The unstable situation of the geopolitical environment currently makes it difficult to predict economic scenarios for real estate markets. The Colliers company has therefore prepared the 10 most fundamental forecasts for 2023, clarifying the situation in the CEE-6 region and extending to Slovakia.
Geopolitics remains in focus
The region of Central and Eastern Europe will grow in global importance. Renowned commentator George Friedman said that amid the war conflict in Ukraine, the center of gravity of Europe is shifting to the northeast.
Silviu Pop, research director for Romania and Central and Eastern Europe at Colliers, adds: “Increased Western focus on the region means strengthening democracies and economic performance, thanks to a greater flow of Western capital to countries that offer a stable environment for investment at much lower costs as in developed economies. “Friend-shoring” was first a buzzword in 2022, from 2023 it will become more of a reality.”
A slowdown, not a recession, is in sight
CEE-6 countries are expected to remain in positive numbers in 2023. The International Monetary Fund forecasts that expansion in the region will slow to 1.5 percent, less than half the pace seen in 2022 (estimated at 3.7 percent). This is the worst pace in almost a decade, outside of the pandemic year of 2020. There are specific challenges in each country, from the political background to geopolitical issues to specific macroeconomic issues. However, long-term forecasts continue to show that the CEE-6 region is growing twice as fast as the Eurozone.
Changes in the legislation of the Slovak Republic can have a positive impact on development in Slovakia. The newly approved building regulations optimize the current processes in order to significantly reduce the time to obtain a building permit. A new Office of Spatial Planning and Construction is being established as a central body of state administration together with a specialized construction office for the so-called assessment of the effects of constructions on the environment at the Ministry of the Environment. Legislative changes will allow developers to shorten project implementation time, as well as more accurately calculate work schedules and invested capital.
Emphasis on green/efficient buildings
Renting in an ecological and energy-efficient building brings financial benefits. As a result, rents and the value of a building are expected to be determined more by how energy efficient it is in all CEE-6 countries. It should apply to all real estate sectors, but especially offices and industry.
“In Slovakia, sustainability is already a key decision-making factor, the importance of which will only increase in the coming years,” notes Richard Urvay, director of Colliers in Slovakia. The term ESG (Environmental, social and governance) refers to the connection between socially and socially responsible investing and investment strategies. Today, even in Slovakia, investments in ESG are considered key to ensuring the competitiveness of buildings, both in terms of higher quality and comfort, as well as in terms of energy efficiency and potential savings associated with it.
Changing the way of working across the region
Companies will still keep most of their offices regardless of how many days a week employees work from home. However, the layout of the offices will change. According to the Colliers report, they will no longer focus exclusively on work spaces, but will also include spaces that support creativity and team spirit. The discussion about how employees will work will be much deeper. There are already first examples in the region where some companies (for example, Telekom Hungary) introduced a 4-day work week. In Romania, a draft law has been drawn up in parliament (which has not yet been approved) allowing for four 10-hour working days per week.
Flexibility is an increasingly important topic for the Slovak office space market. Shared workspaces and social spaces enable the reduction of the total rented area. This trend is preferred especially by large multinational companies operating in Bratislava.
Consequences of inflation
High inflation and the sharp increase in construction costs that we have seen in recent years will haunt the real estate markets in the CEE region for many years to come. Indexing the rent according to inflation will mean a sharp increase in the current rent. Higher construction costs will mean there will be less construction than usual, according to Colliers.
In the case of persistent strong demand on the real estate market, this will mean additional pressure on rents in the medium term. On the other hand, further increases in key interest rates are expected as the European Central Bank tries to gain control over the price level. This will have the effect of increasing the cost of financing, which will result in greater caution on the part of investors.
Recovery of demand for offices
The demand for renting office space has recovered, but it is still not quite at the pre-pandemic level. However, we have seen a growing share of lease extensions compared to relocation. Tenants in quality offices are motivated to extend their leases by a variety of factors, from rising equipment costs to higher rents.
