Real estate has its ups and downs

hile Slovakia’s real estate and construction market was marked in 2013 by a tragic event, the death toll was nevertheless lower than the previos year. Yet, the year also saw more pleasant events, like the opening of the first fashion outlet centre in the country. However, Slovakia continues to wait for the completion of the final stretches of the highway linking its two biggest cities, Bratislava and Košice.The city of Žilina has the most retail space, with 1,280 m2 per 1,000 citizens, followed by Bratislava with 1,000 m2. Prešov is the least saturated regional capital in Slovakia, with only 200 m2 of retail space per 1,000 citizens, according to Colliers International.Bratislava remains the smallest office market in central Europe, according to a report on office real estate markets in the region published by the Cushman & Wakefield real estate services firm for the first half of 2013.

The highway bridge under construction close to the village of Kurimany collapsed on November 2, 2012, taking the lives of four workers. That tragedy is still being investigated a year later.
Meanwhile, the investigation into an accidental explosion during the construction of the Šibenik tunnel, about three kilometres away from the spot of the 2012 tragedy, was not over in early November 2013 either. One man, an explosives manager, was killed in this accident and five others were injured.

The Ministry of Transport, Construction and Regional Development has declared that construction of the highway between Bratislava and Košice, known as the D1, is one of its top priorities.

“During the term of this government there should not be one single section left on which construction either has not started or finished, which means that minimally all the sections of the cross-country highway will be under construction except the section at Hubová, where we have a special geological situation, which is being solved now,” František Palko, state secretary of the Transport Ministry, told The Slovak Spectator.

The construction of the missing highway stretches in Slovakia has been prolonged by the complaints of companies that failed to win the tenders to build the individual stretches.

Transport Minister Ján Počiatek remains optimistic and hopes that the missing 120 kilometres of the 460-km highway between Bratislava and Košice will be completed by 2019, as he confirmed for public service Slovak Television in late September 2013.

Some experts doubt this date, pointing to the slow public procurement process and limited finances for highway construction.

“When the current development will continue also next year [2014], then we estimate the term [of completion of the Bratislava-Košice highway] at 2020, 2022,” Ondrej Matej, the director of the Institute for Transport and the Economy, told the Slovak Television.

SLOVAKIA GETS ITS FIRST OUTLET CENTRE

Slovakia finally has its first shopping outlet, One Fashion Outlet (OFO) Voderady, which drew about 12,500 eager shoppers when it opened on October 30, 2013. As Slovakia was the only country in the region without a shopping outlet, Slovaks previously had to travel to Austrian Designer Outlet Parndorf, about 40 km from Bratislava, to find brand name goods at discount prices.

“This is an outlet centre of the fourth generation,” Andrej Brna, the director of the board of directors of the outlet’s developer Realiz, said at the press conference prior to the opening. He explained that in contrast with older fashion outlets, Voderady offers a rest zone with restaurants and cafés, a more sophisticated design and natural construction materials, all of which make it a daytrip destination.

Parndorf, which offers a total of 42,000 m2 of shopping area with over 170 shops, is considered to be Voderady’s biggest competition. The first phase of OFO Voderady offers 15,000 m2 of 70 shops, not all of which managed to be completed in time for the ceremonial opening. Realiz reports 75-percent occupancy, with 20 percent allotted for name brands, more of which will arrive only after the centre is completed and open, within six to nine months. Name brands already present include Nike, Adidas, Benetton, Levi’s, Ecco, Mustang and others.

The developer plans to continue building the centre in two more phases. Once completed, it should offer 35,500 m2 of leasable area, 130 shops and parking for 2,500 cars. Total investments are projected at €65 million, €30 million of which went into the first phase.

“Our interest is to open the second phase within two years at most to reach the critical mass,” said Brna, adding that after the second phase the outlet centre should offer 25,000 m2 of shopping space. While the plan is to open the second phase in spring or autumn 2015, they will ultimately base their decision on the outlet’s results and the number of contracts signed by new tenants.

