The Slovak economy, despite many negative factors last year and economic slowdown, overcame negative predictions and remained in solid growth of 1.7% in 2022 and is projected to grow by 1.3% this year, according to the Ministry of Finance. A robust labour market (unemployment below 6%) is one of the key factors that mitigate the risk of recession. Therefore, the recession is expected to be either short-lived in the first half of the year or there will not be a recession at all. Additionally, persisting supply-chain disruptions, that have affected the industry the most, are anticipated to subside in the second half of the year thus improving the global economy. Despite inflation reaching high levels at the end of 2022, European Central Bank measures in the form of interest rate hikes tamed the inflation and set it on the path of decline. This, however, also resulted in abated investment activity and an increase in yields across all commercial real estate segments. Capital values for properties remained unchanged due to indexation of rents and further rental upward pressure caused by elevated construction costs and low vacancy, mostly in the industrial sector.
Economic uncertainty and confidence about the outlook throughout 2022 resulted in lowered investment activity towards year-end. Transaction volumes continued in this trend in the beginning of this year even as sellers tend to hold on to their assets in periods of lower liquidity and uncertain economic outlook and buyers are reluctant to buy as financing costs increase. Even though transactions are generally low in the first quarters, we only witnessed sales of minor assets
Overall retail sales in 2022 resisted inflation and grew by more than 4%, mostly due to increased sales at the end of last year. However, it is expected that due to elevated inflation and that household savings are gradually depleted, the first half of the year retail sales will struggle. As we expect inflation to fall substantially in H2 2023, consumer confidence and consumer spending are expected to improve. Although overall rents in both shopping centers and retail parks did not increase, service charges rose by 30-50% on average and their impact on retailers is more visible than any other real estate segments as they share much more common areas and require higher heating of those spaces. This deepens the gap between prime and non-prime retail establishments, which, in order to improve their market position, will need to undergo refurbishments or make the premises more attractive.
Substantial increases in service charges, which in many cases reached 50%, are offsetting any potential increase in rents. As in retail segment, regarding older assets, less energy-efficient office buildings struggle the most. Increased service charges and the growing trend of home offices are shifting the face of office segment. Moreover, tenants no longer just demand the right space layout and a "nice" design but are also focusing on the selection and use of sustainably sourced materials. Consequently, international tenants downsize leased areas by 20-50% on average and tend to relocate from older buildings to new ones. As we expect, this might result in the growth of vacancy throughout the year, hence many planned office buildings are being transferred into residence projects.
Although the current situation may have significantly impacted other commercial real estate segments, logistics demand suffered mildly. Leasing activity and new completions hit record-high figures last year and, although we expect it to persist also this year, supply-chain disruptions and financing costs took their toll. Developers are no longer willing to build as many speculative assets and rather delay the construction until they have tenants, known as built-to-suit projects. Rents in 2022 increased on average by 10% and rose by another 5% in Q1. Even though construction costs are stabilizing, we expect rents across all regions to increase gradually throughout the year party as a result of record low vacancy of around 3%. Although it may seem that higher rents create pressure on tenants, they generally accept it as part of the current economic situation.
The Slovak economy is a relatively energy-intensive economy compared to other EU economies. Therefore, increasing energy prices represent one of the main drivers of the recent increase in inflation to double-digit figures. However, its growth was significantly slower than in previous months. Notwithstanding, Slovakia's commercial real estate market experienced a successful H1 2022.
The total volume of investments in Slovakia exceeded €600 million in the first half of 2022, making it the strongest half-year in the last 20 years. Although there are several pending transactions on the market, we expect decreased investment activity in H2 mainly due to uncertainty associated with rising inflation and interest rates as well as surging operating and construction costs.
