Cushman & Wakefield Slovakia has concluded quarterly reporting on prices in the commercial real estate market in Slovakia. According to our estimates, we are seeing price stabilisation, which also persists in the retail real estate market, both on the rent side and on the yield side. The most competitive shopping centres can achieve a prime monthly rent of 65 euros per square metre, logistics halls 4 euros per square metre (smaller units reach 5 euros per square metre) and office real estate 17 euros per square metre.
Footfall in shopping centres and retail parks in Slovakia has returned to normal, except for projects partly dependent on neighbouring office projects, as a large part of major companies maintain the concept of partial home office.
Less office investment liquidity in the city centre caused a limited increase in prime yields from 5.75% to 6.00%. However, prime yields in the office sector remain at 5.75% due to the strong position of the newly created CBD submarket. Overall, prime yields have stabilised after the slight uptick earlier this year and their further development will depend on the development of the economy and investment sentiment.
According to the Statistical Office of the Slovak Republic, a significant improvement in turnovers in the industrial sector was recorded in July. The year-on-year decrease reached only 1.5% compared to 33.9% in May. Prices of consumer goods increased by 2.2% year-on-year in August, while prices in the restaurant and hotel sector increased by 2.3%. The construction sector records a continuing year-on-year decline in turnovers.
From 1 September 2020, Croatia, France, Spain, the Netherlands, Belgium and Malta are excluded from the list of so-called less risky countries. All persons who enter the territory of the Slovak Republic and during the previous 14 days visited a risky country are ordered to isolate at home until they obtain a negative RT-PCR test for COVID-19, which may be performed at the earliest on the fifth day of isolation.
It will be possible to organise group events indoors only for up to 500 people at one time and outdoors for up to 1000 people at one time, while wearing face masks will continue to be mandatory at group events both indoors and outdoors.
According to the Statistical Office of the Slovak Republic, the seasonally adjusted three-month moving average of the economic sentiment indicator increased again by 9 points to 83.5 in August. Confidence has risen sharply in trade, as well as in industry and among consumers, and slightly in services. Nevertheless, it has decreased in construction. In the 2nd quarter of 2020, compared to the same period last year, the prices of dwellings increased by 9.7%.
The Ministry of Health has published a new pandemic plan, in which it sets out precise procedures and tasks for state administration bodies, local government bodies and expert bodies that manage, ensure and perform activities in connection with the protection of public health. Instead of the moving median, the Ministry of Health will be guided by the hospital bed occupancy. According to the pandemic plan, Slovakia is currently in phase 1 (phase of deterioration of the epidemiological situation), therefore the reprofiling of the hospital bed capacities is being prepared and preparatory measures for the repatriation of citizens from abroad are also being implemented.
According to the plan, the recommendation to introduce restrictions on business operations and services is linked to the so-called red or critical epidemiological situation in the region, which will be evaluated by the so-called traffic light system using relevant data. In the red phase, work from home is ordered and work meetings will be replaced by online conference calls.
From 1 September 2020 to 1 October 2020, a ban on mass events with more than 1000 participants outdoors, including sporting events and mass events indoors with more than 500 participants is planned.
The Government plans to discuss with employers the introduction of a regulation ordering the confirmation of registration with the relevant regional public health office and a negative RT-PCR test for COVID-19 before allowing the workers coming from high-risk countries in the company premises.
In the future, we do not expect a widespread negative impact on the commercial real estate sector, as the pandemic plan considers mainly the regional or individual response to possible outbreaks.
The COVID-19 pandemic has a stable course in Slovakia and is under control in terms of public health. The Slovak economy is recovering from the trough of the business cycle, which was achieved in the second quarter. This is also indicated by the data of the Statistical Office of the Slovak Republic, according to which the seasonally adjusted moving average of the economic sentiment indicator (ESI) increased again by 9.7 points to 74.5 after a historical decline in the last three months. The best results are recorded in the services and industry sectors. The construction and consumer sectors are also picking up. Year-on-year, however, this indicator still records values lower by 20.8 points.