OFO Voderady is located seven kilometres from Trnava, only one kilometre from the D1 cross-country highway, and about 40 kilometres from Bratislava. According to Vladimír Kozár, project director of OFO Voderady, its target group consists of anyone aged 15-16 and up who is willing to spend money on fashion and name brand clothes.

“We primarily built the outlet centre for Slovaks, which means a catching area of almost 3 million Slovaks within a two-hour drive time,” said Kozár, adding that this includes inhabitants of Žilina and Banská Bystrica. He considers Košice inhabitants to be potential shoppers as well, since they are already willing to travel to Parndorf. Since the highway near the centre is used as a transit route by Czechs and Poles, he would like to see them shopping in Voderady, too. He would also like to attract Arab and Russian clients of the nearby Piešťany spa.

OFO Voderady is not the only outlet project to have been repeatedly announcing its arrival: another one, D1 Outlet City by Ján Čarnogurský Junior’s IPEC, is to be located only several kilometres away from OFO Voderady, near Senec. The latest plan is to open the outlet centre as part of a bigger project called D1 Park next summer, the Trend weekly wrote in late October.

Lukáš Šarközi, a consultant at Colliers International, sees the opening of OFO Voderady as good news for shoppers, as the outlet will increase the number of places where this kind of shopping can be done. But from a strategic viewpoint, he points out that Parndorf is the same distance from Bratislava, and that D1 Outlet City is being planned for Senec.

“From a historical point of view, competing for clients in such a small area has not brought the desired effect to any of the involved parties,” Šarközi told The Slovak Spectator.

Outlets differ from more traditional shopping centres in terms of prices, goods, location, as well as the design and layout. Outlets also offer collections from previous seasons and goods designed specifically for outlets at prices reduced by as much as 30-70 percent. As a result, shoppers may have difficulty finding clothes in the size or colour they are looking for. Outlets are also located outside city centres and their building designs are less sophisticated.

RETAIL IN SLOVAKIA

“From the viewpoint of the retail market of related construction we can observe full construction activity on the project of the Bory Mall in Bratislava, with a gross leasable area of 55,000 m2 of the Penta Group developer,” Šarközi told The Slovak Spectator. “This activity is the most important construction activity on the retail market in Bratislava for 2013. Other construction activities are linked with revitalisation of some of Bratislava’s shopping centres.”

Regarding to regional capitals, Šarközi assessed construction activities as having diminished, with the exception of Poprad, where the shopping and entertainment centre Horse is under construction, and Levice where the centre Dituria is being built.

“The main trend is the movement of the market to the side of tenants, which is visible in the Visegrad group countries,” said Šarközi. “One of the biggest differences between the market in Slovakia and the market in neighbouring countries is the absence of a ‘High Street’ - a highly frequented shopping area with an especially wide offer of fashion retailers and luxury brands.

However, this phenomenon is linked especially with the size and purchasing power of Slovak towns.”
“The end of 2013 and the whole of 2014 will be marked by openings of significant as well as smaller projects,” said Šarközi. “The market in Slovakia is moving eastwards and in the near future we will witness saturation of regional towns. Revitalisation of [shopping] centres as a trend is one of the inevitable preconditions of sustainability and competitiveness of existing centres.”

SOME ENCOURAGING SIGNS OF ACTIVITY IN BRATISLAVA’S OFFICE MARKET

The total office space stock in central European region capitals, Bratislava, Budapest, Prague and Warsaw, stands at over 11.5 million m2. Warsaw is the largest office market in central Europe in terms of leasing volumes, existing built stock and development pipelines. Warsaw boasted the largest total office stock of more than 4 million m2 at the end of June 2013, followed by Budapest with over 3.1 million m2. Prague’s total office stock is expected to top 3 million m2 by mid-2014 while Bratislava currently has a built stock of nearly 1.5 million m2.

“Warsaw and Prague are the dominant markets in central Europe given the number of projects planned and tenant activity,” said Jonathan Hallett, managing partner of Cushman & Wakefield’s Central European Region, as cited in the press release. “Greater supply will lead to growing competition among developers who will focus on securing as many pre-lets as possible, while tenants are likely to put more downward pressure on rent and demand better incentives in lease packages. This pressure may ease following improvement in Europe’s economic conditions in the long term. Budapest has reached stability while Bratislava remains a tenant’s market.”

