In the last month, the COVID-19 pandemic situation has been continuously deteriorating, and the Government has introduced several measures to slow down the spread of coronavirus. As of 4 December, new measures have been introduced, including the weekend closure of all shops, malls, children's play spaces, restaurants etc, although supermarkets, pharmacies and petrol stations will operate normally, while cinemas and theatres may open every day until 17.00. The lock-down measures which were in force from mid-March until the beginning of May, have not yet been re-introduced, as authorities are trying to calm the pandemic without rigorous measures, in order to reduce the impact on the economy.
Despite the pandemic, the real estate sector remained very active, construction activity continued both on commercial and infrastructural projects in Serbia as construction sites stayed operational, as well as new ones opening.
Looking at the office segment, Israeli investor Afi Europe has commenced construction works on its new Class A office tower as part of its Belgrade Skyline project. Once completed, the tower should comprise 30,000 sq m GLA of office space.
The retail sector is also active: on 30 October, Belgrade witnessed the opening of the largest shopping mall in the country, as the part of the Belgrade Waterfront project, Galerija Shopping Mall features 93,000 sq m of GLA.
After a relatively quiet period during August and September, during which the situation in the country has been almost back to normal, since mid-October, the COVID-19 pandemic in Serbia has been worsening, but is still under control and no new precautionary measures have been introduced by the authorities.
Despite the contraction of GDP, the inflation remains low and stable, allowing the National Bank of Serbia to lower its policy rate to 1.25% in June 2020. The crisis caused by the COVID-19 pandemic pushed the NBS’ projection of economic growth down to -1.5% in 2020, yet long term GDP contraction is not projected.
Looking at the office segment, during Q3 2020, three small-scale projects were completed, totalling 12,000 sq m. As of beginning of the year, development completions exceeded 52,000 sq m. This has led to the increase of the total modern stock to the level of 970,000 sq m of GLA. After the third quarter of 2020, the total take-up amounts to approximately 65,000 sq m, being only 8% lower as compared to the same period in 2019, and 2019 was the strongest year in terms of take up in the last 10 years.
As of mid-May, the retail market began recovery, however the number of infected cases slowed down the activities in second half of June. Since end of July, the market notes a positive trend again, still it certainly takes time to understand how this situation will influence the prices and rents. At the moment rental levels remained stable. Furthermore, as the COVID-19 pandemic slowed down, cinemas reopened on 1 September.
During the previous period, construction activity continued on both commercial and infrastructural projects in Serbia as the construction sites remained operational despite the current situation. Investors’ expansion appetite for both manufacturing and logistics facilities in Serbia over the previous period was confirmed with the largest logistics investment transaction in Serbia, which occurred in the period of pandemic. Namely, Israeli investor BIG CEE acquired a logistics and distribution complex of 17,000 sq m, which is in a long-term lease by Kuehne Nagel, the deal was concluded by our Investment and Capital Markets team.
Due to the positive performance in January and February, the economy was not strongly affected by the coronavirus pandemic in the first quarter of 2020, despite the contraction in March. The economy grew by approximately 5% in Q1, recording a positive growth rate for the 22nd consecutive quarter. At the beginning of May 2020, the Serbian Government lifted the state of emergency and curfew, which were adopted to reduce transmission of COVID-19, however the number of patients infected with coronavirus increased significantly in Serbia as of second half of June. The economic downturn should be significant in Q2 2020, while, as projected, the economy will witness the accelerated recovery as of Q3, with adopted measures introduced by the Government.
Despite the lockdown in the previous period, construction activity continued in Serbia as the construction sites remained operational. Therefore, Belgrade saw the completions of three office buildings, all representing the expansion of existing office complexes. Namely, Israeli AFI Europe has completed the tenth office building of 12,000 sq m of GLA within Airport City Belgrade Business Park, GTC has completed the last building within GTC Green Heart office complex, which now comprises 46,000 sq m of GLA, while Belgrade got the second office tower, Usce 2, which was developed by the local company MPC. The second quarter completions amount to 40,000 sq m, which brought the total Belgrade office stock to the level of nearly 960,000 sq m of GLA.
