Cushman & Wakefield MarketBeat reports analyse quarterly Slovak Republic commercial property activity across office, retail and industrial real estate sectors including supply, demand and pricing trends at the market and submarket levels.
COVID-19 pandemic struck the global economy in full force and Slovakia’s economy is no exception. It has been affected both by demand slump as well as restrictions imposed by the government to curb the spread of coronavirus. Although late, the Government’s partial compensation for the losses of private sector’s revenue might relieve the initial burden in most cases. However, taking government aid is not a viable business plan in the long run. Hence, soaring unemployment and an extraordinary occupational mobility are likely as foreign demand falls. Based on the Statistical Office of the SR figures, the annual inflation rate slowed down to 2.3% in March, above the estimated inflation in eurozone and even the European Central Bank’s target rate of near, but under, 2.0%. Unlike during the financial crash of 2008, the construction sector will now be affected last. Loans to private sector are expected to drop amidst the reluctant lending attitude of financial sector, however, there is a rising demand for revolving credit facilities. Real estate investment is expected to drop this year due to investor unwillingness to close deals amid pricing and/or income uncertainty.
Office
Total office demand reached 25,800 sq m in the first quarter of 2020, showing resilient pre-COVID market sentiment. Net demand accounted for close to two-thirds of leased space, which is the highest share since Q3 2018. Once again, IT was the most dominant sector, capturing 29% of net take-up. Financial sector placed second with 19%. Professional services recorded a third consecutive decrease in net take-up share. Two thirds of gross demand were in CBD district. Only 19% of office space was leased in schemes opened in 2017 or later (incl. planned projects). Leasing activity is expected to record a weaker year. As of the end of first quarter, approximately 172,700 sq m of office space was under construction, most of which lies within the central business district which has a high absorption potential. Only about one-fifth of this space has been leased so far. Bratislava office stock is planned to grow by 114,400 sq m in 2020. We therefore expect vacancy rate to increase this year.
We anticipate prime office rent to decrease back to €16.50 in the second quarter. No further drop is expected.
Retail
Extraordinary circumstances in retail caused tenant turnover woes which negatively affected income of each retail landlord in the country. Despite joint efforts and petition from retailers and landlords, the Government failed to provide initial help that would be specific to retail, an industry directly affected by the pandemic. To keep the retail alive and going, the existing contracts will have to be renegotiated to reflect changes in retail spending in the country. Incorporating turnover rents more widely is one example. To help bridge the initial period, some landlords offered rent-free periods or credit notes to tenants. Hence, the Government’s legislation on the postponement of landlord claims is only a supplementary measure. The resulting shortfall in revenue will affect asset pricing substantially. Pre-leases in schemes under construction slowed down which postponed many completion dates, including Stanica Nivy, an ambitious large-scale project in the centre of Bratislava.
We saw a cautious increase in prime retail yield in the first quarter. COVID-19 pandemic accelerated this anticipated development which is believed to continue.
Industrial
Slovakia industrial stock increased by 76,900 sq m to 2,538,100 sq m, which represents a 3% quarterly growth. Vacancy rate increased to 6.9%, most of which lies in regions of Bratislava and Nitra. More than 40% of vacant space is in new buildings built in 2019 and 2020. Prologis, a developer who owns the most leasable stock in Slovakia, recorded a solid demand, capturing more than a half of market’s take-up in the first quarter. Overall, gross demand had the strongest first quarter in the last three years and consisted mainly of new leases and expansions. We expect to see upwards of 180,000 sq m delivered in the next three quarters, which would result in an annual stock growth of 10%.
Industrial sector came out on top in the first quarter, recording strong leasing and unaffected prime rent and yield. Well-situated, grade A assets should expect €4.00 per sq m for large leases of 5 years and more.
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