With the pandemic nearing its end, one of the worst periods for the retail market has also passed. As soon as most of the measures relating to restrictions on movement were lifted, people naturally moved from the internet environment into the shops. Consequently, e-commerce is going through a slowdown as consumers are no more limited only to online shopping. The ongoing war in Ukraine did not fulfill the fears of cooling consumer spending, but on the contrary, it brought a lot of opportunities associated with the influx of new consumers and various brands that show interest in entering our market. As a result, this meant increased turnover for several retail establishments compared to the same period before the pandemic.
Office sector went through a major change as reclassification of office buildings took place. One of the causes of this was the separation of the most cutting-edge buildings into the newly established category. Lack of current up-to-date standards was another issue addressed in the reclassification process since attitudes toward ESG and technology advancement have not been taken into account. We recorded an unchanged vacancy rate of 11.8%. However, fewer completions and persisting volumes of leasing activity on the market could even reduce the vacancy in the second half of 2022.
As in the previous two years, demand for renting warehouses remained strong in 2022 as evidenced by historical highs of total take-up in industrial sector exceeding 400,000 sq m. Furthermore, in Q2 we recorded the lowest vacancy in the previous four years at 5.2%. New supply in H1, totaling 213,000 sq m, already managed to surpass the whole of last year. Although the development under construction slightly decreased to 348,000 sq m, more than half of it is already pre-leased indicating that developers are more reluctant to build speculatively in the environment of rising inputs. On the client side, we perceive increased demand for the purchase of land and thus the construction of the property in their ownership.
After 2 long years of pandemics and restrictions associated with it, the economy could breathe freely at the beginning of the year. GDP growth in the first three months even surpassed forecasts. However, Russia's invasion of Ukraine has slowed economic growth and is causing significant disruptions in many sectors across the CEE region.
One of the biggest effects of the war is steadily rising inflation, which reached 11.8% in April, representing a 1.4 pp month-on-month pick-up. This is mainly due to the high dependence on Russian oil and gas and thus rising energy prices. Food prices have also been affected, as Ukraine, also known as Europe's granary, is the fifth largest grain producer and, together with Russia, accounts for around a quarter of global wheat production. Despite double-digit inflation, the national bank has held interest rates at 0% since 2016 and does not plan to raise them until ECB does so.
One of the positive effects of the war in Ukraine is the arrival of more than 350,000 refugees, which brings new opportunities, one of which is a significant number of people willing to spend their money, mostly in the retail sector, which had a tough two years during the pandemic. Another is additional workforce, as many segments lack a labor force, especially in the hospitality sector, where jobs are gradually being filled by people from Ukraine. As a result, unemployment has fallen significantly since the beginning of the year, as evidenced by the April year-on-year decline of 1.46 pp. Thus, the unemployment curve continues its downward trend. We also noticed increased demand for office spaces as many companies are relocating from Ukraine and Russia, which leads to new opportunities in the market.
Investors' approach is more cautious and, therefore, investment volumes have seen a slight decline compared to previous years, caused mostly by the uncertainty regarding the war. Nevertheless, we report several ongoing transactions, confirming the attractiveness of the market with strong representation of domestic and regional investors. The appetite of developers does not abate, especially in the industrial sector, where we see record-breaking pipeline mostly mainly due to thriving e-commerce and logistics.
The industrial market remains the most liquid and fastest growing segment of commercial real estate, enjoying the interest of both tenants and investors, as evidenced by the expansion of existing developers and the ongoing construction of new warehouses. The change in the position of the industrial segment in commercial real estate is also reflected in the fact that for the first time ever, a logistics project won the Grand Prix at this year's CIJ Awards Slovakia - the Log Center R7 industrial park in Kostolné Kračany by developer Go Asset Development.
In the third quarter, three times more class A warehouses were under construction than in the same period last year, while the overall vacancy rate at 7.65% is lower by more than one percentage point. In the first three quarters of 2021 alone, we saw the market increase by approximately 160,000 square metres of first-class industrial warehouses. The high absorption of industrial areas is mainly driven by the expanding e-commerce sector, but established supply chains for the automotive sector also play an important role.