Construction prices in June 2020 increased by 3% compared to the same period last year. Construction prices have increased by an average of 3.1% year-on-year since the beginning of the year.
Industrial real estate recorded a strong second quarter with a total lease of almost 120,000 sq m. Most new leases took place in western Slovakia in the distribution sector. Despite strong demand, due to an increase in tenant mobility, there is virtually zero net increase in total leased space compared to the previous quarter. We also record an increase in the vacancy rate by 2.3 percentage points to 9.14%, mainly due to newly completed speculative areas in western Slovakia. We expect continuing healthy demand and stable development of industrial real estate prices, as well as the level of rents.
The European Union aid package for Slovakia for the years 2021 to 2027 was approved at a record value of €44 billion. As this money will be granted on the basis of submitted projects, there is a risk of forfeiture. Between 2021 and 2023, Slovakia will have up to €7.5 billion available from the coronavirus recovery fund.
The coronary crisis also had the expected impact on leasing activity in the office sector during the second quarter. A total of 31,000 sq m of office space was leased, which represents a year-on-year drop of approximately 60%. The good news is the increase in total occupied areas by 21,000 sq m compared to the first quarter. Occupied areas also increased for the third quarter in a row. At the same time, we record the highest share of net demand in the last seven quarters.
Nevertheless, we record an increase in the vacancy rate to 9.82%, as the increase in new supply in Bratislava is higher than the increase in total occupancy. Two major projects have been completed: Nivy Tower and Einpark Offices. The traditional increase in leasing activity at the end of the year should help absorb the additional over 60,000 sq m of space, which should be added by the end of the year.
In the investment market, we record a strong first half of the year thanks to the completion of transactions from 2019, with the total volume of completed transactions reaching a value of approximately €450 million. Investments in industrial real estate accounted for more than half of the volume, which confirms the continuing demand of investors for this segment.
A consortium of experts in the field of epidemiology presented new measures, which came into force on Monday, 6 July. Mass sports events must ensure that every other row is emptied, which is a reaction to a football match in Dunajská Streda, where visitors ignored the mandatory chessboard seating. There can still be a maximum of one visitor per ten square metres indoors and a maximum of one visitor per five square metres outdoors.
Bulgaria and Montenegro, which have seen an increase in coronavirus cases, have been removed from the list of less risky countries. However, Netherlands, Belgium, France, Italy, Spain, Ireland, Japan, Australia, New Zealand, South Korea and China have been added to the list.
Rental subsidies for compulsorily closed operations during a pandemic are already being paid gradually. According to the Ministry of Economy, up to 100,000 entities are eligible, but so far only a fraction of them have submitted an application. One reason may be the still outstanding agreements between landlords and tenants on the amount of the discount. Another problem is the need to sign an electronic application for both parties, for which it is necessary to have an activated electronic mailbox for delivery. According to NASES, some applicants do not have the application for signing or have an outdated version. According to some users, electronic signing itself is also confusing.
On Saturday, 20 June, the Government lifted the ban on Sunday shopping, which was introduced in connection with the suppression of the coronavirus pandemic in the Slovak Republic. Stores will continue to have to pay attention to increased hygiene and sanitation. From July, public events with more than a thousand participants will be allowed, with a maximum seating capacity of 50%. Secondary schools and the second stage of primary schools are also opening. Pupils and students will not have to wear a facemask during lessons.
Slovaks can now travel to Poland without restrictions. Citizens of EU member states may cross the territory of Slovakia without the consent of the Ministry of the Interior, but they are obliged to cross the territory of the Slovak Republic without stopping no later than 8 hours after entry.
With the end of the quarter, we bring up-to-date information on prime rents and yields for the most attractive premises in individual sectors. In the office real estate sector, we did not see any changes in prime rent, but we see a pressure on the incentives provided. Prime yield for office buildings in Bratislava increased slightly to 5.75% in the second quarter, reflecting the expected increase in vacancy. However, buildings with an average lease length exceeding 5 years can achieve a yield of less than 5.50% in the best locations. We record prime yield for shopping centres at 6.00% in the current quarter, due to rising saturation in Bratislava and a negative outlook for the sector not only due to the COVID-19 pandemic.
