Caution is the sector's watchword

Slovakia’s economy has resumed the rate of growth it was registering before the financial and economic crisis struck, which has helped to inject some optimism into the slumbering real estate and construction sector. However, caution is still one the sector's watchwords given the continuing impact of the downturn.

(Source: ČTK)

Slovakia’s economy has resumed the rate of growth it was registering before the financial and economic crisis struck, which has helped to inject some optimism into the slumbering real estate and construction sector. However, caution is still one the sector's watchwords given the continuing impact of the downturn.

The market still demands cash upfront, meaning developers must secure pre-leases before laying the foundations of any building. Nevertheless, market watchers say that the market has been cleansed and that it promises to be resistant to any excesses for several years to come.

Economic growth pumps up expectations

The International Monetary Fund (IMF) predicts that the Slovak economy will be among the fastest growing economies in the European Union over the next two years. In the first quarter of 2011 the country generated some optimistic economic numbers; Slovakia’s gross domestic product (GDP) grew by 3.5 percent year-on-year, close to the rate of growth registered before the financial and economic crisis. On a seasonally-adjusted basis, the Slovak economy grew by 1.0 percent from the last quarter of 2010, the Slovak Statistics Office reported in its flash estimate released on May 15.

Observers said that growth has again been fuelled mainly by foreign demand and the numbers suggest that Slovakia’s most significant trading partners, such as Germany, have been doing well.

The strong growth in Germany was to a certain degree associated with a revival in the construction sector which “at the end of [last] year had been stalled by unfavourable weather”, said Mária Valachyová of Slovenská Sporiteľňa, Slovakia's biggest bank. For that reason growth in the sector was even faster at the beginning of this year, she suggested.

“Partly it is a one-off impulse,” Valachyová said, adding that other aspects of German growth remain very strong and that this is good news for Slovakia since Germany takes 20 percent of Slovakia’s exports.

Ľubomír Koršňák, an analyst with UniCredit Bank Slovakia, commented that reviving investment by domestic companies has probably made a contribution to GDP growth as well. At the time this Real Estate Guide went to print, the detailed structure of first-quarter GDP had not been released.

Eva Sadovská, an analyst with Poštová Banka, also acknowledged the role of strong foreign demand in Slovakia’s resumption of pre-crisis levels of growth, but nevertheless said that she does not have any great hopes for domestic consumption.

“Unemployment in the first quarter remained high and thus did not allow Slovaks to become spendthrift,” Sadovská said.

Koršňák commented that the government’s austerity programme has contributed to a reduction in consumer confidence and has delayed a recovery in domestic consumption.

“We expect that government spending will also record a drop and that the savings measures within the public administration have had an anti-growth effect on GDP,” Koršňák wrote.

The IMF predicted that Slovakia’s economy will grow by 3.8 percent over the full year and by 4.2 percent in 2012, while predicting average economic growth in the eurozone at 1.6 percent in 2011 and 1.8 percent in 2012.

Market watchers have confirmed that the positive growth figures are one source of the breeze of optimism in the real estate sector.

“We all expect this to positively impact on jobs and more jobs means more demand for real estate, as well as companies expanding their production as the euro still provides a positive differentiating factor for various economic sectors – producers in particular,” Andrew Thompson, managing partner of Cushman & Wakefield told The Slovak Spectator.

Miroslav Barnáš, country manager of King Sturge, assumes that the end of the year will bring increasing activity in all real estate sectors.

“The end of 2011 and the beginning of 2012 will record positive movements in investment as well,” Barnáš told The Slovak Spectator, adding that this will be spurred mainly by accelerated investment activity in the central and eastern European region in general, by the lack of a good institutional product in Warsaw and Prague, and by accelerated yield compression in the region.

Apart from closely watching the development of Slovakia’s largest trading partners, businesses across all sectors are also cautiously following potential changes to legislation and regulations that might affect their performance. Whenever governments change, the expectations or concerns of businesses – depending on what the emerging ruling group stands for – are accentuated.

Change of government; change of highway plans, legislation

Last year, Slovakia’s voters showed the door to the Robert Fico-led ruling coalition of Smer, the Slovak National Party (SNS) and the Movement for a Democratic Slovakia (HZDS), and ushered in a coalition led by Iveta Radičová, Slovakia’s first female prime minister.

Among other policies, the new four-party ruling coalition – comprising the Slovak Democratic and Christian Union (SDKÚ), Freedom and Solidarity (SaS), the Christian Democratic Movement (KDH) and Most-Híd – agreed to modify the Labour Code, make changes to the country’s payroll tax system and clean up Slovakia’s judiciary.

The Fico government ended its term without having delivered on its promise to complete a highway link between Bratislava and Košice, the country’s so-called eastern capital, by 2010. The government of Radičová has since announced some fundamental changes to the country’s highway plans.
In May 2011, the Ministry of Transport, Construction and Regional Development introduced its Programme for the Construction of Highways and Dual Carriageways for 2011 to 2014, which foresees the state finally providing the nation with a cross-country highway by 2017.

Transport Minister Ján Figeľ said that there had been numerous illusions created around highway construction and for this very reason his department had to reassess some of the approaches of the previous government.

According to Figeľ, the goal is to avoid creating the impression that with limited funding and public financial resources the state can build everything, and in a very short time. Instead, the minister said, his ambition is to present the public with a realistic plan.

Figeľ said that approximately 130 kilometres of highway and dual carriageways will be delivered by 2014, while the construction of additional sections of up to 250 kilometres will begin. The completion of the D1 highway must await construction of a major tunnel at Višňové, near Žilina, which might take approximately five years.