This sentiment was followed by the Government itself, which agreed to start works on a strategic park in the Valaliky municipality with an area of 381 hectares. The location was chosen mainly due to the demand of investors in the area around Košice. The park has the ability to attract large foreign investments, which are currently hindered by the weak preparedness of the area.
However, the strong demand for industrial real estate in Slovakia is not directly reflected in the amount of effective rent, which is growing only slightly, primarily in the most desirable locations. The situation is different in the surrounding countries, where rising construction costs as well as low vacancy rates have already reflected in an increase in rents across the market.
In terms of investment, the interest of domestic and foreign players in the newly completed warehouses persists, but the problem is the lack of assets for sale. Due to the low riskiness of the segment and the continuing interest of investors, we are seeing a continuous decline in investors' expected returns and we expect a decline in prime yield to 5.00%, in line with declines in the Czech Republic and other surrounding countries.
A total of 14,706 square metres of modern office space was added to the Bratislava market in the third quarter. The largest part of this was the Klingerka Offices project from JTRE, which houses SPP - distribution. The second new project is Sky Park Jurkovičova Tepláreň, which mainly provides flexible premises under the base4work brand.
The new supply of office space should increase by another 27,000 square metres by the end of the year, which poses a challenge for developers in attracting new tenants due to the fact that some companies have slowed down expansion plans. According to the results of our survey, the IT sector, which traditionally leads in the statistics of new leases, should continue to be one of the main sectors of demand growth over the next 12 months.
At the end of the third quarter, approximately 111,300 square metres of modern office space were under construction, of which almost two-thirds are located in the CBD, which still has strong absorption potential. This year, the total supply of office space in Bratislava should increase by almost 4%.
Due to the postponement of the project completion dates, the new supply for 2022 was narrowed down to only one project, namely Lakeside Park 02 from Wood & Company and Immocap, which is expected to bring 13,500 square metres to the Inner City in the second quarter.
The total area of contracted office leases reached 43,800 square metres in the third quarter. For the fourth consecutive quarter, we recorded a higher volume of new leases than the renegotiations of existing leases, which, combined with high demand in the CBD zone, indicates the popularity of new buildings in tenants' decisions.
The economic impacts of the partial closure of the Slovak economy and mandatory telework can lead to long-term changes in the strategies of companies and an increased prevalence of work from home, which can also have a negative impact on the size of leased premises. At present, however, we are rather feeling the overall strengthening of activity in those companies that have successfully overcome the challenges associated with the pandemic and are looking for a higher standard of office space.
Prime rents in high-standard buildings fell by 50 cents to € 16.50 at the beginning of the year and remained at that level at the end of the third quarter. Landlords are reluctant to reduce contracted rents in order to protect the value of their properties, so they prefer incentives, such as longer rent free periods, to a decrease in contracted rents.
Prime yield was maintained at 5.50% based on closed transactions in the best locations in Bratislava.
Despite the impact of the pandemic on the performance of shopping centres, new schemes are being completed in several regional cities. In September, the Eperia project was expanded by approximately 11,000 square meters, competing for Prešov consumers with the Novum Prešov shopping centre, which opened its doors in October last year, and currently has an openness of more than 90%.
A new larger shopping centre was added to the map of Bratislava retail after the opening of the Nivy project, which should also have an impact on the performance of surrounding projects and regroup existing consumers among them. After the opening of the Nivy shopping centre on 30 September, Eurovea 2, which is expected to open at the end of next year, is currently the last large Bratislava project under construction.
Within Slovakia, the opening of the Promenada shopping centre in Nitra with 26,000 square meters of leasable space for 120 retail units is also expected in the first half of next year. Some projects in the planning phase face the problem of rising prices for building materials, which reduce the potential profitability of projects.
The main Bratislava centres maintain a stable level of rents with individual agreement on conditions that result from the difficult situation of tenants during a pandemic. Popular measures include turnover rents, step rents or fit-out contributions due to depleted tenants' financial reserves. A significant change is also a widened gap between first-class and other retail projects.
