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19.05.2014

Bank Austria Real Estate Country Facts:
Are commercial real estate markets in Romania and Bulgaria profiting from rising risk appetite?

  • With interest rates still at extremely low levels, real estate remains a very attractive asset class for institutional investors
  • In 2013, investment in commercial real estate in Europe rose 30 percent to EUR 165.6 billion
  • Transaction volumes for commercial real estate in Romania (EUR 229 million) and Bulgaria (EUR 23 million) remained small in 2013, but investors’ risk appetite is rising: in Q1 2014, the volume of investment in Romania increased sharply to EUR 300 million
  • Office property: committed investors will quickly take the lead, amidst a limited supply of core real estate in Romania and Bulgaria
  • New shopping centre space leads to increased competition, but prime yields of around 9 percent in Sofia and Bucharest should make the market interesting for investors

Reinhard Madlencnik, Head of Real Estate at Bank Austria: “Generally speaking, I see an upward trend in demand for credit in the commercial real estate business, which is supported by the upswing in economic activity. Demand from both commercial property developers and investors, and public sector housing developers is picking up. There is more in the pipeline than in previous years and the ratio of projects actually being implemented is also increasing again.” In 2013, Bank Austria’s real estate business recorded roughly EUR 2.1 billion in new transactions. Of this, roughly EUR 400 million related to subsidised residential construction in Austria, almost EUR 1.2 billion to the commercial real estate sector in Austria/Germany and approximately EUR 500 million in commercial real estate in CEE and SEE. Madlencnik continued, “I expect a good year for the real estate business in 2014. And our ambitious goals reflect this: for 2014, we are aiming for new business on the order of EUR 2.5 billion, representing growth of almost 17 percent compared to 2013. The markets in Central and Eastern Europe are our core markets. We are involved in financing property development and investments, and are more than happy to assist our customers with promising projects in Romania and Bulgaria. In these cross-border transactions, we work closely with our colleagues in the countries involved. UniCredit has a dense network of subsidiaries in CEE. Consequently, in addition to our many years of experience in financing, our customers also profit from the local bank’s knowledge, and this strategy has really proven its value over the years.”

Increasingly sharp focus on markets with earnings potential
In Europe, there was a strong increase in investments in commercial property last year: according to data from CBRE (CB Richard Ellis), EUR 165.6 billion was invested. This represents growth of roughly 30 percent. Demand was particularly strong for commercial real estate in large, liquid markets, and this trend was also felt in CEE. The largest markets in the region – Russia and Poland – accounted for more than 80 percent of all commercial property transactions in 2013, with some tentative signs of a revival in demand also registered in the smaller markets in the region. The volume of commercial property transactions in Romania and Bulgaria was rather modest last year: Romania saw turnover of EUR 229 million and thus came in well ahead of Bulgaria at EUR 23 million. Karla Schestauber, real estate analyst at Bank Austria, noted optimistically, “As risk appetite rises, however, this could change. In the core markets, investors are starting to view core real estate, i.e. properties in excellent locations with very creditworthy tenants and long-term leases, as overbought,” and added, “Consequently, markets with earnings potential are shifting more and more into focus. This trend is evidenced by the robust increase in the volume of investments in Romania, which increased to EUR 300 million in Q1 2014.” For Bucharest, CBRE published a prime yield of 8.25 percent for the office market in Q1 2014. Immobilien Rating GmbH (IRG) estimates the prime yield in Sofia at 9.5 percent.

Quality construction and energy efficiency rate highly in the office market
Even though the record levels of production from past years were not reached in Sofia and Bucharest, the amount of office space has still almost doubled again since the end of 2008. By the end of 2013, Sofia had a stock of around 1.7 million m2 of modern office space, and Bucharest had reached almost 2.4 million m2. Nevertheless, the amount of office space per inhabitant in Sofia and Bucharest still falls far short of the levels seen in other Eastern European capitals, such as Prague, Warsaw and Budapest. This difference is even more striking compared to major Western European cities and urban conglomerations, and Vienna itself only ranks in the middle of the field in this regard. Another aspect of these two office markets is that the quality of the offices only partially corresponds to Western European standards. “With the limited supply of core real estate in these smaller markets, committed investors will quickly take the lead. Developers which can take advantage of the depressed land prices and construction costs to build cheap, energy-efficient properties will also enjoy significant competitive advantages. Country risk, which is a cost component in real estate loans, has improved considerably in both countries. In both countries, the spreads are well lower than in the EU’s newest member, Croatia,” explained Madlencnik, summarising the market potential. Schestauber added, “With prime yields in Western Europe at low levels, this should be quite attractive for investors hunting for returns. Along with good transportation connections, office buildings with a high level of energy efficiency, Green Building certification and low operating costs will enjoy competitive advantages.”