In the industrial real estate market, we record a stable level of prime and secondary rents and yields across the submarkets. High liquidity and positive development in the industrial real estate segment causes a convergence of prime industrial yield with prime retail yield.
After 90 days, the National Emergency has ended, but the State Emergency situation remains in place to ensure the continuity of special regimes for parts of the economy. The ban on exercising the right to peaceful assembly has also been lifted since Wednesday, 10 June.
According to current information, the footfall of most shopping centres is around 60 - 80% compared to the period before the COVID-19 pandemic, while individual operations are able to achieve 50 - 200% of revenues from the beginning of the year, depending on the sector. Termination of leases has so far occurred mainly for tenants who had a weak financial situation before the pandemic.
The largest cinema networks operating in Slovakia, Cinema City and CINEMAX, announced the reopening of their cinemas in the second half of June. We assume that this will have a positive impact on the overall footfall of shopping centres and their revenues.
Despite the postponement of the opening of most of the planned retail projects to next year, we could see the opening of the Tesco Galéria Petržalka shopping centre at the beginning of June, where well-known fashion and gastronomic brands also opened along with it. This year we also expect the opening of the Forum Prešov shopping centre or the Tesco Kamenné námestie redevelopment in the centre of Bratislava.
Among the positive factors influencing retail in Slovakia is the agreed Government support in rental relationships, potential confirmation of optimistic scenarios for the unemployment rate, low interest rates, and in the case of certain concessions of landlords (such as incentives, rent discounts, but also changes in the tenant mix of their centres). We can envisage the stabilisation of retail by the end of the year and a possible revival of investment activity in this sector next year. One of the most affected retail segments is restaurants, due to the loss of tourism revenues and long-lasting restrictions on occupancy after reopening. A separate category is retail operations in office buildings, whose revenues are gradually increasing with the return of employees to offices, but lag behind the levels from the beginning of the year by more than 30% on average.
The number of active cases of COVID-19 shows a long-term declining trend and Slovakia has started to open borders with the Czech Republic, Hungary and Austria without restrictions, which began on Friday, 5 June at 08.00. All retail outlets, including those in shopping centres, may be open subject to epidemiological measures.
The office real estate market enjoys the gradual return of companies to their premises. We have recorded a slight increase in demand for new leases compared to previous weeks. However, these are mainly companies with a lease period ending in the next 12 months, which are trying to find premises that better meet their requirements, using a wide range of available premises. Tenants are increasingly considering the level of operating expenses, while some tenants are interested in reducing the leased area. Negotiations show a stronger position for tenants, especially in terms of incentives and contributions.
During the second quarter, we have not yet recorded changes in the prime office rent in any of the Bratislava submarkets. More attractive rental conditions can even lead to faster occupation of vacant premises and thus stabilise the income of landlords who are able to provide more advantageous rental conditions. Development of office real estate under construction continues uninterrupted.
Confirmation of the Government's expectation of a decline in the unemployment rate in May could also have a positive impact on the commercial real estate market.
On 28 May, for the first time since the outbreak of the pandemic, Slovakia reached a 7-day moving median of new COVID-19 cases of 0. Slovaks can now travel to Hungary, Poland, the Czech Republic, Austria, Croatia, Slovenia, Switzerland and Germany for up to 48 hours without quarantine or submission of a negative test on return to the Slovak Republic. This measure only applies mutually to the Czech Republic and Hungary. From 1 June, the voluntary return of children to primary schools (only for 1st to 5th grade) and kindergartens applies. Fitness centres, swimming pools and other indoor sports facilities are also opening.
The industrial real estate sector remains the least affected sector of the real estate market, where rental forgiveness is rather the exception, especially in the area of logistics and distribution. Possible rental forgiveness is in most cases compensated by the extension of leases. We record reduced demand for new industrial premises, similar to other sectors. Tenants are waiting for further developments and economic impact and approach new contracts with caution, preferring shorter leases. Developers temporarily halted speculative construction, reflecting a decline in demand for new premises.
