Still tentative, but reviving slowly

Though there is still post-crisis edginess on the Slovak real estate market, some segments already display encouraging signs. The market would be helped if there were more international developers to make things more transparent, said Andrew Thompson, the managing partner with Cushman & Wakefield. Miroslav Barnáš, managing director of Jones Lang Lasalle Slovakia says that in parallel with general economy recovery, since the beginning of 2013 investor appetite is on the rise.
Meanwhile, Kamil Bado, the director of Gleeds, suggests that banks have understood they cannot sit on their money forever and are beginning to finance new projects.

The Slovak Spectator spoke to Thompson, Barnáš and Bado about the real estate market, the main trends in 2013 and their expectations for 2014.

The Slovak Spectator (TSS): How do you characterise the situation on the Slovak real estate market?
Andrew Thompson (ST): The market varies depending on the sector. The industrial sector continues to be active on the demand side with requirements from all sectors including production, logistics and distribution. The supply side remains limited. The retail warehouse sector is active with some new market entrants and plenty of development activity. Sales of stand-alone units also form part of this active market. Retail, shopping centres and high streets are still relatively slow in this market, although there are hot spots. Limited expansions and new entrants, although there are some, limit new developments, which is a good thing as market saturation in some areas means that new schemes cannibalise from existing schemes rather than adding to the mix available to the consumer. We are seeing some existing centres struggling as a result.

There appear to be two trends: a move towards smaller schemes, retail warehouse centres in smaller markets. These schemes are easier to lease and finance than larger centres. Then there is a move towards even larger, market dominant schemes where all the key anchors are located in one centre thereby securing critical mass. The predicted growth in consumer spending in 2014 and improved
domestic demand will encourage growth in this market.

Offices are generally slow with a large percentage of re-negotiations rather than relocations. This
year there are shoots of recovery with expansions in several groups, some consolidation in others, resulting in a couple of very large requirements, and even some new market entrants. There are encouraging signs of growth.

Fortunately, supply is limited at the moment with few developments under construction, an all time low, which is sensible given the historic high vacancy rates. That said, there are plenty of sites capable of supporting development when the market recovers.

Miroslav Barnáš (MB): The Slovak real estate market was seriously affected by the world-wide economic downturn and cautiousness of investors. Total investments in 2011 reached €500 million, but 2012 saw transactions worth just €20 million. From the beginning of 2013 as the economy recovers, investors’ appetite for investments is on the rise. The total investment volume recorded in H1 2013 amounted to circa €97 million and includes the acquisition of Apollo Business Centre II by Generali PPF and the acquisition of KraussMaffei production site near Martin by Tatra Asset Management. Jones Lang LaSalle has also recorded transactions of the Aupark shopping mall in Žilina and a sale of Heitman’s shopping centre Aquario in Nové Zámky to a local investor. The second half of the year is expected to bring further property deals due to tax optimisation issues and stronger confidence in the CEE market that is currently witnessing a 34 percent year-on-year increase in investment volume. Therefore, we expect total investments to hit the €350 million mark towards the end of this year.

Kamil Bado (KB): The situation on the Slovak market is still very nervous and real estate projects have not significantly emerged. Mostly those who had for a long time been in the state of preparation woke up and the amount of money invested in these projects did not allow further delay of the start of construction, especially when the acquisition of the land was covered from external resources.

On the developer playground only large domestic players remained while foreign capital has almost disappeared. Speculative projects have disappeared as well, while in the logistics or office segment a concrete customer is needed. Only the residential market is beginning to revive, where as well speculative capital has disappeared and the apartments are being sold to end consumers.
TSS: Are there any new trends emerging in 2013 compared to previous years?

KB: The trend of building environmentally sustainable buildings has arrived in Slovakia. It is becoming trendy to own a certificate based on some environmental standard: LEEDS or BREEAM. The law, which implements into Slovakia’s environment the EU regulations on zero emission buildings, has also influenced this trend. Yet the too early introduction of this law puts Slovak developers into disadvantage in the wider European competition, since the fulfillment of the requested criteria for energy efficiency on a tense market is almost economic suicide.

TSS: Which segments of the Slovak market are attracting interest and which are stagnating?
AT: Probably the big winner this year is investment sales. The demand has come from both local and international groups with two new investors buying products in the market. Encouragingly, there are a significant number of others who are actively researching the market but vendors need to be sensible with pricing expectations for a product to sell. Retail is the key sector of interest, with some interest, in office and some limited industrial and retail warehouse interest.

