- Office buildings dominated commercial real estate investments in the first half of the year.
- The total volume of investments was exclusively domestic capital (SK + CZ).
- Yields increased in all segments, reflecting the rise in interest rates.
- Capital values per square meter remained unchanged for warehouse spaces, while the office segment recorded a slight decrease.
- Slovakia continues to maintain its reputation as a safe investment location with competitive returns.
Despite negative expectations and experiences from the last market downturn in 2008, when the market came to a complete halt and investments in commercial real estate were not forthcoming, the situation did not repeat itself, and the market remains liquid even though investors are willing to buy at higher yields. Thanks to high inflation combined with a rise in market rents, values per square meter remained unchanged for warehouse spaces, while the office segment recorded a slight decrease in values. The secondary market with less attractive office spaces was hit harder, as it did not allow owners (landlords) to increase rents, unlike the premium segment.
The total volume of transactions in commercial real estate in Slovakia for the first half of the year recorded a 62% year-on-year decline. The slowdown in investments is mainly due to the increase in prime yields into the 6% territory by the end of Q2 2023, reflecting the rise in interest rates. They are thus returning above 6%, and we expect them to increase by a maximum of 25-50 bps by the end of the year. This often causes a discrepancy between the expectations of buyers and sellers, slowing down the sales process. However, there are still investors in the market who will take advantage of the situation of increased yields, which is reflected in several ongoing transactions. We, therefore, expect investment activity to increase in the second half of the year, and total investments could reach 500-600 million euros in 2023.
The yield spread between segments is gradually decreasing as we can see in the graph below:
The most significant transactions in the past half-year were undoubtedly the office buildings Pribinova 19 and Landererova 12, both previously owned by JTRE. On the buyer's side of Pribinova 19 was the Slovak investment fund IAD Investments, and for Landererova 12 was the Czech investment fund ZFP Investments. Both projects are among the more successful ones, as they have stable tenants with long-term contracts. Similar projects, especially newer office buildings in the city centre with high occupancy, long lease contracts, and demonstrable certificates such as BREEAM, LEED and WELL, recorded a minimal decrease in value and will therefore continue to be attractive to investors. On the other hand, older buildings in worse locations, which have problems with higher vacancy rates, have recorded a more significant decrease in value. This gap will deepen in the coming years, and older buildings will have to undergo significant refurbishments to keep up, also due to sustainability and increasing pressure on the "greenness of buildings", i.e. ESG standards.
The situation is similar for industrial properties, but we have recorded a more significant increase in rent for them, on average by 20-30% over the last year, which compensated for the increase in yields and kept their values unchanged or even allowed for a slight increase. We record a larger number of ongoing transactions in this segment, several of which should materialize by the end of the year.
Due to high inflation and a decline in real incomes, consumer spending remains weakened, which negatively affects the retail sector. The opening of Eurovea 2 in combination with increasing operating costs for rent and service fees (energy, lighting, etc.) have caused many of them to be forced to cease their activities. Some shopping centres in the capital, as well as in regional cities, thus have a higher vacancy rate and increased costs do not allow rental growth in this segment. The situation is different in retail parks, which are becoming an increasingly attractive product, as evidenced, for example, by the acquisition of the Vendo portfolio (4 retail parks) by the Czech investment fund Accolade. ZDR Investments, yet another Czech investment fund, bought a retail park in Topoľčany.
In conclusion, despite the decrease in investment transactions, the Slovak commercial real estate market remains liquid and continues to offer competitive returns. The market is adjusting to the rise in interest rates, with yields expected to increase further by the end of the year. However, the market remains attractive to investors, particularly in the office segment, which has demonstrated resilience and continues to offer stable returns.
As of 29th June 2023, we do not register any transaction that should be completed by the end of June 2023 and to be added to the volume of transactions in Slovakia, closed in the first half of the year.