According to ACEA, EU demand for new passenger cars fell by 38.5% in the first four months of the year due to the negative impact of the coronavirus on the March and April results. However, after a significant slowdown in industrial production in the last two months, there is a resumption of production hampered by lower foreign demand. Most car manufacturers currently run a maximum of two shifts, with the exception of the PSA plant in Trnava, which has already rolled out three-shift production.
In the office and retail real estate market, we are seeing a slight recovery in demand resulting from the relatively successful return of tenants to their premises, but retail sales in office buildings lag significantly behind standard revenues due to the increased number of employees working from home.
According to the Government of the Slovak Republic, the consistently low numbers of new coronavirus cases brings the reopening of the rest of the economy closer than the set plan. On Monday 25 May, however, there was a protest by fitness centre owners, who must continue to close indoor facilities. According to the Union of fitness centres in Slovakia, they employ up to 20,000 people in 2,300 facilities.
The Ministry of Economy committed to rent contributions for a period of approximately 2 months of mandatory closure of retail operations, and this is to become a reality at the beginning of June. Landlords can provide any discount of up to 100% of the rent and the State will contribute half of the sum. Landlords who choose not to reduce the rents by 100% will not be able to terminate the contract or increase the rent to the tenant for the entire period of repayment of the remainder of the lease, which may be up to 48 months. The purpose of this condition is to discourage landlords from either low or no discount.
As the measure came late, many tenants in a weaker financial standing have already withdrawn from contracts and some landlords have already foregone the entire rent during the crisis, for example in exchange for extending the contract. The extent of take-up will depend on the specific text of the legislation, but in particular the possibility of a 50% state contribution is expected to be widely used.
According to the latest statistics from the Central Office of Labour, Social Affairs and Family, the registered unemployment rate in Slovakia rose to 6.57% in April from 5.19% in March. This represents a year-on-year increase of 1.67 percentage points. Unemployment is expected to continue to rise throughout the second quarter.
On Monday, 18 May, the Government announced a further acceleration of the opening of the economy, in connection with the favorable development of the COVID-19 pandemic in Slovakia. As of 18 May, the 7-day moving median of daily infected persons out of quarantine was 3. In the last, fourth phase, scheduled on 20 May, reopening of shopping centres (without indoor playgrounds) is planned, in which until now only selected key retail operations, including opticians, grocery stores, drugstores, pharmacies, post offices, etc. were allowed to open. Restaurant interiors will also be accessible. Cinemas will be limited to 100 people. The space reserved for one customer in the store will be reduced from 25 square meters to 15 square meters.
According to the preliminary agreement of the Government, the State should contribute to the tenants with the same share as their landlords. The tenant will be able to repay the rest in the next 48 months. During this period, the landlord will not be able to increase the rent or terminate the contract.
From Sunday, 17 May, Austria abolished systematic inspections on its side on the so-called internal borders with Switzerland, Liechtenstein, Germany, the Czech Republic, the Slovak Republic and Hungary. For Slovak citizens, all other measures apply when crossing the border into Austria - for example, a negative test for COVID-19 not older than 4 days or a 14-day mandatory domestic quarantine. Regarding citizens entering Slovakia, the National Council of the Slovak Republic approved intelligent domestic isolation as an optional replacement for State quarantine. Additionally, a person visiting foreign country for less than 24 hours will not have to undergo quarantine. The bilateral opening of the borders with Austria and the Czech Republic is the subject of negotiations but is expected in the first half of June.
The second and third phases of the opening of the economy began together on 6 May as a result of the positive development of the COVID-19 pandemic in Slovakia. In the mentioned two phases, operations of the services sector, accommodation, retail as well as catering on external terraces were opened. Taxi services, outdoor tourist attractions, museums, galleries and libraries can also operate.
The Government is currently negotiating to accelerate the launch of the fourth phase, which includes shopping malls, cinemas, theatres, mass events, schools and kindergartens, and all indoor operations. The date of 20 May is being discussed, but the exact date will depend on the number of newly infected, from which the 7-day moving average adjusted for people who are isolated in a quarantine facility is derived. On Tuesday, 12 May, it was at a value of 4.
