LODZ, Poland -- In 1990, Jacek Szwajcowski disregarded the advice of friends and gave up a prospering engineering business to invest €3,000 of his own money in his mother-in-law's pharmacy.

Soon he was supplying a handful of local pharmacies in Lodz (pronounced "Wootch") with medicines and his wholesale pharmaceuticals business was born. Today he is running a 4.4 billion-zloty ($1.92 billion) wholesale and retail pharmacy business with a 20% share of the Polish market. As Polska Grupa Farmaceutyczna SA grew, he built 12 distribution centers throughout Poland. Now he is about to expand into Central and Eastern Europe.

"We want to have 20% market share in each of the main Eastern and Central European countries in the next five years," Mr. Szwajcowski says in his office overlooking a warehouse adorned with the initials PGF.

Mr. Szwajcowski is a perfect example of why frustrated property investors haven't given up on Central and Eastern Europe as the U.S.-led economic slowdown has begun to hit emerging markets. As economies in Eastern Europe have grown, developers have been building everything from highways, warehouses and factories to high-rise apartment buildings, hotels and shopping centers to meet the demand.

Even as its growth slows, the region still outpaces Western Europe. Poland's economy is expected to expand 5% next year, compared with 1.4% growth for the euro zone, according to the Organization for Economic Cooperation and Development.

The economic prospects across the region are attracting a number of property investors. Cash-rich German open-ended funds have been on a spending spree, using their strong euros to scoop up deals throughout the region. SEB Asset Management AG bought the Arkonska Business Park in Gdansk for an undisclosed sum earlier this month. Last year, SEB bought an office building from Philips Electronics in Lodz.

Quinlan Private, the Irish investment group owned by financier Derek Quinlan, raised some €725 million ($1.06 billion) from Irish, U.K. and U.S. investors earlier this year to purchase European property.

But the case of PGF also tells another story. The company has almost reached the limits of growth in Poland and is moving farther east. PGF's experience is typical of trends in industrial investment in the region.

Poland today is comparable to Western Europe. Property yields have converged with Western levels. Prime office rents are higher in Warsaw than in Berlin. Wage levels and manufacturing costs also are on the rise. Investors are searching for opportunities in southeastern Europe, the Balkans and in Ukraine, which is strategically located to serve growing demand in Russia.

"If you look at it like a curve, then foreign investment is falling in matured economies like Poland while countries close to joining the European Union, like Croatia, are in the middle and further out is Ukraine, which is at the beginning of the curve," says Fadi Farra, an OECD economist.

To see the change, consider the levels of foreign direct investment in the region. Between 2004 and 2007, FDI grew about 7% a year and accounted for 3.8% of gross domestic product in Poland. OECD data show that FDI in Poland is actually falling in absolute terms. This is representative of Eastern European countries already in the EU, Mr. Farra says.

The central region is still attractive, investors say, because economic growth is solid and there is less risk than farther east. "Overall the core Central-Eastern European zone is the second-biggest growth zone outside Asia," says Barbara Knoflach, chief executive of SEB Asset Management. "Countries like Ukraine and Moldava are for the opportunistic investors. It is too soon for core investors to go there."

In Croatia, which could join the EU as early as 2010, FDI grew 22% during the same period and accounts for about 12.4% of GDP. Ukraine is just at the beginning of this investment cycle, with FDI surging 52% a year and accounting for 6.6% of GDP.

More-mature economies in the region, like Poland's, face high land prices, high wages and a shortage of skilled labor, says John Palmer, who heads property consultant CB Richard Ellis's industrial and logistics business in Central and Eastern Europe.

Today, Ukraine is comparable with Poland in the early 1990s. It is strategically located on the border of Russia and will benefit from infrastructure investment as 2012 host, together with Poland, of the European Cup soccer championship.

Mr. Szwajcowski also is confident that the scenario he experienced in his home market is about to be played out in neighboring countries to the east. PGF is putting together financing for an investment drive there.

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