For 2014, the volume of new construction in Sofia is estimated at about 100,000 m² (representing a considerable increase compared to the previous year), with around 120,000 m² of new space coming on the market in Bucharest. In recent years, high vacancy rates have developed in these two capitals. In Sofia, the vacancy rate is around 27 percent, which is almost twice as high as the rate of 15 percent registered in Bucharest. As a result, Sofia is a European leader in terms of vacant office space. In Bucharest, however, following a sharp increase, the development of vacancies has been stable for some time now, and the production of new office space and demand is expected to be broadly balanced this year. By contrast, completion of the projects City Tower and Capital Fort in Sofia will result in yet another significant increase in available office space. Compared to the previous year, the volume of new construction activity has tripled, and as a result the vacancy rate in the Bulgarian capital may rise slightly again, after some recent declines. Consequently, location and quality are decisive factors.

New shopping centre space fuels competition
“In the SC market, competition in these two countries will intensify in the years ahead. New, modern shopping centres will be coming onto the market, offering good entertainment value. Older centres which cannot keep up the pace in terms of location and brand mixes will be facing pressure. And with prime yields ranging at 9 percent in Sofia and 8.5 to 9 percent in Bucharest, these are certainly interesting markets for investors,” said Schestauber.

In early 2014, Bulgaria had SC floorspace of around 735,000 m². Most of this floorspace (around 85 percent of all available space) was located in the capital of Sofia which has a population of around 1.3 million and in cities with more than 200,000 inhabitants (Plovdiv, Varna and Burgas). In Sofia, only one shopping centre opened last year, but it was the largest one so far. With a gross leasable area of around 82,000 m² and 150 shops, Paradise Center is located in the south part of Sofia and boasts being the “first lifestyle centre” with large areas for recreation and entertainment. After some initial difficulties in leasing when it opened, the centre was almost filled by the end of 2013 thanks to some incentives, and the vacancy rate dropped below 10 percent. By the end of 2014, four new shopping centres which are currently under construction will be opening their doors, with total gross leasable area of 135,000 m². At end-2013, shopping centre floorspace amounted to around 254 m² per 1,000 inhabitants in Sofia, and this rate will increase to around 360 m² after completion of the shopping centres under construction at the end of 2014. Compared to Bucharest (417 m² per 1,000 inhabitants), this rate is still considerably lower and it is also lower than in Vienna, at 540 m² per 1,000 inhabitants.

In early 2014, the stock of SC space in Romania amounted to around 1.6 million m². Of this, 50 percent was located in the five largest cities: Bucharest (30 percent), Cluj Napoca (5 percent), Timisoara (4 percent), Iasi (5 percent) and Constanta (6 percent). In 2013, a total of four new shopping centres were opened in Romania with a gross leasable area of 107,000 m²; occupancy rates at the official openings were higher than in previous years. In 2014, roughly 56,000 m² will be added to the market, marking the smallest increase in the last 10 years. In the next two years, the main shopping centre projects will be concentrated in Bucharest and Brasov. All in all, floorspace in Bucharest is expected to grow by around 250,000 m² to 975,000 m² in the years 2014, 2015 and 2016, representing an increase of more than one third compared to the current volume. As a result, the SC density per 1,000 inhabitants will increase from the current level of 397 m² to 557 m². This is higher than the level of the Viennese market (540 m² / 1,000 inhabitants), which is generally considered to be a saturated market.

Enquiries: Bank Austria Press Office Austria
Matthias Raftl, Tel. +43 (0) 50505 - 52809
E-Mail: matthias.raftl@unicreditgroup.at