The international credit rating agency Fitch downgraded Slovak government bonds from A+ to A with a stable outlook due to the expected negative economic development associated with an increase in the country's debt to 60% of GDP in 2020. Other countries that have recently been downgraded by Fitch include the United Kingdom, Hong Kong, Italy, South Africa, Nigeria, et al. Government bond yields have a long-term correlation with mortgage interest rates, and therefore we expect the commercial real estate market to follow their development. Increase in interest rates may signal an increase in the costs associated with borrowing, which in turn reduces the potential internal rate of return. The decline in government bond yields increases the attractiveness of investing in commercial properties.
Our outlook for prime rents and yields in the commercial real estate sector has not changed since the last publication.
On 4 May, the Government announced an acceleration of the opening of the economy, which was initially planned over four phases. According to the new rules, the second and third phases will be implemented together, starting on Wednesday 6 May. The Government has thus responded to the favourable course of the pandemic in the last week. As of Monday 4 May, the 7-day moving average of new cases was 4.
However, the Prime Minister still has a negative attitude towards the accelerated opening of shopping centres, so the expected faster recovery of high street operations compared to shopping centres is becoming a reality. Despite joint efforts and petition from retailers and landlords, the Government failed to provide initial help that was specific to retail, an industry directly affected by the pandemic. To keep retail alive and going, the existing contracts will have to be renegotiated to reflect changes in consumer behavior in the country. Incorporating turnover rents more widely is one example.
Some shopping centre owners insist on full performance of the contract by tenants. Many centres agreed on rental discounts for several months or issuing credit notes on invoices already issued. Changes in leases complicate the situation for landlords, which causes a postponement of the opening of projects planned for this year. HB Reavis has already announced the postponement of the opening of the ambitious Stanica Nivy project to next year.
Regarding the investment market, we continue to see the continuation of acquisitions initiated before the pandemic, but their closing and pricing will depend on the ability of current owners to minimise the impact of the crisis on long-term asset returns. Retail and hospitality, which are most affected by the crisis, also account for the smallest share of investments in commercial real estate in Slovakia. Assuming low interest rates and the availability of capital, we can see a faster recovery of the investment market, mainly in logistics and office properties.
Parliament approved amendments to a law on COVID-19 impacts, according to which, the landlord may not unilaterally terminate the real estate lease by 31 December 2020 due to the tenant’s delay in paying rent. This includes payments for services that are usually associated with the lease due in the period from 1 April to 30 June 2020, that are a result of COVID-19. The landlord's claim does not expire, instead is postponed to next year. Nevertheless, landlords are at a disadvantage due to the negative impact of this measure on their cash flow, which some address by introducing an advance payment. Some landlords have already granted rent-free periods of several months. According to the Government, this is only a short-term solution, and it is still negotiating further measures in retail.
The opening of shopping centres is scheduled for June at the earliest. Leasing of shopping centres under construction has slowed down, which may postpone the opening of new projects. Fast fashion stores will be hit the hardest, as they report oversupply of goods from unsold collections and ongoing production, which will lead to significant discounts after reopening.
Slovak companies are already preparing for the gradual return of their employees to their workplaces. They are likely to take advantage of rotating schedules and the partial preservation of working from home. They are also expected to strengthen hygiene practices, clean common areas more frequently, update their protocols for entering and moving around the office, and more. These measures will require increased operational costs. A detailed concept of an effective return to the ‘new normal’ was is detailed on our 6 Feet Office page.
In industry, there may be a slight stagnation in demand in the second quarter, as the assumption of an increase in the expansion of retail chains’ distribution centres and e-commerce is not being met. However, we are still recording new supply and new projects under construction.
The Government presented a 4-phase plan to reopen all retail operations, with the first one starting this Wednesday and the following phases commencing if the number of new coronavirus cases is favourable. As expected, the Government will not subsidise rents. Starting this Wednesday, shops smaller than 300 sq m can be opened. Restaurants will only be able to hand out meals through a window and the Government wants to launch special meal vouchers for seniors, which will only be valid for restaurant meals delivered by taxi providers.
