The prolonged restrictions introduced due to the second wave of the COVID-19 pandemic weighed on the real output of Slovakia, resulting in a 5.2% contraction of GDP in 2020. The gradual easing in the second quarter of 2021 along with the continued government support is expected to contribute to the rebound in GDP growth, mostly driven by pent-up demand and maintained low borrowing costs. Slovakia’s heavy focus on manufacturing is both a blessing and a curse, as the industrial sector is proving to be shielded from the direct impacts of the pandemic. Housing market has been bolstered by lower interest rates together with buyers, whose economic situation was not negatively affected by the lockdown, looking for more living space as commuting times matter less. With the assumed reopening of the economy in the later first half of 2021, a sharp rebound in spending should prop up consumer-oriented businesses.
The first quarter’s figures still indicate a solid net take-up share of 78%, although it was partially driven by occupiers which already had operations in Bratislava and relocated under more competitive conditions. Total leasable area under construction reached 6-quarter low of 127-thousand square metres as Sky Park Offices opened for tenants. We record a further increase in the office vacancy rate which is expected as new supply emerges. Net absorption recorded a minor decrease of 1,000 sq m which shows that the addressable market remains roughly the same size after growing by 27-thousand square metres a year prior.
Office investment saw a solid start to the year owing to two major transactions. InTeFi announced its acquisition of a majority stake in Cassovar Business Center in Košice, which includes 13,500 sq m of leasable office areas. The strategically located BBC 1/1 Plus buildings changed hands in the first major office transaction in 2021, which further increases the office market presence of the purchaser, Wood & Company. Pending transactions will decide if the rebounding investor confidence brings the pricing back to the pre-pandemic levels, below the currently achievable prime yield of 5.75%.
The possibility to apply for a rent subsidy has been extended until the end of June. The subsidy can be provided to a tenant in the amount in which the discount from the rent was provided based on an agreement between the landlord and the tenant, but not more than 50% of the rent for the period of difficult use. Despite this measure, however, some tenants had to terminate their leases. Tenancy mix is undergoing a shift towards more competitive brands and sectors of retail that showed resilience during the pandemic.
New development stalled, and no major completions were recorded during the first quarter. Nitra, Žilina, Bratislava and Martin remain the only cities with more than 1 sq m of shopping centre GLA per capita. The modern and highly competitive shopping centre Novum Prešov has opened more than a half of its shops earlier this year and is ready to launch most of its remaining units soon.
Total industrial stock grew by 8% year-on-year as the adoption of online shopping accelerated the built-to-suit development for e-commerce companies seeking to expand their distribution centres. The total leasable space under construction was more than 263,100 sq m, which represents more than 45% year-on-year increase and more than 9% of the existing stock. There are currently 10 buildings under construction, 8 of which are in the Western Slovakia. Much of the industrial space under construction has already been pre-leased. Vacancy rate increased by 1.14 percentage points to 8.78%, mainly due to newly built speculative stock. Quarterly net absorption reached 47,700 sq m and was positive in all four main regions. Total quarterly take-up recorded a 3.5% year-on-year growth, reaching 138,200 sq m.
Prime industrial and logistics properties have consistently offered comparatively higher returns than those generated in the neighbouring countries while showing low volatility during the current cycle. Strong covenant remains key to pricing and combined with longer WAULT to break/expiry, our EOY outlook for prime logistics yields is optimistic at around 5.75% or lower. The main risk in logistics is the possibility of decreasing effective rents as some tenants may ask for incentives in return for longer leases. So far in 2021, we saw the completion of the sale of the Arete Invest CEE II sub fund to Cromwell European REIT which comprises of 11 industrial properties in the Czech Republic and Slovakia, and the acquisition of Immopark Žilina, which consists of existing buildings and land for further development in a strategic location near Žilina airport, by CTP. Leasing market grows organically with the needs of the market and the most common asking rent is 3.95 euros per sq m per month.
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