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Bank Austria Real Estate Country Facts:
Commercial real estate markets in Romania and Bulgaria benefit from growing risk appetite

  • Strong global demand for commercial real estate amidst low interest rates
  • Heavy demand for core properties – i.e. real estate in very good locations, with long lease agreements and tenants with strong credit ratings – in liquid markets leads to sharp price increases and significant decline in prime yields
  • Smaller and less liquid markets such as Romania and Bulgaria score well with more attractive real estate yields

According to Reinhard Madlencnik, Head of Real Estate at Bank Austria, “the low-interest environment means that demand for commercial real estate remains high. Large, global investors in particular, like pension and state funds, have widened the share of real estate in their investment portfolios in search of yields. Investors looking for good returns have to take another step up the risk ladder. This means that smaller, and so far less liquid, markets such as Romania and Bulgaria with their attractive returns should pop up again on investors’ radar screens.”

2015: another record year in the history of real estate at Bank Austria
Loans amounting to a good EUR 3.6 billion were awarded last year in total (2014: EUR 3.2 billion), of which the majority was for commercial real estate in Austria and around EUR 600 million was for commercial real estate in CEE/SEE and Germany. Madlencnik adds, “I expect 2016 to be a successful year for real estate, and our goals are accordingly ambitious: for 2016 we are striving to acquire new business on a similar level to 2015. The markets in Central and Eastern Europe belong to our core markets in this respect. We finance both developments and investments and are most willing to follow our customers with promising projects to Romania and Bulgaria as we are convinced that these real estate markets have potential. With these so-called cross-border transactions we work closely together with colleagues at UniCredit Bulbank and UniCredit Bank Romania. Our customers therefore benefit not only from our long-standing financial expertise, but also from the know-how of a local bank – a concept that has proved to be very valuable.”

Markets with attractive real estate returns move more into the spotlight
Since investors looking for yield have to move up the risk ladder, this also means that non-core real estate markets such as Romania and Bulgaria should crop up (again) on investor radar screens. Both offer attractive yields – prime office yields for example were recently around 7.75 percent in Bucharest and 8.5 percent in Sofia, shopping centres posted figures of about 8 percent and 9 percent, while logistics and industrial prime yields were around 9 and 11 percent.

Investment activity dipped in 2015 after the first signs of a recovery in 2014. In Bulgaria, this figure dropped below EUR 230 million last year according to Cushman & Wakefield, down from roughly EUR 270 million in 2014, and in Romania from almost EUR 1.1 billion in 2014 to just short of EUR 530 million. “Yet this could change if risk appetite grows. Investors are beginning to view core properties – i.e. real estate in very good locations with long lease agreements and tenants with strong credit ratings – in core markets as overbought”, said Karla Schestauber, real estate analyst at Bank Austria, before adding: “This means markets with earnings potential like Romania and Bulgaria are coming more strongly into the spotlight again.” What is more, according to the “EMEA Investor Intentions Survey 2016” by CBRE, the appeal of the CEE region has risen sharply compared to the heavily bought Western European markets. For the first time, the CEE region (also including SEE) was ranked in top place for real estate investments in a regional/country comparison. Bulgaria and Romania should also profit from this.

Office markets in Sofia and Bucharest starting to move again
The office sector in Bucharest is undergoing dynamic development with a pipeline that is full, while much less new space is coming on to the market in Sofia. The new buildings can generally be classified as Grade A properties with very good technical fittings and excellent transport links. Aggressive competition will increase with the relatively high vacancy rates, and older offices with inadequate technical configurations and in poor locations will lose out. The demand for new office space is benefiting from the increasing significance of Bucharest and Sofia as outsourcing locations. Bucharest is ranked in the top half of the Tholons 2016 Top 100 Outsourcing Destinations in the world.

At the end of 2015, Sofia had just under 1.8 million m² of modern office space, while Bucharest had almost 2.7 million m². New construction activity in both capital cities was comparatively moderate last year, coming in below the record values of earlier years, at roughly 100,000 m² in Sofia and almost 90,000 m² in Bucharest.

“The quality of existing office space in Sofia and also in Bucharest does not always meet the growing requirements. This means there is definitely demand for suitable space in the prime segment in Sofia and Bucharest, also in the outsourcing sector, which is increasingly the reason for new space sales in both cities. However, at the same time this increases the pressure on old space with suboptimal fittings and equipment, or space in less attractive locations”, analysed Schestauber.

New construction activity in Sofia is expected to total roughly 70,000 m² in Sofia in 2016 (down slightly on the previous year), while more than 350,000 m² could be completed this year in Bucharest, which is a substantial increase.

Logistics markets in Romania and Bulgaria: rising demand, low vacancies
In Romania and Bulgaria the logistics markets are dominated by built-to-suit properties. Rarely do speculative properties come on to the market. This results in low vacancy rates and rents that are stable or growing slightly. The growing demand seen on the market for a while only makes the lack of high-quality space that meets modern logistics requirements even more evident. This is why there are now initial signs of a revival in construction activity, only a small part of which is speculative though. Logistics spaces both in Bulgaria and in Romania are concentrated in the metropolitan area around the two capital cities. At the end of 2015 the region around Sofia had approximately 1.4 million m², and roughly 50,000 m² in new space could be added this year. Bucharest had around 1 million m² of logistics space available at the end of 2015. This year will see up to 140,000 m² of new space added to the metropolitan area of the Romanian capital, the first notable growth for some time.

New shopping centre space intensifies competition
High growth in space is ramping up the competition among shopping centres in Bulgaria and Romania. “ Strong private consumption in both countries is bolstering the development of retail turnover, which is beneficial for demand in shopping centres whose tenants favour top-quality locations and a balanced tenant mix. This is set to widen the gap between the very good and the less good shopping centres even further”, summarised Schestauber.

Following the significant growth in space in 2013 and 2014 the vacancy rate in Sofia shopping centres has stabilised again, amounting to roughly 11.5 percent at the end of 2015 across all shopping centres. In the next two years we can expect vacancy rates that are stable or declining moderately, due to a lack of new projects and the partial modernisation of existing shopping centres.
After a subdued year in 2014 with new SC space of roughly 56,000 m² (lowest growth since 2005), the Romanian market for commercial real estate has really picked up momentum again. Last year, three new shopping centres were opened in total, and three expansions were completed. This brought the shopping centre portfolio up by around 217,500 m² to roughly 2.1 million m², with more than half of all the space found in Bucharest and Transylvania.

“Competition in the SC sector will intensify in both countries in the coming years. New, modern shopping centres are coming onto the market that will exert pressure on older centres that fail to impress based on their locations and tenant mixes. Prime yields of roughly 9 percent in Sofia and 8 percent in Bucharest make this an altogether interesting market for investors”, summarised Schestauber.

Enquiries: UniCredit Bank Austria Media Relations
Martin Kammerer, Tel.: +43 (0) 50505 - 52803;
E-mail: martin.kammerer@unicreditgroup.at