New supply in the central European region reached 198,000 m2 in the second half of 2013. At the end of June 2013 there was over 845,000 m2 of office space under construction across central Europe, with Warsaw accounting for almost 448,000 m2 and Prague for 291,000 m2. New supply in Bratislava and Budapest was the same, 53,000 m2.

Jones Lang LaSalle specified in its regular report for the second quarter of 2013 that two new office buildings were supplied to the market at the end of the first and the beginning of the second quarter: Hamilton House (2,400 m2) at Rajska street and Forum Business Center (18,300 m2) at Bajkalská Street, representing 20,700 m2 of A-standard office space. The share of new A-standard office space increased to 58.5 percent. The remaining 41.5 percent account for B-standard office space. The vacancy rate decreased from 14.3 percent at the end of the first quarter to 13.6 percent at the end of June 2013.

Demand for office space in the Bratislava office market increased over the second quarter by almost 30 percent, with 25,936 m2 taken up in the second quarter of 2013. New transactions made up 60.5 percent of the total demand, while re-negotiations accounted for the rest. Dalibor Surový, the head of the office space rental department at Jones Lang LaSalle in Slovakia, says the higher share of new rental contracts confirms the current market trend, wherein companies searching for more effective ways to do business are looking for new ways to save, and costs linked with rentals are becoming very important.

“When companies think about moving, it is mostly because the current space cannot be optimised from the technical point of view,” Surový said, as cited in the press release. “Optimising of cost per working station is currently the most resonating term on the market.”

In Bratislava Cushman & Wakefield has seen only a limited number of new occupants in the market in recent years, but there have been some encouraging signs of activity this year.

“We further expect that as the economy improves, occupier growth will come back into the market,” said Andrew Thompson, managing partner of Cushman & Wakefield Slovakia. “On the investment side, Slovakia is expected to have a record year in terms of transactions. What makes 2013 so special is that a number of those transactions expected to complete this year will be through new investors to the Slovak market.”

Prime rent in the central business districts of the four central European capital cities remains stable, with the exception of Warsaw, where it fell slightly and currently stands at €25.50/m2/month, Cushman & Wakefield reported for the first half of 2013. In Prague and Budapest prime space in the top prestigious locations can achieve rent of €21/m2/month, with Bratislava lower at €15/m2/month. Rent is at an attractive level when compared with the €112/m2/month commanded in London’s West End, the world’s most expensive office market according to C&W’s Office Space Across the World 2013 report.

Investment activity in the core central European markets of Poland, the Czech Republic, Slovakia and Hungary saw €1.72 billion invested during the first half of 2013. Investors’ preference for the office sector continued, attracting 62.5 percent of the total volume across the same period.

Jones Lang LaSalle specified that there are several projects under construction in Bratislava. ITB Development is expected to deliver BC Štefánikova (4,500 m2). The construction of Westend Gate (35,000 m2) developed by J&T Real Estate, to be ready during the third quarter of 2014, continued at the end of the second quarter of 2013.

According to Cushman & Wakefield, while Slovakia’s economy continues to expand, this economic growth has not yet filtered down to the property market in Q2, as high unemployment and weak consumer and business confidence continue to slow recovery.

New construction continues to be restrained by restrictive financing, which requires a high pre-lease ratio for financing to be granted. Only about 33,000 m2 of newly built space is expected to come online in 2013, which represents one of the lowest annual volumes on record. On the other hand, vacancy will increase mainly in Grade B space through rationalisations and subsequent disposals of excess space, Cushman & Wakefield wrote in its regular Marketbeat office snapshot.

RESIDENTIAL MARKET IS STABLE

After some turbulence in recent years, Slovakia’s residential market is stable.

