Summary
- Warsaw is currently the most liquid and active property market in Central Europe. Despite the crisis, Warsaw has been experiencing a construction boom showing in record volume of buildings under construction. In the nearest 18 months developers plan to build even 430,000 m2 of office space in Warsaw.
- According to our estimates Prague should be able to absorb approximately 100 thousand m2 of leasable office space a year in the horizon of five years. However, Bratislava will suffice with approximately 40-50 thousand m2 construction per year due to current oversupply of the market.
- Only developers with sufficient available resources and long-term investment horizon can afford to open new office locations.
- High technical quality and effectiveness of buildings meeting requirements of A+ categorization, keeping the latest BMS trends (technical security of buildings), possibilities for division of space, safety, accessibility or parking comfort will be common for projects to be successful. Categorization of buildings according to some of available green certification systems preferred
by the tenants will be a necessity.
1. Current Market Situation
Based on current statistical data there were as of the end of June this year 3.7 mil. m2 of modern offices of A or B category in offer in Warsaw, 2.86 mil. m2 in Prague and 1.47 mil. m2 in Bratislava. In all three cities equally approximately 60%-70% of the offer is formed by new buildings, the rest accounts for reconstructions of older objects. The vacancy rate reached 7.4% in Warsaw, 11.5% in Prague and 10.7% in Bratislava.
- A strong growth in modern office space offer has been the common denominator of the Prague, Bratislava and Warsaw markets in the last decade, which more than doubled in this period in all three cities.
- The most dynamic growth of offer was seen in Bratislava (CAGR 10%), which experienced a developer boom with a slight delay in comparison with other capitals of the Central European region. The steep rise in offer of new administrative complexes, to a greater or lesser extent reflecting real space needs of locally established companies, was however influenced by turbulences on the financial markets and subsequent arrival of crisis in the real economy.
- The property market was moreover struck by reduced lending capacity of banks (no acquisition financing, significantly stricter conditions for construction and investment financing), which in effect rid the market off so called leverage players (investors financing construction through bank loans) and strengthening of position of strong equity developers able to construct speculatively from their own resources and without secured pre-lease.
All three cities reported a y-o-y fall in demand in 2009 (demand in Warsaw fell by 46% in 2009, in Bratislava even by 55%, in Prague only by 5%, but the decreasing trend continued in the year 2010 by 13%), which showed in the vacancy rate and a drop in nominal and effective rent (rent, which is paid after considering discounts provided by the building owner; most frequently rent holiday is concerned and subsidies provided for furnishing completion of the tenant space).
Share of vacant offices on total offer exceeded the threshold of 10% in Prague and Bratislava (the highest vacancy rate was reported in statistics in the beginning of 2010, specifically 13.8% in Prague and 14.2% in Bratislava). Warsaw, supported by strong macroeconomic fundamentals of Polish economy, remained relatively immune to global trends. Although the vacancy rate increased, it remained under the level of 7.5%.
The highest rent reached in the period of culminating property cycle exceeded the threshold of 32 EUR/m2/month in Warsaw, 23 EUR/m2/month in Prague and 18 EUR/m2/month in Bratislava. Subsequently rent dropped by 5%-15% to the threshold, where it remains nowadays. Official statistics were not able to capture a much more significant drop of effective rent, which depending on project and micro-location fell by 10%-30%.
2. Estimate on Future Development
Warsaw is currently the most liquid and active property market in Central Europe. Despite the crisis, Warsaw has been experiencing a construction boom showing in record volume of buildings under construction. (In the nearest 18 months developers plan to build more than 430,000 m2 of new office space, while before year end of 2014 the stock could increase by even 20% in comparison with the current situation).
Warsaw unequivocally represents the strongest leasing market in the region, having leased record 573 thousand m2 in the city last year (30% was represented by re-negotiations of lease agreements). In 2012 comparable volume of gross demand will probably be achieved. In spite of that we state, that in short-term Warsaw has been showing signals of market overheating, which is going to have impact on growth of vacancy and fall in rent, and that especially in less attractive or secondary locations (e.g. Mokotów, Ochota, Wlochy, Wola). Taking into consideration a relatively limited pipeline in CBD (location with the highest concentration of attractive administrative space) we expect stabilization of nominal rent and slight decrease in effective rent. The vacancy rate will grow in short term. However, in the horizon of the following five years, it should not exceed the level of 10%. According to our estimates Warsaw should be able to absorb 160-180 thousand m2 of new space a year in medium to long run without pressure on growth of vacancy and fall of rent.
Prague and Bratislava were struck by the crisis substantially more harshly. In addition to the drop in rent both cities experienced a nosedive in new constructions. With few exceptions there are only projects under construction of strong developers prepared to build without bank financing, able to break the vicious cycle, when companies are not willing to commit to projects in preparatory phase, which subsequently limits ability of developers to receive external financing for their construction. Given this reason Prague will see only approximately 70-75 thousand m2 of office space receive occupancy permit in 2013, Bratislava only approximately 35-40 thousand m2, which is less than a half of average of last five years. In short-term aspect we thus expect significantly weaker pressure in these markets on fall of rent than in Warsaw. The factor pressuring on fall of rent is especially owing to high ratio of re-negotiations (even up to 40%) on gross demand. In both cities under current conditions tenants are able to negotiate more advantageous lease terms than three years ago.
Continuous cost saving measures in companies force landlords to lower their expectations especially in old (more than 5-years old) buildings. In medium-term aspect nominal rent is to remain stable, owing to expected inflation in Eurozone as the main potential resource of its growth. According to our estimates Prague should be able to absorb approximately 100 thousand m2 per year in a five-year horizon. Bratislava should suffice with approximately 40-50 thousand m2 per year with respect to the current oversupply in the market. Given these assumptions the vacancy rate should not deviate from 10% much. We expect that the share of re-negotiations at the level of 30% is going to become common in the market.
In addition to build-to-suit projects (buildings constructed tailor-made to previously known specific tenant) developers in all three cities will see opportunities in speculative projects in developed business centers with quality and established infrastructure and good transport accessibility. Centers or CBDs of individual cities will remain attractive, mostly with substantially limited availability of suitable land plots (especially in Prague). Only developers with sufficient free resources and long-term investment horizon will afford to open new office locations. In this aspect city outskirts with cheap land plots available represent an opportunity. High technical quality and effectiveness of buildings meeting requirements of A+ categorization, keeping the latest BMS trends (technical security of buildings), possibilities for division of space, safety, accessibility or parking comfort will be common for projects to be successful. Categorization of buildings according to some of available green certification systems preferred by the tenants will be a necessity. Last but not least it must be noted that the key factor to the future development or revival of property market rests in mastering current macroeconomic challenges in the global and especially European economy.
Marek Vážan
Senior Analyst for Property Development, Penta Investments
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