Yet it seems that not just plans but also some laws will need changing.

Earlier this year the Constitutional Court ruled that an amendment passed by the previous government to Slovakia’s highway construction legislation that permitted the state to begin building highways on privately-owned land before the land expropriation process was completed was unconstitutional.

The court ruled that neither the state nor any other body can start building highways on property that is not fully owned by them. The court, in its official statement, said that the owners affected by what was known as the expropriation law were in fact disadvantaged compared to other owners of land. The challenged provisions allowed a situation in which they formally remained owners of the real estate, but could not, de facto, carry out traditional rights under the ownership law, the court wrote.

Will the construction of illegal or unapproved structures end?

Along with changes to its highway construction plans, the government also set out to address the problem of construction of illegal or unlicensed structures, something which the state had in effect been tolerating for some time. The Ministry of Transport, Construction and Regional Development has prepared a small revision to the Construction Act which changes the treatment of illegal construction sites.

If the legislation is approved, as of September the state will have a sharper tool to penalise not only those who finance such structures but also those who build and oversee them. The law will also more clearly define the fines and sanctions for not observing the rules.

Under the new law “there is a wider circle of so-called responsible persons who are being assessed during the whole process of construction, throughout all construction activities, and there are much stricter fines for drafting an illegal construction project or investing funds in such a structure,” said Minister Figeľ.

The ministry also wants to revamp the Construction Act, which dates back to 1976, so that it caters to 21st-century needs.

In mid May 2011, parliament also moved to its second reading a law on deregulation of rents for homes returned via restitution. There will be a five-year transition period for liberalisation of rents, and tenants in such housing who currently pay regulated rent can be required to move out of affected apartments by late 2017, the SITA newswire reported.

After the proposals take effect, lessors will be allowed to increase the agreed monthly rent only once a year, by 20 percent this year and in the 2012-2015 period. At the same time, tenants will be able to apply for substitute housing with regulated rents within a set time, SITA reported. The state will allocate €73 million to help municipalities fund the purchase of apartments for affected citizens.

The condition of the sector

Construction production in March 2011 posted growth of 0.5 percent compared to March last year, with a volume of €368 million, according to the Statistics Office. Compared to February, production grew by 5.6 percent. Over the first three months of 2011, construction production reached €895 million, down 2.5 percent year-on-year, the Statistics Office said, as reported by SITA.

In fact the construction sector in Slovakia in March performed better than the average for the eurozone and also better than the average for the entire European Union, both on a month-on-month and year-on-year basis.

The president of the Association of Slovak Construction Businesses (ZSPS), Zsolt Lukáč, believes the Slovak construction sector might bottom out this year and then start growing again in earnest next year.

“If the Ministry of Transport launches construction-related activities, I believe that production will increase this year, but that mainly next year an uplift in the sector might take place,” Lukáč said, as quoted by SITA.

As for the residential sector, in the first quarter of 2011 residential real estate prices in Slovakia fell by a countrywide average of 2.5 percent compared to the same period in 2010, and by 0.47 percent from the final quarter of 2010, the SITA newswire reported.

In the fourth quarter of 2010, residential real estate prices had fallen 2.1 percent year-on-year and 2.6 percent from the previous quarter. The countrywide average price per square metre for residential property was €1,264 in the first quarter, according to information released by the National Bank of Slovakia, which monitors real estate prices together with the National Association of Real Estate Agencies.

Given this development, observers predict continuing caution among developers when it comes to launching new residential projects.

Mikuláš Cár of the National Bank of Slovakia (NBS) says this development will create pressure on developers to observe the needs of their clients more closely, and at the same time to show more willingness to settle for a price which is closer to the client’s target price, SITA reported.

Even though new construction of industrial space for leasing has started in Košice Region and other new build-to-order projects are planned in Žilina Region, no new building was recorded as having been finished and no new industrial property developed for lease during the first quarter of 2011 in Slovakia, according to Cushman & Wakefield.

The vacancy rate in the first quarter dropped to approximately 3.7 percent in Slovakia, the lowest vacancy rate on record, according to Cushman & Wakefield. It said this has been caused by the fact that existing space is continuing to be leased but no new premises are coming onto the market.
In the first quarter approximately 22,000 square metres of modern industrial space for rent was leased in Slovakia.

However, industry experts say that Slovakia’s low vacancy rate in logistics parks and an expected inflow of new foreign investment may spur the construction of new warehousing space for logistics and manufacturing companies.

The office space market has not shown many signs of confidence yet.

“In the office real estate market we see an increasing amount of vacant space in B-grade buildings,” Jörg Kreindl, managing director of CB Richard Ellis (CBRE), said. “A lot will depend on how these buildings are positioned and how occupants react to these offers – this will determine the success and rental levels of the few new projects.”

In terms of activity in the market for office space, the first quarter of 2011 was one of the quietest in the last two years in Bratislava, and compared to the same period last year it saw a 45-percent drop in new projects, according to CBRE.

“The first quarter of 2011 was, in terms of activity, one of the weakest in the past two years; however, we do not think that this drop is a trend,” said Oliver Galanta of CBRE, as quoted by SITA. “Statistics from the second quarter, which should bring some positive results, will tell us much more.”

CBRE expects 62,000 square metres of new office space to emerge in Bratislava by the end of the year.

More information about Slovak real estate market you can find in our Real Estate and Construction Guide.

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