“Offer keeps prevailing over demand, but demand is big enough,” Daniela Danihel Rážová, director of real estate agency Bond Reality and head of Slovakia’s Association of Real Estate Brokers, told The Slovak Spectator, adding however that, clients are only purchasing real estate with a realistic price. “On the market there are still offers with high prices to which clients do not respond at all, and in spite of this owners are not willing to adapt the price to the market.”

According to Michal Zajíček, a research and real estate consultant at the real estate agency Lexxus, the market indicates a hint of revival, with buyers showing more interest in new apartments than one year ago.

“Many clients respond to starting pre-sale prices, which the developer increases after the construction is launched,” Zajíček said, adding that when using this strategy, developers are even able to sell all the apartments in projects with up to 50 apartments before the final approval.
According to Danihel Rážová, none of the new trends have been observed in Slovakia, while the market continues to expect entry of cheaper and smaller apartments in new constructions.

Ján Palenčár, president of the National Association of Real Estate Offices of Slovakia (NARKS), has noted a change in consumer behaviour in the real estate market.

“The buyers are devoting more time to get know the offer and simultaneously very sensitively evaluating the architectural solution, materials used and installed facilities, and the general price,” Palenčár told The Slovak Spectator, attributing this change in consumer behaviour to the post-crisis era, during which clients have started conservatively assessing their requirements in terms of the utility value of the apartment and its accommodations compared with other requirements.
Zajíček agrees that buyers are more informed, while new projects are of higher quality in terms of architectural solutions and building materials.

“The primary criterion when choosing [an apartment] continues to be the combination of the price and product, followed by locality, quality of construction and other works, the size, standard and others,” said Zajíček.

According to Palenčár, buyers are most interested in small apartments, sized 40 m2 in the case of one-room apartments, up to 55 m2 for two-room apartments and 75 m2 for three-room apartments.

“Clients, when assessing the price of offered real estate, assess the total price and not the price for one square metre,” said Palenčár.

In Bratislava, one, two and three-room apartments are the most sought after. The price for a standard sized one-room apartment is about €55,000, in the case of two-room apartments it is up to €70,000, and three-room apartments are fetching up to €100,000. Buyers are also interested in apartments with well-designed floor plans in new buildings costing up to €290,000, and in cheaper family houses, according to Danihel Rážová. However, only a small number of new apartments have good floor plans, locations and prices.

“Apartments in housing estates with reasonable prices are sold very fast; on the market there remain only those which are more expensive, whose owners gradually reduce the price,” said Danihel Rážová.
Palenčár estimates that in Bratislava there are about 2,300 available and completed apartments, most of which were designed before the crisis and thus do not meet the requirements of current buyers.

“As far as we compare the most in demand, i.e. a three-room apartment in a new construction in Bratislava with a price of up to €150,000, with the offer, then the demand fully exceeds the offer,” said Palenčár, adding that developers have adapted to the requirements of the current market and thus expects that demand will be gradually fulfilled without any excessive price swings.

According to Zajíček, the ratio between completed apartments and those which are under construction is 42 to 58. The number of available completed apartments decreased over the previous year, while the number of apartments which are available but still under construction increased. In his opinion this indicates the successful sale of the remaining available apartments in completed and approved projects and an increased number of apartments in new projects, in which there is high interest.

“The current offer is sufficient enough to satisfy the demand in all categories, segments of the market as well as localities,” said Zajíček. “Developers in new projects bring an optimal mix of apartments, primarily oriented in the most sought-after categories.”

He specified that during recent months smaller projects were especially successful, but even projects with more than 100 apartments are not an exception either. Zajíček anticipates reduced activity at the end of the year and during the winter months.

“New projects enter the market much more prepared and they do not hurry with the start of the sale and construction,” said Zajíček. “Spring is considered to be the best time to start a project.”
During the last two years the average number of apartments sold quarterly in Bratislava oscillated between 400 up to almost 700, with 500 apartments being the most sold in a single quarter, according to Zajíček.

“Based on experiences so far, a similar development can also be expected in the following months,” said Zajíček.

Danihel Rážová expects either a stable situation similar to the current one or with some small swings up as well as down due to seasonal influences.

For more information about the Slovak business environment please see our Investment Advisory Guide.