Tenants can no longer draw subsidies in the form of rent relief, and pandemic aid to businesses has been reduced as well. An indirect consequence is that many employees migrate to sectors with greater job stability, such as industry. However, the industrial sector is facing its own problems, in particular the limited supply of components in supply chains. Rising prices of energy and other inputs cause prices of a significant part of consumer goods to rise.
However, the current situation in retail creates an opportunity for new business concepts that use omnichannel sales, and thus benefit from the growing popularity of online shopping. Some optimism can also be observed in travel agencies, which benefit from the gradual opening of popular destinations to foreign tourists. According to the Statistical Office of the Slovak Republic, retail experienced a year-on-year increase in sales every month from March to the last monitored August of this year, but most of the income was used to compensate for the loss period during the lockdown.
7 September 2021
The moving median of new COVID-19 cases is gradually rising and currently stands at around 200 cases per day. An increase in the number of cases was expected during this period, but the onset of the number of infected is faster than it was in the same period last year. In addition, Pope Francis is due to visit Slovakia from 12 to 15 September, which brings with it challenges regarding the organization of the mass event, which could further worsen the pandemic situation in the country.
This week, 23 out of 79 districts are already in the alert tier in the COVID warning system, which represents an increase of 9 districts. The alert tier of the warning system introduces capacity restrictions for shops, services, restaurants as well as mass events and may therefore have a limited impact on the footfall of shopping centres, restaurants or hotels in the districts concerned.
In the second quarter, however, according to the Statistical Office of the Slovak Republic, the economy grew, with year-on-year GDP growth (at constant prices, not seasonally adjusted) recording 9.6%. This was driven by recovering demand, mainly due to rising household final consumption. This is also supported by the positive development of the average wage, which grew the fastest in the last more than sixteen years (by 10.5% compared to the same period last year). The growth of real wages is likely to turn into an increase in retail sales in the following quarter as well, which may bring the turnovers of selected shopping centres closer to pre-pandemic levels. Investment activity also picked up, with gross capital formation recording a double-digit growth of 23.5% after six quarters of declines in the growth rate. However, these increases are largely due to the base effect and the economy still underperformed compared to the pre-pandemic year of 2019.
22 August 2021
From 16 August, the new rules of the COVID warning system apply, which now divides Slovakia into only five tiers. A fundamental change is that the districts that have a high vaccination rate will be advantaged. According to the currently valid rules, they will not be able to go to the worst, fifth level of threat. The nudging element should be incorporated in the form of the abolition of national measures and the transfer of responsibility for the introduction of lockdown to districts, which are now also evaluated on the basis of vaccination rates.
The most widespread vaccines in our country, Vaxzevria and Comirnata, provide more than 90% protection against the severe course of COVID-19 (and almost 100% protection against death) in the Delta variant environment, which eases the burden on the healthcare system tremendously. Districts that have a high vaccination rate of the population over the age of 50 (including Bratislava) can therefore improve their position in the COVID warning system by up to two tiers.
Emphasis is also placed on individual responsibility, and the restrictions within the individual tiers of the system are also assessed according to whether the person is fully vaccinated, tested or has already overcome the disease in the last 180 days. People who have not overcome COVID-19 and are not vaccinated or tested experience the most restrictions.
For shops and services, only normal hygiene measures apply at the lowest tier of monitoring. Worse districts are limited to 1 customer per 15 square meters of store's retail space, but depending on individual protection of customers, operations may be limited to 1 customer per 25 square meters of store's retail space with reserved hours for seniors.
A similar approach applies to restaurants that are at the lowest tier of monitoring without restrictions but depending on the tier of warning system and individual protection of customers, they must adhere to strict capacity restrictions for interior and exterior or maintain only walk-up windows and delivery.
The repeal of nationwide measures should prevent a situation where shopping centres in cities with a high vaccination rate and a relatively low incidence of COVID-19 would be closed or limited in capacity.