MB: We now see increased initiative from local vendors bringing most of their products, not only institutional ones, to the market. This is interestingly and, for the moment, successfully testing the appetite of both types of investors, local and international institutions. The main focus remains on Grade A office products in Bratislava, regional retail schemes and some industrial buildings located in the prime logistics hubs.

KB: It seems that the sector of residential is reviving the fastest. Despite the fact that in Bratislava there are thousands of unsold apartments, there is still demand for new projects. As long as there is a residential project in a good location and for a reasonable price, it is not a problem to fulfil the conditions of the sale set by banks before the start of the construction. Bad projects from the past remain an iron ball fastened to the foot of the developers and their banks. Sooner or later these projects will have to show their true colours and admit their losses.

In the office sector there is a fight for tenants and they are getting reorganised within particular developer projects since the tenants are currently extracting better rents, addresses or newer technologies, there are available in the newer buildings. The retail segment is getting through the worst and new projects are in the pipeline. The most stagnating sector is that of logistics and industrial projects. Industrial clients always feel lower a number of orders and thus no large expansions like in past years have come into consideration.

TSS: Which segment has changed the most dramatically as a result of the eurozone crisis?
AT: Industrial (production) has probably been the most heavily influenced by the eurozone crisis.

KB: Today, essentially none. The banks have understood that they cannot sit on their money forever thus they are again starting to finance projects. They are nevertheless more careful than in the past. The credibility of the creditor has become an important part of assessing investments.

TSS: When compared to other central European markets, are developments on the Slovak market specific or rather characteristic for the whole region?
AT: Similar trends can be found in all markets, although difficulties in Hungary mark that out as a special case: struggling economies, negative press reports, high vacancies in office and industrial space. The domestic demand and size of Poland and Polish cities mark that market out as special. It is nowadays treated as a core market by many developers and investors along with Germany, France, etc.

Slovakia has tended to struggle for investment due to the concern of investors and developers of the limited market size and the dominance of local developers. The market would be helped if there were more international developers and this would help make the market more transparent. This is particularly the case in the office market. Industrial and retail are less affected by this issue as they are already more diversified.

MB: The property market in central and eastern Europe is dominated by Poland. Poland’s big cities are becoming core investments and a necessary part of the investment portfolio for international investors. Prague is usually the next stop for investors seeking investment opportunities in the CEE region. The Slovak real estate market, in comparison with other countries in the CEE, is less developed in terms of size, investment volume and number of international players. It is dominated by European and local players who are prepared to face higher risks and are seeing also higher revenues. Therefore, as a rule of thumb, Slovak yields on property investments are in general 50 basic points higher than those in more mature markets like Poland and the Czech Republic.

KB: We see the main difference in the method of procuring construction. The big players started largely using the form of construction management, which is dividing the construction into several supplier units and their mutual coordination with the investors. This form makes it possible to lower costs by reducing the number of entities in the supplier system, where the surcharges of individual higher suppliers were mounting, which inflated the price. The disadvantage of this system is moving the risk from the construction company to the investor, which not everyone can afford. Other specifics of Slovakia are its regional differentiation while Bratislava unambiguously dominates. Private capital emerges outside Bratislava only very rarely.

TSS: What factors in your opinion will most significantly impact the real estate market in 2014?
AT: More international investors in 2014. Hopefully growth in both office and retail sectors as domestic demand and the economy continues to improve. At the end of the day, we in Slovakia are heavily dependent on Europe (and ultimately the United States). In this respect, October will be critical for both the United States and for the rest of the world. Surely defaulting on its debt is not an option but the climate in Washington is far more uncertain than I think people could ever have imagined. It’s also possible to see more manufacturing coming back to the CEE.

MB: Macro and microeconomic factors affect the investment environment at all times. Slovakia’s near-term outlook is clouded by the situation in the eurozone and GDP growth, which should remain positive. Industrial output and exports have been the key drivers of the economic recovery since late 2009 and have experienced modest growth in first months of 2013 following a one-month drop in December 2012. Although industry is likely to keep Slovak GDP growth in positive territory in 2014, the risks of a renewed economic downturn remain high given that domestic demand continues to be weak.

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