The RICS Commercial Property Monitor for Q2 2015 showed that most countries in Central and Eastern Europe have good growth prospects and the expectations for commercial property markets have further improved. Both the Occupier Sentiment Index and the Investment Sentiment Index stand in positive territory in all four examined countries.
Good growth prospects across the region A pick up in the euro zone economies will support economic activity this year in Bulgaria, but high unemployment, weak domestic demand and spill over effects from Russia and Greece will act as a drag on growth. However, despite economic uncertainties, investment sentiment picked up in Q2, largely due to a rebound in demand in the office sector.
After posting a 4.2 percent y-o-y growth in Q1, the economic outlook remains favourable in the Czech Republic, driven primarily by strong domestic consumption and investment. Downside risks to growth come mainly from external sources.
In Hungary, the improving labour market is once again reflected in a sharp rise in demand for leasable space. This is expected to translate into firm rental growth over the year ahead. Likewise, with a strong momentum in the economy, commercial real estate investors appear in an optimistic mood with appetite growing across both domestic and foreign buyers.
Romanian GDP expanded by 4.3 percent y-o-y in Q1, much faster than expected. In fact, the better outturn was mainly driven by robust private consumption and growing investment. Improving economic fundamentals suggest that the Romanian economy can continue to gain further growth momentum in the second half of the year.
Bulgaria and Hungary perform better The Occupier Sentiment Index (OSI) sits firmly in positive territory in both Hungary and Bulgaria, with Hungary posting the strongest gain. This signals that overall occupier market conditions are improving at a healthy pace in these two countries. Meanwhile, in the Czech Republic and Romania, readings were broadly neutral, indicating that occupier market dynamics remained more or less unchanged during the second quarter of the year.
“The current vacancy at Class A office buildings is less than 4 percent and the insufficient stock of quality office space projects prompt tenants to sign on schemes yet at planning stage. The average occupiers continue to be companies from IT and BPO sectors, where mergers and acquisitions worldwide have led to changes in their business at regional level. As a result of this reorganization they are now seeking larger areas compared to previous years,” said Michaela Lashova MRICS, Managing Partner at Forton, Cushman & Wakefield Alliance Member in Bulgaria and Macedonia.
Occupier demand increased in all sectors in Bulgaria, the Czech Republic and Hungary, The increase in demand was especially strong for office space in Bulgaria and Hungary, while in the Czech Republic the industrial and retail segments posted the strongest rise. In Romania office and industrial demand rose firmly, while demand for retail space remained broadly unchanged.
When looking at twelve month rental projections, survey respondents are most confident about seeing rental increases in Bulgaria during the year ahead. Leasable space in Hungary and Romania is also expected to post reasonable rental growth during the next twelve months, although secondary assets (especially in retail) exhibit much weaker projections. Meanwhile, the Czech Republic is the only country where rents are anticipated to fall at the all-sector level, weighed down by particularly negative sentiment across secondary space (the office market is set to be the worst performing area).
Improving conditions in the investment market A positive value for the Investment Sentiment Index (ISI) was recorded in each country, demonstrating that conditions in the investment market picked up across the board. The Czech Republic was the standout performer, posting a value of +32. In the Czech Republic, Hungary and Romania investor demand grew across all sectors helped by an increase in enquiries from foreign investors. In Bulgaria, the improvement was largely driven by the office sector, where demand grew strongly.
“Investment and development markets remain strong across CEE as reflected in both the Occupier and Investment Sentiment Indices. The Hungarian and Bulgarian markets show particularly positive trends, driven by improving macroeconomic and property fundamentals. While the Czech market is less dynamic, it is stable at sustainable levels, particularly in Prague which may be a beneficiary of slower Polish investment markets. The strong performance of the Romanian economy should lead to improved sentiment in the coming months. Focus everywhere remains on prime buildings in central locations across all asset classes. Based on sound economic performance, CEE developers and investors can expect stable, growing markets in the quarters to come,” according to Noah M. Steinberg FRICS, Chairman & CEO of WING Zrt., Chair of RICS in Hungary.
Regarding capital value expectations, respondents anticipate that values will rise steadily in all four countries at the all-property level. The strongest growth is expected to come in Hungary with prime areas of the market set to outperform secondary (particularly in the office sector). The prime office arena is also anticipated to be the strongest performing category in terms of capital value growth in Bulgaria and Romania. In the Czech Republic, prime retail space is projected the post the largest price gains.