Everyone has had to adopt new strategies to respond to changes in the market brought on by the financial crisis.
A number of players are looking for opportunities throughout the region, where developers are being pressed by the banks’ reluctance to fund speculative schemes to secure pre-leases for their projects, according to real estate professionals who keep their fingers on the pulse of the sector. They also say that over the past five years the key players have been returning to their “original roots”, while exchanging their current asset management roles for development ones. They also note that both sustainability and a healthy working environment are now setting the trends. The Slovak Spectator spoke to Andrew Thompson, managing partner of Cushman & Wakefield, Tomáš Hegeduš, director of CBRE in Slovakia and Miroslav Barnáš, authorised representative of Jones Lang LaSalle Slovakia, about challenges of the market and new strategies that might be emerging on the market in response to the crisis and the situation in the eurozone.
The Slovak Spectator (TSS): How would you characterise the situation on the Slovak real estate market? When compared to other central European markets, are these developments specific to or rather characteristic of the whole region?
Andrew Thompson (AT): The answer depends very much on the sector. In the area of occupier demand, we are witnessing much more active demand in the industrial and retail warehouse sectors at the moment whilst offices and retail remain relatively quiet albeit real take-up (actual movers) in offices will be improved compared to 2011.
As for developer activity, the story is very similar to the above story for occupiers. Speculative office construction is at an all-time low with only one new start in 2012 due for completion in 2013. For 2013, retail development has slowed. A number of schemes remain in the pipeline, but the decision whether to build will be based mainly on the success of the pre-leasing. On the industrial side, the sector has seen a return to speculative construction for the first time in approximately two years, albeit on a limited scale and mostly focused around Bratislava and Senec.
Are these comments similar to the region as a whole? These comments are certainly specific to the local market and indeed, the differences around the CEE region are marked. For example, over the last two years, Poland has seen significant occupier, developer, investors (funds that buy end product that developers have built and leased) and bank interest – significantly ahead of any of the other markets in the CEE.
Tomáš Hegeduš (TH): We see some different trends in the region, either in the office or the industrial sector. In Warsaw we see a huge pipeline of new projects under construction accompanied by low vacancy rates. Budapest has very limited construction for the near future and the vacancy, with over 20 percent, correlates with the general economic situation in the country.
Bratislava and Prague have vacancy of around 10 percent and the pipeline of future developments is very limited. This will gradually lead to an increase of rents and a decrease of vacancy rates, but on the other hand, it shows lower inflow of FDI to these two towns, which affects the employment rates and new jobs creation.
Miroslav Barnáš (MB): Slovakia is a small country with an open economy and an overall business-friendly sentiment. After a successful year in 2011, where approximately €556 million was transacted, we have not seen any major investment transactions in H1 2012. The high level of uncertainty in the eurozone and availability of debt has frozen investment activity across all sectors in Slovakia. Despite great competition, Slovakia is and will remain a strategic place for investors in the field of business process outsourcing and shared service centres to go to.
The central and eastern European real estate market has seen an approximate 40 percent drop in volumes transacted compared to the same period in 2011. For H1 2012 we have recorded a regional investment volume of €1.26 billion. Poland remains the most active market with close to 70 percent of the total regional transaction volume and only falling short of its 2011 comparison by 6 percent in the same period.
TSS: Which sectors of the Slovak market are attracting the interest of investors and which are stagnant?
AT: Sometimes different people use different key jargon in real estate and I want to split these so that I answer the question correctly. Normally when I think of an ‘investor’ I am thinking about the groups that buy income producing projects. From this perspective, retail is attracting the strongest interest although there is interest for industrial and offices also. Certainly hotels are a tough sell with most investors turned off by the idea of a hotel property in a market that has suffered from over-supply.
TH: The industrial market has shown a slight recovery in 2012 and shows slow but steady growth. The retail market, thanks to new developments completed in Košice (Aupark), Bratislava (Central) and lots of small retail warehouse projects, sees healthy growth and we still see more opportunities for retail projects in some towns as well as in Bratislava. The office market is the sector where we expect a significant decrease of activity in 2013 and 2014.
MB: Currently, we see an increase in the activity of local vendors bringing some institutional products to the market. This will test the appetite of investors for grade A product in Slovakia. At the moment we see interest mainly in office products in Bratislava and industrial buildings located in the prime logistics hubs. Recent governmental indications of changes in the taxation system due to the consolidation of public debt may well affect investment sentiment in Slovakia for some months to come. The occupational market in Slovakia has also slowed slightly through the last financial crisis. All market sectors have been affected with industrial taking the lead.
TSS: How have the attitudes of the key players in real estate changed over the past couple of years?
