Current analysis of real estate markets in Poland, Slovakia and the Czech Republic:
First stop for "investors' caravan" en route to the East?
- New projects in the office, shopping centre and logistics sector are being postponed or abandoned altogether due to economic crisis
- Improved stability in exchange rates and better assessment of country-specific risks are, however, positive signs of recovery
- Project quality continues to count; an end to speculation; steady real estate "craftsmanship" is in demand
The international crisis has hit the commercial real estate markets in Central and Eastern Europe hard. Thus the approximate investment volumes in this respect fell from EUR 9.8 billion in 2008 to EUR 2.5 billion last year. At the same time, investor interest was up again in the last two quarters of 2009, particularly amongst those on the lookout for top properties in the office and retail sector in Poland and the Czech Republic. This is one of the findings of Bank Austria’s "Real Estate Country Facts" about Poland, Slovakia and the Czech Republic. According to this current market analysis, the initial signs of a recovery are good: economic indicators have improved, real estate investors are once again showing interest and banks still active in the market have retained conservative finance structures – although overly strict restrictions are gradually being abandoned. Reinhard Madlencnik, Head of Real Estate at Bank Austria: "We are willing to finance good projects in the long term: we have planned for an increase in credit growth in 2010."
Economic crisis reduces office space growth
Since 2000, the amount of modern office spaces in major cities in Poland, the Czech Republic and Slovakia has almost tripled. Particularly in the investment boom period in CEE countries, a huge number of office projects were implemented, a great many of which were speculative and were initiated just before the global financial market crisis erupted. Consequently, even at the height of the crisis in 2008 and 2009, almost 1.5 million square metres of new office space was being completed in Warsaw, Prague and Bratislava. "We are anticipating a drop in the completion of new office space in 2010 and, even more significantly, in 2011/12", says Madlencnik. "Numerous projects in the pipeline have been put on ice due to the economic slump, and these abandoned projects are now having knock-on effects further down the line."
Vacancy rates have been showing an upward trend since 2008 after reaching an all-time low in 2007. At the end of last year, vacancies in Warsaw amounted to a comparatively moderate seven percent by comparison. Prague and Bratislava, on the other hand, were already showing rates of around twelve percent. Other increases are also expected, although these will vary in terms of sharpness. Given the trend in rental prices, which have seen a steep upward movement since 2006 in CEE countries, the economic crisis has forced the market to make (healthy) adjustments. Relatively speaking, the slowdown was at its mildest in Prague and Bratislava. The fall was greatest in Warsaw, in keeping with the stronger starting position there.
Retail rents under pressure
For some time now, Bratislava, Prague and Warsaw have been saturated markets, which is why investor interest had already shifted to other major cities before the crisis. By 2008, many towns and cities had already been truly overwhelmed with shopping centres. Last year, approximately 1,000,000 square metres of new commercial premises came onto the market in Poland, Slovakia and the Czech Republic. In 2010, new production looks set to be of much the same order of magnitude. These premises are also mostly the result of projects that were already underway when the financial crisis began.
Vacancy rates in Warsaw and Bratislava are still relatively low. In Prague, the average vacancy rate is significantly higher, at around 10%. "But in Prague, too, there are top shopping centres and their capacity utilisation continues to be excellent. Location and design are key", as Reinhard Madlencnik points out.
"As in other countries, tenants are using the crisis to renegotiate rents. Landlords are trying, through incentives, not to knock down net rents in order to keep their tenants. That said, rents have dropped significantly", says real estate analyst Karla Schestauber.
Hardly any new logistics properties coming onto the market
The industrial property sector reacted to the economic slowdown particularly quickly. Projects here are often established in individual modules or phases, meaning that investors have quite a lot of room for manoeuvre. "Although many logistics properties were established speculatively before the crisis, which led to high surplus production and relatively high vacancy rates, hardly any of them are coming onto the market now", Schestauber comments.
As in the office and shopping centre sector, peak returns have also stabilised in the logistics industry. In contrast to other forms of utilisation, this segment has also seen an alignment of returns. Thus peak returns in Bratislava, Prague and Warsaw at the end of 2009 were almost equal at 8.75 percent. According to data from CBRE, at the end of 2009 peak office returns were 6.75 percent in Warsaw, 7 percent in Prague and 7.5 percent in Bratislava.
"There is now a clear gap between peak returns and returns for real estate in less successful locations and of lesser quality", summarises Madlencnik. "And this gap will only close up again slowly. Investment projects are being given preference when it comes to making financial decisions due to the low risk. Projects offering energy efficiency – and therefore low gross rents – start with a definite advantage."
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