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12.10.2011

Bank Austria Real Estate Country Facts
Commercial property markets in Croatia, Serbia and Slovenia – gaining ground, but risk of overheating remains

  • High-potential segments in all three countries – overheating combined with fierce competition a significant factor
  • Saturation and undersupply in shopping centre markets – Slovenia small and relatively stable; hotly contested market in Croatia; retail space in short supply in Serbia
  • Office property market: office space per capita in Zagreb and Belgrade still significantly lower than in other regional capitals such as Bratislava, Prague, Warsaw and Budapest; vacancy rates still close to 20% in Serbian capital
  • Strong growth potential in Croatian and Serbian markets for warehouse and logistics space, but investors remain wary

Although the current turbulence on global financial markets has dented the growth prospects of Croatia, Serbia and Slovenia, the neighbouring Balkan states' real estate markets have benefited from the muted economic recovery of the past two years. Yields have slipped after increasing during the economic crisis. Top office yields hit 7.5% in Ljubljana, 8.3% in Zagreb and 9.5% in Belgrade at the end of the second quarter of 2011. By contrast, the figure for Vienna was 5.25%. In spite of its anaemic economy, which is expected to grow by 0.2% this year, Croatia saw real estate investment of about EUR 140 million (m) in 2010, significantly higher than the total of around EUR 110m recorded in Serbia. No data are available for real estate investment in Slovenia in 2010, but the country trailed its neighbours by some distance in 2009, attracting inflows of only EUR 11m.

"Of course, these amounts are significantly lower than the EUR 1.6 billion (bn) invested in Austria. But investment in Croatia jumped almost 70% year on year, and we expect EU accession in July 2013 to have a particularly positive impact on real estate investments and market sentiment. However, competition in the shopping centre segment looks set to become even more cut-throat," according to Reinhard Madlencnik, Head of Real Estate at Bank Austria. "Transparency is a key indicator for the attractiveness of commercial real estate markets, but there is room for improvement on this front in all three of the markets we analysed. The latest Jones Lang LaSalle transparency index rates Slovenia as semi-transparent and Croatia as a low-transparency country. Serbia was not included in the ranking. All three countries have some way to go if they want to attract strong interest from investors," he adds.

Undersupply and oversaturation in retail markets
There have been some sharp contrasts in the development of the Croatian, Serbian and Slovenian retail markets, despite their geographical proximity. "Looking at Slovenia, we found a small, relatively stable shopping centre market. The addition of new shopping centre space in the country is a longer-term undertaking, meaning that the market is expanding slowly," says Bank Austria real estate analyst Karla Schestauber. Croatia's capital Zagreb has the highest shopping centre density in the region, with 456 square metres (m²) of lettable space for every 1,000 inhabitants. "The Croatian market was already saturated before the onset of the economic crisis, and that is reflected in the fierce competition we are currently seeing. Construction projects are now focusing on areas outside the capital. Croatian retailers were hit hard by the economic downturn. Since then rents have dropped to EUR 7-20 per square metre for anchor tenants, and to between EUR 15 and EUR 65 per square metre for other tenants, according to Immobilien Rating (IRG). So the retail market in the Zagreb area could remain under pressure for some time yet," Schestauber continues.

Demand for office property still muted
The focal points of the Slovenian, Croatian and Serbian office property markets are – as expected – the countries' capital cities. Belgrade, with over a million inhabitants, has a stock of around 520,000 m² of office space, while Zagreb has 590,000 m² and a population of some 800,000. Ljubljana, a city of just over 270,000 residents, is not a key office location and is less attractive to overseas investors on account of its size. "In terms of office space per capita, Zagreb and Belgrade are still lagging way behind other regional capitals such as Bratislava and Prague. Compared with Vienna – and the Austrian capital is far from being a West European leader in terms of the amount of available office space – the shortfall becomes even more pronounced, although demand is still subdued," says Reinhard Madlencnik.

Vacancy rates are around the 20% mark in Belgrade, compared with 7% in Zagreb. Vacancies are stable in the Slovenian capital, but no precise figures are available. The economic and financial crisis pushed down rents in both Belgrade and Zagreb. However, top rents in Ljubljana remained flat at EUR 25/m², according to IRG. This is significantly higher than in the Croatian and Serbian capitals, where premium office space costs EUR 16-17/m².

Logistics market still underdeveloped, but major upside potential in Serbia and Croatia
Warehouse and logistics space is the least developed segment in both the Serbian and Croatian real estate markets. The supply of modern space with high-quality technical equipment is limited, while local infrastructure is in need of significant upgrades, or in some cases non-existent. Serbia currently has around 400,000 m², and Croatia approximately 700,000 m² of warehouse and logistics space, but modern, high-quality properties are thin on the ground. "Especially in Croatia and Serbia, the dearth of state-of-the-art warehouse and logistics space could provide attractive opportunities for prospective developers and investors – far greater than the rewards on offer in the smaller Slovenian logistics segment. However, many investors still see entry into the Serbian and Croatian warehouse and logistics markets as a high-risk proposition," concludes Karla Schestauber.

 Real Estate Country Facts

Contact: Bank Austria Press Office Austria
 Julia Wegenstein, Tel: +43 (0)50505 52854
 E-mail:  julia.wegenstein@unicreditgroup.at

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