The RICS Commercial Property Monitor for Q3 2015 showed that expectations for commercial property markets in Central and Eastern European countries have improved remarkably. Both, the Occupier Sentiment Index and the Investment Sentiment Index stands in positive territory across all sectors and projections for the future also paint a positive picture.
Bulgaria has weaker prospects than the others but overall good opportunities in SEE
Macroeconomic imbalances characterise subdued economic growth in Bulgaria. Real GDP growth has recently stalled at around 1% on weak domestic demand and private investment. Recent forecast has been improved for the second time this year to 2,00-2,20 growth. While growth is expected to improve modestly this year, weak labour market policies, a lack of targeted education and training programs, emigration, and an ageing demographic will continue to provide significant headwinds. The labor market recovery has been at the center of the more recent positive developments with unemployment trending downward on the back of stronger private investment. Negative demographics remain a long-term issue, so as in any CEE country or Germany for example.
“The commercial property market in Bulgaria has experienced substantial growth over the last quarters in line with the country’s award as best outsourcing destination in Europe for 2015. Thanks to the remarkable performance of the automotive and the BPO industries the market enjoys strong tenants’ demand and rents increasing which provides the grounds for attractive investment opportunities,” commented Michaela Lashova MRICS, RICS Ambassador for SEE and CEO of Forton/Cushman & Wakefield.
The Czech economy continued to expand, at one of the fastest paces in the EU during Q2. What is also very positive is that economic growth was balanced, with exports, private consumption and government spending all growing at a solid pace. In addition, partly as a result of the growing demand for cars, investment grew rapidly.
Despite very strong development activity this year, 157,000 sqm were added to stock in the first three quarters alone and annual supply should reach the highest level since 2008 with 186,000 sqm, the vacancy rate dropped by 0.4 percentage points to 16.4 percent in Q3 2015 compared to the previous quarter based on the data collected by the Prague Research Forum.
Macroeconomic growth in Hungary has continued during Q2, albeit at a more moderate pace of 2.7 percent over the same period of last year. The main contributor to growth was rising domestic demand. This expansion of economic activity will be supportive of labour market growth, which should contribute to rising real household incomes in a low inflation environment.
Real GDP growth in Romania came in at 3.7 percent y-o-y in Q2 2015 with domestic demand dynamics remaining supportive. Both gross fixed capital formation and private consumption increased significantly, while growth in real disposable incomes has boosted household confidence and retail sales. This should help gradually lower the unemployment rate.
A new record for Hungary
The Occupier Sentiment Index (OSI) sits firmly in positive territory in all four examined countries. In the Czech Republic and Romania readings have risen firmly after being in the neutral territory during the last quarter, signalling that overall occupier market conditions are improving at a healthy pace. Meanwhile, the OSI climbed to +46 in Hungary, the highest reading on record, suggesting overall market conditions are improving at the fastest rate since the series was formed in 2008.
Occupier demand rose across all sectors in all four countries. The increase in demand was especially strong for office space in Bulgaria, while in the Czech Republic the industrial segment was the standout performer. In Hungary, tenant demand for office and industrial areas posted a particularly sharp growth.
When looking at twelve month rental projections, survey respondents are most confident about seeing rental increases in Hungary during the year ahead with all sectors projected to post firm growth. In Romania, the prime office and retail sectors are expected to see the strongest growth. Meanwhile, in the Czech Republic rents are anticipated to rise in the retail sector, remain broadly flat across industrial units and decline in the office segment. Rent expectations also remain mixed in Bulgaria, ranging from a strong growth projected in the office arena to no change expected in retail rents.
Increasing interest from foreign buyers
A positive value was recorded for the Investment Sentiment Index (ISI) in each country, demonstrating that conditions in the investment market picked up across the board. Bulgaria, Hungary and Romania have all shown significant improvement with the latter two setting new post-crisis records (+29 and +22, respectively). Demand from investors increased across all areas of the market in the region, helped by a growing number of enquiries from foreign buyers.
“For those of us lucky enough to attend the Expo Real in Munich earlier this month, the results of the Occupier and Investment Sentiment Indices were apparent on the ground. The markets are healthier. International investors as well as international banks continue to focus on the region with increasing enthusiasm. Local players from our region arrived in Munich with sustainable, attractive projects in their portfolios. Hungary and Romania show marked improvement, Slovakia and the Czech Republic remain positive while Bulgaria still faces some challenges. While not included in this part of the survey, Poland remains the most significant CEE market, but there were hints of caution already before the elections there, and the impact of developments in that market on its regional counterparts remains to be seen,” added Noah M. Steinberg FRICS, Chairman of the RICS Board in Hungary and Chairman & CEO of WING.
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 94 percent of respondents feeling that commercial property is either at or below fair value at present. In Bulgaria and Romania, the office sector is expected to be the standout performer.