The retail market that suffered a great deal during pandemic period is coming back to normal with reopening of the shopping malls as of 8 May. In terms of new developments, Belgrade retail offer was recently enriched with the opening of MPC’s BEO Shopping Center in Zvezdara Municipality, 43,000 sq m-large retail scheme offers more than 150 domestic and international brands to the customers, while the German brand Peek & Cloppenburg opened its first store in Serbia within this mall. Belgrade modern retail stock currently totals 440,000 sq m of GLA.
At the beginning of May 2020, the Serbian Government lifted the State of Emergency and curfew, which were adopted to reduce transmission of COVID-19. It is too early yet to estimate precisely forthcoming effects as the pandemic of COVID-19 will certainly have an impact on the Serbian economy. It appears that we will witness consecutive declines in global and regional GDP in the current and next quarter of 2020.
As a result of relaxation of the measures, companies are slowly regaining their usual operational mode. Some companies are still postponing the return to their offices until September, particularly the ICT sector and international companies.
For the office market the year 2020 started off with great momentum continuing from 2016-onwards, with high occupancy demand, low vacancy levels, strong development activity and overall solid market fundamentals. As a consequence of the current situation, leasing activity slowed down as of beginning of March, which caused a decrease in the total take up for cca 45% as compared to Q1 2019. Since lockdowns were lifted and the current situation is becoming more relaxed, the demand has already picked up, additionally a number of deals that were put on hold have been reactivated.
The retail market that suffered a great deal during this period is returning to normal with reopening of the shopping malls as of 8 May. It is expected that activities within sector will additionally normalise with announced opening of cinemas as of 1 July.
The past few years were marked by the influx of international investors who recognised the numerous opportunities that Belgrade and Serbia can offer, while the already present investors showed their interest in long-term investments. With the relaxations of the measures the industrial and logistics market is also reviving with opening of a few new opportunities.
During the previous period, construction activity continued on both commercial and infrastructural projects in Serbia as the construction sites remained operational despite the current situation, however some scheduled completions could be delayed or postponed.
The real estate market is clearly exposed to the current situation, property types which depend on social contact and human interaction, such as the hospitality and retail segment are more exposed, while the other property types such as office, industrial and residential are more resilient but not immune.
By the end of Q1 2020, the impact of the global slowdown on the back of the COVID-19 pandemic became also visible in the Belgrade office market and the market activity narrowed, causing the drop in the overall demand. In order to alleviate the situation, most landlords are trying to identify tailor-made solutions for tenants based on the numerous factors, which are favourable for both landlords and tenants. At the moment, there is no significant impact on the headline rents, having in mind that the investors are applying a different pricing strategy.
As a result of lockdown measures, retailers turned to flexible omni-channel retail models, in order to recompense the revenue from their physical stores and to ensure that commerce keeps going. The high-street was also affected, since the main pedestrian zones depend significantly on the high footfall and attract mostly tourists. When it comes to the rental levels, the previous period was marked by difficult and complex negotiations between tenants and landlords regarding rental payments. However, there were no interruptions in construction activity on the retail market, yet previous ongoing projects are slightly postponed.
Although the industrial and logistics market in Serbia is clearly exposed to the effects of the global pandemic crisis, market fundamentals were very strong prior to the COVID-19 crisis. Moreover, the pandemic is underlining the importance of supply chains and logistics, and the sector is prepared to rapidly respond to the post pandemic recovery.
The real estate market is clearly exposed to the COVID-19 situation, still certain property types are more exposed than others. The Serbian property market enters 2020 on a solid basis, bearing in mind the continuation of the strong performance which started back in late-2016 and continued onwards.
Near-term demand in the office segment will be rather limited until the situation is resolved. It is expected that large companies will be careful in relocation of their premises or expansion activities, while small and medium-sized companies are likely to experience higher financial liquidity risks.
Shopping centre landlords are also analysing the current situation as per the newly introduced governmental measures to close all shopping centres in Serbia. Most shopping centre landlords are trying to meet tailor-made solutions in line with the retailer’s particular industry, which will be favourable for both landlords and tenants. Although retail is affected the most, it is expected to be the first segment to lead the recovery of the market.
Limited market conditions in which the retailers operate may result in the reduced demand for warehouse space at least in the short-term, although this is the sector to be the most resilient to the current situation. Rental levels may also come under increased pressure in all commercial segments as leasing activity compresses. Bearing in mind that setting up of a production facility is a lengthy process and represents a strategic decision of a company, we say that Serbia is still a favourable choice for international factories that had showed their interest in Serbia before the pandemic.