Foreign investors still eye real estate here

THE CURRENT interest in making real estate investments in Slovakia is better now than over the last few years even though the country is not the first choice among the Visegrad Group (V4) in attracting investors from other parts of Europe. Nevertheless, Slovakia has good investment opportunities in several real estate sectors and Slovakia’s geographical position as well as its adoption of the euro gives it a competitive advantage in certain kinds of deals.

THE CURRENT interest in making real estate investments in Slovakia is better now than over the last few years even though the country is not the first choice among the Visegrad Group (V4) in attracting investors from other parts of Europe. Nevertheless, Slovakia has good investment opportunities in several real estate sectors and Slovakia’s geographical position as well as its adoption of the euro gives it a competitive advantage in certain kinds of deals.

The Slovak Spectator spoke to Ignacio Gomez, a consultant at the investment division of Colliers, Andrew Thompson, managing partner of Cushman & Wakefield Slovakia, and Joerg Kreindl, managing director of CB Richard Ellis in Slovakia, about the interest of foreign and local investors in purchasing or developing real estate in Slovakia as well as about their perspectives on the best investment opportunities right now and in the foreseeable future.

The Slovak Spectator (TSS): What is the current interest in real estate investment in Slovakia? What kinds of real estate are investors interested in? Has this changed compared to the pre-crisis period?

Ignacio Gomez (IG): Before the crisis investors were interested relatively equally in all segments. The main difference, compared to the pre-crisis period, lays in the fact that in the past they were interested not only in existing real estate, but to the same extent also in land for future development. Another difference is in the character of investors themselves, specifically their number and the amount which they are willing to invest in real estate.

While before the crisis active investors included institutional funds as well as private investors, for the time being private local investors make up the majority of active investors.

During the crisis interest was only in so-called sales&leaseback transactions, on condition that the renter was established and the lease period was for at least 10 years.

Investors are currently interested especially in retail investments across the whole of Slovakia. An ideal investment is when there is only one well-known renter, for example Tesco, Billa, or similar, and the lease contract is signed for 10 years at least.

We are also gradually seeing interest in other retail real estate, so-called multi-tenant retail parks, small shopping centres, but investors are continuing to require that the main renter is a well-known company with a minimum 10-year lease contract. On the other hand, in some specific segments we are also registering interest in land for further development. But in Slovakia we are still registering interest mostly from private investors.

Andrew Thompson (AT): The current interest of investors is at the highest level in the last three years. This interest varies from local buyers to international buyers, particularly those from the UK, Austria and Germany.

Joerg Kreindl (JK): The interest of investors is still focused around ‘prime buildings’ in a great location, with high occupancy, strong tenants and long lease contracts. There are only a small number of such projects and most of them are too expensive [in Slovakia] compared to prime buildings in other countries in central and eastern Europe. However, the gap between the expectations of buyers and sellers is shrinking again now and therefore we expect deals to happen next year.

TSS: Could you compare the situation in Slovakia with neighbouring countries?

IG: Poland and the Czech Republic are currently the most preferred destinations within the central and eastern Europe (CEE) region. The size of their internal markets and economic development draws investors, either private or institutional.

Institutional funds have access to larger projects and significant transactions have been recorded in Warsaw this year, in the segments for office space and retail real estate.

The Czech Republic, or to be more specific Prague, has also registered some transactions, especially office space projects.

Slovakia and Hungary are not currently recording large activity from institutional investors. Those who are active are prevailingly private investors and the volume of investments is lower.

Pressure towards increased real estate prices in Poland is starting to rise. If this trend is confirmed, Slovakia could again become an interesting destination for investors.

AT: The Czech Republic and Poland continue to attract the strongest interest among the Visegrad Group of countries, with the main German [investment] funds being used to and comfortable in purchasing there. In Slovakia, some German and Austrian funds still consider the market too small in some sectors, although it is notable that a number of these funds are monitoring the market closely and expect to enter with the right project.

JK: Poland is in the centre of attention for investors keen on CEE, followed by the Czech Republic. Slovakia is regarded as a well functioning economy but with a small market and overpriced real estate. With declining prime yields in Warsaw and Prague, properties in Bratislava will get more attractive pricing and could be the next targets for institutional investors.

TSS: What real estate investment opportunities do you see in Slovakia and why?

IG: In our opinion, all fully rented-out real estate has potential. If economic growth continues, it is assumed that existing vacancies in administrative buildings and retail and logistics real estate will be filled and there will again be space for new projects.

AT: There are more investment opportunities available this year than over the last couple of years and this should result in more transactions. We are aware of a number which are pending and looking into 2011 we expect to see this trend continue.

The main attractions of Slovakia relate to the strong background economic factors, for example GDP growth, compared to the rest of Europe and high unemployment, indicating that there is even more potential for structural growth subject to the unemployed gaining appropriate training for the jobs that are available. This growth should feed into employment figures, particularly over 2011, having impacts over all other sectors.

More people with money to spend in shops means increased consumer spending. This impacts directly on retail investments such as shopping centres, helping to keep them sustainable, and if retailers make more profits they can in principle pay higher rentals to be in those shopping centres or high street locations. Growth of companies means more demand for office and industrial space. More hotel beds required for business in Slovakia may thereby improve investments into hotels.

Added to these background economic fundamentals are important competitive advantages which include geographical location – a key location is still attractive for logistics distributors – and the euro, as this eliminates currency risk for international investors from the eurozone and means a distinct advantage compared to the other V4 countries. With its skill set, cost of labour and [knowledge of] languages Slovakia remains attractive for inward investments across industrial and office sectors in particular.

All of the above reflects a positive environment for business in Slovakia which is very attractive to investors. In addition to that, there are product areas where scarcity and the lack of competition create a stronger business case for investment. The office sector in Bratislava is a particular case where the lack of supply coupled with a strong demand is likely to impact on rental levels, increasing rents over the next 12-18 months.

Finally, we are starting to see banks take a more active approach to problem loans and we expect to see more activity in this sector in 2011. This will typically result in more sales or injections of equity/joint venture partnerships.

JK: Solid quality office buildings with large shared service operations with long lease contracts, as these companies are happy with Slovakia. Also, prime retail projects leased at sustainable market rental levels.

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