Hospitality operators will only be able to offer long-term stays (without offering meals) and street markets will need to follow strict hygiene rules. Shopping centres are set to open in the last phase.
Based on inquiries of industrial landlords, we can conclude that occupational activity was not affected by the coronavirus crisis during the first quarter of this year. A significant part of the demand consists of new contracts, but we also record expansions. New projects completed in the first quarter (P3 Košice, Sihoť Park) are gradually being leased. We remain optimistic about the further development of prime yield in this sector and don’t rule out a possible narrowing of the gap with the shopping centre yield.
Office property recorded a solid leasing activity in the first quarter, with a healthy share of new contracts and expansions.
In the CE investment market, we see mixed sentiment towards yields. Industrial transactions should be least affected by the current crisis, while other segments expect some risk premium. Funds report existing capital for investment and consider buying opportunistic assets, but they must handle mainly retail (i.e. non-professional) investors who announce withdrawals.
Although we have seen a relatively slow growth of new cases of COVID-19 so far, the effects of increased mobility over Easter are likely to manifest in 1-2 weeks. Nevertheless, the Minister of Economy, Sulik wants to continue opening certain business operations and alleviating restrictions imposed by the Government. Prime Minister Matovic is against this, which has created some tensions in the new Government. As the Central Crisis Committee, composed of hygienists and epidemiologists, has the final word, we do not expect any substantial easing during the first 2 weeks after the end of Easter.
We expect a significant increase in the unemployment rate as some companies are forced to cut production or close due to lack of demand and restrictive measures. Thousands of companies have already applied for a state contribution in the event of a loss of revenue. Inflation will likely slow sharply and fall significantly below the ECB's 2% target.
By the end of the first quarter, we saw an increase in shopping centre prime yields of 0.15% to 5.90%, a cautious increase of 0.10% to 5.60% for office properties and a slight increase of 0.05% to 6.25% for logistics halls. We saw a drop in prime rent only in retail, which is a long-awaited movement due to the retail property saturation and pipeline surge. The market is currently mostly inactive and waiting to see what happens.
From 6 April, new measures adopted by the Slovak Government to combat the new coronavirus have come into force.
Measures include anyone entering the Slovak Republic must be isolated to designated facilities for the time necessary to carry out laboratory diagnosis of COVID-19.
During the Easter holidays the Government plans to restrict the free movement of people except for commuting to and from work, shopping, doctor visits or outdoor walks within the district.
In commercial real estate market, we continue to record delays in negotiations and contract signings.
Landlords are now primarily focused on the operations and contractual terms of the existing tenants.
In the shopping centre market we are not noticing a surge in new short-term rentals since existing tenants try to deliver goods ordered via the internet from their premises. Tenants are requesting rent holidays during the closure of their operations. Large tenants are demanding a switch to turnover rent after reopening, in exchange for an extension to the lease term.
For the time being, landlords in all segments have generally refused to accept non-payment of rents and have delayed most negotiations until they conclude negotiations with banks and the new legislative changes take place, allowing the Government to subsidise tenants.
The new Slovak Government will help companies and sole traders maintain jobs with measures that will cost €1 billion per month (around 1% of Slovakia's annual GDP) and bank guarantees for €500 million per month. This business relief is conditional on the beneficiaries undertaking not to lay off their employees.
The state will provide contributions to sole traders and employees in whose businesses have been forced to close as well as their direct suppliers. The sum of the Government’s contribution will depend on how far sales have dropped. The state will also reimburse 55% of gross wage to workers on quarantine or nursing leave.
In addition, the Government has agreed to conditionally postpone the payment of taxes and levies and the application of tax losses from previous periods.
The commercial real estate sector is witnessing the postponement of both investment transactions and rental contracts. Most existing construction projects are postponed for later periods as well. We are yet to see a change in pricing in connection with the pandemic. The retail sector however expects an already anticipated prime rent and yield correction in relation to retail saturation reaching a peak in the Capital.