AT: Having been living here for five years and having been active in the market for about seven years, I have witnessed significant changes over that period. Five years ago, there was a weight of excitement about the market with significant CEE players buying into the market. This included developer/investors such as Orco, Europa Capital and Avestus, as well as investors such as Pramerica and ING. This international investor interest receded about 4 years ago. It was partly replaced by a more local or at least ‘Czech and Slovak’ market for developers and investors alike, which became active in 2011, and we are just now seeing further deals in 2012 after a quiet first nine months. We expect this local investor market to continue to develop in line with other, more mature markets such as Italy, where local investors represent a significant part of the market. More recently, this picture of international interest has morphed into a combination of a rebirth of interest from international investors in Slovakia combined with local players. Whilst the deals from these new investors have been limited to date, there are purchasers ready to enter the market for the right product at the right price. Slovakia does represent a discount on other markets, particularly the Czech Republic and Poland, without representing the risks of markets such as Hungary, Romania or Bulgaria.
One other change that should be noted is that some extremely successful local groups, such as HB Reavis, Penta and J&T, are now building on their success here and branching out successfully to other markets. Overall I do feel that there is a higher level of professionalism in the markets. As we move from a developer-led market to a more investor-led market over the coming years, this professionalism will continue to grow.
TH: Slovak developers after years of focusing mainly on the local market decided to expand in the region. J&T, Penta and HB Reavis have been operating on the Czech market for some time and are becoming major players in Prague. HB Reavis expanded to the Warsaw market with several large-scale projects and acquired sites in Budapest and Croatia. We expect the others to follow. The three dominant local developers are preparing new development sites in Bratislava and several beautiful projects are expected to come on the market in 2015 and later.
MB: Significantly. The key players are switching back to their “original roots”, exchanging current asset management roles for development ones. We see more of the product being placed on the market again, which if acquired by institutional investors, would institutionalise the local market. This is a good sign for everyone in the market.
TSS: Are there any new strategies emerging on the market in response to the financial situation in the eurozone?
AT: Certainly everyone has needed to adopt new strategies. We are aware of a number of players looking for distressed opportunities throughout the region although again, limited transactions have taken place to date. Developers have needed to be much more focused on securing pre-leases as banks will not provide funding for speculative schemes that are not substantially pre-leased. In the occupier market, tenants have taken advantage of their leverage to negotiate better conditions in pre-lease situations whilst some owner-occupiers are seeking to adopt sale and leaseback strategies to raise cash for developing their businesses. One of the elements that needs to be reviewed is the local law on valuations and the subsequent approach of some local banks to continue to adopt a local valuation approach. Slovak valuation standards do not require a market valuation approach. Whilst all other markets including Czech, Austria, etc., all follow far more relevant market valuations, many valuations in Slovakia continue to be run on the basis of these local valuation standards.
TH: The big projects are being built in phases and the new trend of building-to-suit has arisen with two telephone operators choosing build-to-suit projects!
TSS: What factors will most significantly impact the real estate market in 2013? What trends do you expect to emerge on the market?
AT: The economy is key. One of the positives for Slovakia is the positive GDP and indeed consumer spending expectations in 2012. This together with industrial production needs to stay positive. Bank finance: this is the real fuel for the market. Banks need to believe in the market and provide attractive finance terms. This goes for the corporate sector as much as the real estate sector.
The other factor is completed investment deals. We are aware of a number of on-going transactions and new interests in the market. If these transact, this will help demonstrate liquidity in the market and attract further investor interest. Liquidity helps fuel the market further, it impacts the finance of new construction through to clearer exit strategies for developers. Developers need international investors as the local investor market is not large enough to accommodate all the product that has been developed and developers are now addressing this investor market in a more professional manner.
TH: Sustainability and a healthy working environment are the trendsetters. First, one focuses on the sustainability of buildings, energy savings, recycling, etc. The second one is a mixture of creating a workplace that allows employees to create a healthy work environment on one side and a life-work balance on the other side. We see more and more companies using flexible work time, home offices, shared desks and open office solutions with different working zones. All of these trends create significant savings in rent on the employer’s side, and higher satisfaction and more personal interaction on the employee’s.
MB: During the third quarter, there was no major investment activity on the Slovak real-estate market. However, we are aware of investors’ interest, mainly into office and industrial properties as well as land for development, in 2012. Fixed investment in Slovakia is now expected to fall back slightly in 2012, a trend that may continue into 2013 as well. Much of the future growth in capital spending will be driven by inflows of foreign direct investment once the global economy recovers fully. The country’s prospects are boosted by membership in the EU and eurozone, combined with a location with convenient access to markets in Austria, Germany and elsewhere in central Europe. There will be improvement in the access to project finance, and overall the shape of the real estate market should improve compared to the last three years.
