithuania, according to brokers interviewed for this study, the rental

> 43 Although restituted owners were often allowed to reclaim individual dwellings for their family use.

> 44  In an example from non-study countries, Lowe (2003) cites that 12 percent of Sofia landlords rented restituted units, while there was no such source in Budapest, because of the sluggishness of the Hungarian restitution program, which was severely constrained by insufficient court capacity.

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