At the same time, some tenants in older buildings are still trying to move to more efficient buildings, despite higher rents, because the financial burdens associated with the buildings’ lower efficiency are starting to appear in their bills. This difference between A-standard buildings and older buildings is a theme in the CEE-6 region that also affects other sectors, regardless of whether we are talking about commercial or residential real estate, or renting or buying real estate.
“In 2023, five new projects with a leasable area of approximately 152,500 m2 will be added in Bratislava’s central business zone, which represents an 8 percent increase in the total offer of office space in the city. This, together with the continuing trend of optimizing office space, will lead to an increase in the vacancy rate. Older buildings with lower energy efficiency will probably struggle the most to attract tenants and maintain occupancy,” Richard Urvay comments on the situation on the Slovak market.
Industry and logistics still at a high pace
Industrial and logistics developments and rental demand show no signs of slowing down and in some cases will even remain at the record levels of previous years. However, modern constructions for industry and logistics in the CEE-6 countries remain significantly below the level of Western countries, so there is still a lot of room for growth.
Currently, approximately 134,800 m2 of industrial space is under active construction in Slovakia. Approximately 40 percent of projects are built speculatively. Colliers expects vacancy to remain steadily low with rents rising slightly. The market will continue to be oriented towards landlords.
The company records an increased demand for I&L plots, especially in the Bratislava and Košice regions. Some manufacturing companies from Germany are currently considering the potential relocation of their production facilities to the Central and Eastern European region (including Slovakia) in response to higher uncertainty associated with the availability and prices of energy in Germany.
The residential sector will undergo fundamental changes
All the markets of Central and Eastern European countries are at quite different stages of development of the residential sector, but the models of the European Central Bank show that prices are at least in the area of fair value in most countries. The exception is the Czech Republic, which is experiencing something resembling a bubble in the residential sector. Unless economic conditions worsen significantly in the next few years, prices should not fall significantly, despite higher interest rates reducing the number of potential buyers.
A law on rental housing was adopted in Slovakia, which is supposed to serve as the legal basis for rental housing policy. According to this law, there should be a clear specification of the procurement of state-supported rental apartments, as well as the possibility of acquiring apartments through shares in the companies that own the relevant buildings. To regulate the demand for rental apartments, a new agency for the support of state rental housing is to be created. Several investors have already expressed their readiness to start construction of state-supported rental apartments, including the investment intention of an undisclosed Austrian developer in the amount of 500 million. euro
Growing attractiveness of business parks
In its report, Colliers states that the line between brick-and-mortar stores and e-shops is blurring, as more and more players integrate both types into their business models. With no significant entry of retail players into the market expected, some traditional malls will be forced to rethink their strategies and reallocate assets.
Some retail concepts (especially in the gastro segment) are expected to face difficulties after the alignment of charges and utilities at the end of 2022. In line with the general trend throughout Central and Eastern Europe, new projects with mixed use (retail, office space and residences) are coming to the market in the coming year, while the largest project in our country is Eurovea City by J&T Real Estate.
“Industrial and business parks continue to be the most sought-after types of assets in Slovakia. They show a low vacancy rate, a long life, and therefore more secure cash flow forecasts. A large number of investors want to analyze all investment opportunities that arise in these two sectors,” says Richard Urvay.
Investment strategy of domestic players
Despite its smaller size compared to neighboring countries in the region, Slovakia is a country with strong macroeconomic fundamentals and the advantage of being a member of the Eurozone. From an investment point of view, it still offers an interesting share in the amount of revenues. Every year we witness several corporate transactions in the office sector, which keep the market moving and active. Colliers expects that in 2023 we will see further transactions in the volume between 500 and 700 million. euro
“The Slovak investment scene continues to be characterized by insufficient supply in the segment of basic types of commercial real estate. While domestic players with local and specialist knowledge often engage in value-added deals (with the potential to increase profitability through renovations and changes in building management), the interest of multinational institutional investors is increasingly shifting to industrial real estate and alternative asset classes. The segment of rental residential real estate is also gaining momentum,” concludes Richard Urvay.
Don’t overlook
The real estate scissors will also open by 30 percent. Older apartments are pushing the market down, developers are waiting