The third quarter has seen a rise in active cases and test positivity rate for COVID 19 Despite this, most of the main economic indicators showed continuous month on month improvements According to the Statistical Office of the Slovak Republic, the manufacturing and industrial production returned roughly to the levels from previous year in August Economic sentiment indicator showed three consecutive monthly increases during the third quarter Price growth continued to slow down, reaching 1.4% in August and totaling 2.2% in the first eight months of 2020 Prices in restaurants and hotels grow at a smaller rate than last year, however, they improve on a monthly basis Seasonally adjusted confidence indicator in services increased in September In terms of outlook, Oxford Economics estimates that the positive real GDP growth will return in Q1 2021 and the pre COVID 19 private consumption levels should return by Q2 2021.
Office
The third quarter saw a spike in demand for office premises as well as year-on-year rise in both net and gross take-up. Net take-up, which reached only 30% of total take-up, was led by IT sector, although it was well diversified in general. Higher share of renegotiations results from companies increasingly seeking cost reduction in their workplaces which leads to even lower share of employees that are physically present in offices and hence more competitive leasing market overall. Many tenants tend to move to office premises of higher standard while downsizing to smaller leased areas.
Newly built projects with attractive WAULT (mostly those approaching 10 years) might still attract pricing around 5.50% but prime yield should move up to 6.00% for buildings with 5 year WAULT.
Retail
Prime shopping centres in Bratislava saw an overall decline in footfall to about 70-80% of the pre-COVID level by the end of the third quarter. Regional retail schemes were in a better shape since they have a better ability to capture steady local consumption and are not dependent on the presence of employees in adjacent office buildings. On the part of retailers, sporting goods retailers and variety discount retailers triumph, with their popularity being proven by solid financial results even during the COVID-19 crisis. Fashion and F&B saw an average 20-30% drop in sales, and fitness centres, cinemas and play areas are the most affected due to tighter epidemiological measures.
Due to the potential cashflow disruptions and overall shakeout of the retail market, the prime retail yield moved up to 6.00% with further upward potential.
Industrial
Industrial real estate sector remains the least affected branch of commercial real estate in Slovakia. Rent forgiveness is rather the exception, especially in the sectors of logistics and distribution. In the third quarter, we record continued strong leasing activity reaching almost 85,000 sq m of industrial space. The majority of gross take-up occurred in Bratislava Region and the most demand came from distribution, which proves increasing role of e-commerce in the economy. We also see increasing demand in the newly developed industrial hubs in Eastern Slovakia.
We expect the prime industrial yield to remain unchanged with potential for further contraction down to 6.00% for best locations. Prime rent currently remains at 4 EUR/sq m/month with a positive mid-term outlook.
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