Slovakia among the first countries to reopen, economy in recovery phase

Slovakia’s economy has been hit by the domestic, as well as international restrictive measures which have been implemented to minimize the impact of the coronavirus pandemic on public health. According to Oxford Economics data, Slovakia’s real GDP should see a year-over-year drop in all four quarters of 2020. Prices should continue to rise, although by a smaller rate. The trough of the economic activity was reached in Q2 and most of the economy should now be in a recovery phase, including domestic demand, private sector revenues, industrial production, exports and retail sales. Due to a relatively mild course of the pandemic, Slovakia enjoyed one of the fastest reopenings of the economy in the world. The sentiment in the private sector has grown less tense as evidenced by the month-over-month increase in industrial turnovers, construction output and real estate activities (based on the Statistical Office of the Slovak Republic data).

Office market: expected drop in leasing confirmed, developers react by postponing planned supply

The office market saw the first completions since Q4 2019, delivering around 48,000 sqm of Class A offices. This includes the competitive projects of Nivy Tower by HB Reavis and Einpark Offices by Corwin. As part of the new supply is speculative, we see an increase in the overall vacancy rate in the Bratislava office market, reaching 9.82%. On the other hand, the Bratislava IV district has seen a decrease in vacancy rate as a new tenant from the public sector moves into Westend Plazza by JTRE.

There are currently 11 buildings under construction, totalling 174,000 sqm. Most of this stock (126,000 sqm) is in the central business district (CBD). Additional 63,400 sqm of office stock should be added in 2020 and only 26,400 sqm should be delivered in 2021 as developers respond to coronavirus crisis by postponing planned supply.

Total occupied office stock increased by 21,000 sqm quarter-over-quarter. This represents a third consecutive quarterly increase in net absorption. Gross take-up decreased annually, totalling 31,000 sqm. However, the net take-up share continued to rise and exceeded 64% in Q2.

Prime rent remained at €17.00/sqm/month and is achievable in the city centre and CBD. Prime yield saw a minor increase of 0.15% to 5.75%. Competitive leasing market translated to an increase in standard rent-free period from 5-6 months to now 6-7 months on a 5-year lease contract or even longer based on the level of competitiveness of a project. Tenants are increasingly considering the level of their operating expenses and some show interest in reducing the leased area, although most companies in Slovakia don’t intend to move to a home-based model of working. Stronger negotiating power on the side of tenants contributes to higher incentives and contributions.

Retail market: new schemes approach completion

As of the end of the second quarter, the footfall of most shopping centres was around 60-80% compared to the period before the COVID-19 pandemic, while individual operations were able to achieve 50-200% of turnovers from the beginning of the year, depending on the sector. Termination of leases has so far occurred mainly for tenants who had a weak financial situation before the pandemic or small retailers and F&B concepts. These businesses reported their turnovers dropping to 30% of pre-COVID levels, on average.

Despite the postponement of the opening of most of the planned retail projects to next year, we could see the opening of the Tesco Galéria Petržalka shopping centre at the beginning of June, where well-known fashion and gastronomic brands also opened along with it. This year we also expect the opening of the Forum Prešov shopping centre or the Tesco Kamenné námestie redevelopment in the centre of Bratislava.

Prime shopping centre rent has remained stable at €65/sqm/month in the second quarter. Prime shopping centre yield saw a minor quarter-over-quarter increase of 0.10%. Combined effects of consumption recovery, landlord concessions (such as rent discounts, higher tenant improvement allowance or shorter lease periods) and changes in the shopping centres’ tenant mix could bring about the stabilisation of retail by the end of the year and a possible return of investment activity in this sector next year.

Industrial market: net demand on an uptrend despite vacancy rate spike

The industrial real estate sector remains the least affected commercial real estate sector in Slovakia. Rent forgiveness is rather the exception, especially in the area of logistics and distribution. In the second quarter, the market recorded solid leasing activity reaching almost 120,000 sqm of industrial space. The majority of gross take-up occurred in Bratislava and Western Slovakia regions and the most demand came from distribution, specifically in the e-commerce companies. Although all take-up fell under net demand, the net absorption was essentially flat in the second quarter.

The spike in vacancy rate by 2.3 percentage points can be attributed to the speculative new stock delivered in Q2 which is expected to be occupied in a relatively flexible manner. Therefore, we are inclined to reject the notion of a structural shift in the industrial vacancy rate. We expect the completion of additional 177,000 sqm of stock by the end of this year, most of which have been already pre-leased.

In the industrial real estate market, we record stable price levels across all submarkets. Prime logistics rent remains resilient at €4/sqm/month. Prime logistics yield is stable at 6.25%. Vast stock, newly emerging industrial zones, strong investment demand and positive leasing development in industrial real estate cause a convergence of prime industrial yield with prime shopping centre yield.