Currently, most districts are in the monitoring tier, but the exceptions are the districts of Banská Štiavnica, Gelnica, Kežmarok, Košice I.-IV., Levoča, Poprad, Spišská Nová Ves, Stropkov, Vranov nad Topľou, which are included in the vigilance tier.
9 August 2021
The number of new cases of COVID-19 remains low, with the number of hospitalizations declining to 65 patients by the end of last week. In Slovakia, only a little over 2 million people are currently fully vaccinated, which is about 1 million people less than is necessary to obtain collective immunity. During this week, all districts remain in the green colour of the COVID automatic system, which, however, still limits mass events in terms of maximum capacity and testing.
Retail sales rose above pre-pandemic levels for the first time. According to the Statistical Office of the Slovak Republic, they increased by 6.6% year-on-year in June. The highest growth was recorded in retail sales of automotive fuel (17.1%) and retail sales not in stores (13.3%), which also include internet sales. However, food sales have still not grown since the beginning of the pandemic, falling by 5.5% year-on-year. Clothing and footwear stores prospered, growing by 12.1% and 9%, respectively. Sales for culture and recreation were higher than a year ago, but still below the level of 2019.
The growth of industrial sector is documented also by the acceleration of current construction, which increased by up to 94% year-on-year. The total leasable area under construction represents up to 12% of the existing supply of industrial real estate. The absorption of new areas by tenants remains positive, but an increase in speculative construction may lead to an increase in the vacancy rate in the coming quarters. It is currently at the level of 8.40%. Although we present the current prime yield at 5.75%, we see the potential to decline to 5.25%, as several ongoing transactions predict investors' willingness to achieve lower yields in the industrial real estate segment.
Prices in office real estate have not changed overall, but we have a positive view of the increase in demand for larger leases of more than a thousand square meters in the second quarter. Compared to the same period last year, the total area of new leases increased by 19.5%. This year, a further increase in the vacancy rate in Bratislava is possible, as another 41,000 square metres of leasable space will be completed. Next year, however, we expect a significant moderation in new construction, which, given the positive absorption of leasable areas, would mean a potential decrease in the vacancy rate.
13 July 2021
Despite the fact that the new delta variant of COVID-19 is already spreading in Slovakia, the total number of infected does not grow and the 7-day median number of persons positively tested by PCR tests on average is reaching lower values in July than in previous months, namely 33 cases for the period of the previous week. Slovakia is even ranking lowest among European countries in terms of the number of active cases to the total population ratio.
Optimism is growing in the investment market, as evidenced by the increase in the number of ongoing transactions, which should push the total investment volume beyond 700 million euros by the end of the year. This would represent an approximately 40% increase in investment in the commercial real estate sector compared to last year.
According to preliminary data, the total volume of commercial real estate transactions in Slovakia reached 478 million euros in the first half of 2021, thanks to eight closed transactions.
This year, there is an increase in interest in the retail property segment, which investors previously avoided last year, mainly as a result of increased investor caution due to uncertainty about the impact of the pandemic on their future development. Shopping centres continue to maintain a prime yield of 6% and our outlook for this year is stable. However, most of them are waiting for incomes to stabilize before they are offered for sale.
The wide presence of international investors in the industrial sector provides exceptional liquidity, which, combined with the low perceived asset risk, is pushing for a further decline in the prime yield. At present, prime yield for logistics properties has fallen to 5.75% with a positive long-term outlook. Investments take the form of individual as well as portfolio acquisitions and should exceed € 200 million by the end of the year.
The office sector is proving that, despite the rising vacancy rate, it is able to maintain investor interest in first-class, modern projects as well as older projects that offer an interesting price-risk ratio. Newly built, fully leased office buildings with average lease lengths of more than 7 years with strong tenants can achieve a yield rate of 5.50%.
28 June 2021
Despite the fears of a new delta variant of COVID-19, the epidemiological situation in Slovakia is improving and, as a result, almost all measures affecting the private sector will be relaxed. The new rules now allow access to the interiors of restaurants throughout the country. Six districts remain in the 2nd level of vigilance - Skalica, Myjava, Banská Štiavnica, Spišská Nová Ves, Gelnica and Humenné.
Capacity restrictions at events of a sporting, cultural, entertainment, social or other nature continue to apply, while in districts in the 1st level of vigilance, which also include Bratislava and Košice, it is forbidden to fill seating capacity above 50% indoors (but not more 250 people) or 75% outdoors (but not more than 500 people). In these districts, the standing capacity is also limited, namely 100 people indoors or 250 people outdoors.
On Saturday, June 26, Slovakia began issuing the so-called green EU COVID passport, which is intended to facilitate travel abroad from the beginning of July. This is essentially a confirmation of vaccination, testing (PCR / antigen test) or overcoming COVID-19. The Digital COVID Card can be applied for via korona.gov.sk.
14 June 2021
The first dose of vaccine has already been administered to 41.6% of adults. Compared to the average of the countries of the European Union/European Economic Area, Slovakia lags behind by about 10 percentage points. The number of hospitalized patients with confirmed COVID-19 fell below 200 and the reproductive number, which ranges between 0.80 and 0.84, is also falling.
The output of the domestic economy measured by gross domestic product reached a growth of 0.2% year-on-year (at constant prices, not seasonally adjusted). The absolute value of production still does not reach the level of the pre-pandemic year 2019. The growth of exports and major industries contributed most positively, including motor vehicle production (35% growth), metal production and processing (22% growth) and electricity, gas, steam and cold water distribution (7% growth). Due to restrictive measures during the first quarter, the Statistical Office of the Slovak Republic recorded a decrease in value added mainly in arts, entertainment and recreation by 21.9%, in professional, scientific and technical activities by 14.7%, and also in construction by 11.6%.
A total of 4,485 dwellings were completed in Slovakia in the first three months of this year, a year-on-year decrease of 2.2%. More than a quarter of dwellings were completed in the Bratislava Region with a year-on-year decrease of 9.4%. Office real estate in Bratislava also probably expects a slowdown in construction completions this year, with our estimate representing a year-on-year decrease of 5.7%. However, for industrial real estate in Slovakia, we expect an increase in the volume of completions by up to 54.6% compared to 2020.
1 June 2021
With the growing number of persons vaccinated against COVID-19 (although the rate of vaccination lags behind the European Union average) and inactive cases, the epidemiological situation in Slovakia is significantly improving and, as a result, measures have been relaxed in most of the country. Under the new measures, the interiors of restaurants, cinemas, hotels and fitness centres can be opened, and mass events can be organized. Of course, hygiene measures and capacity restrictions remain in place.
Even during the end of the second wave, negotiations are taking place between landlords and tenants, who are trying to agree on individual rent discounts, which will be paid in half by the state. Some shopping centres do not offer the possibility of a discount on rent at all or only to selected tenants. Applications can be submitted until June 30, 2021, and only for the period of difficult use, which is specified on the website of the Ministry of Economy of the Slovak Republic. For retail and services units, the period is set between 19 December 2020 and 18 April 2021.
The Statistical Office of the Slovak Republic published a trade confidence survey for May 2021. Optimism prevails among Slovak retailers, with up to 46% of respondents expecting an increase in commodity prices, especially for fuels, in non-specialized retail stores, and for food, beverages and tobacco. They perceived the trend of business activity over the last three months positively, but the respondents showed even more optimism when assessing expectations over the next three months. The confidence indicator in trade rose to 16.7, the highest level since March 2020.
25 May 2021
Since mid-May, in addition to the abolition of the State of Emergency in Slovakia, measures have been relaxed again, which are newly determined according to the state of the pandemic in individual districts.
In the districts, which belong to the four lowest levels of warning, it is now possible to eat inside restaurants in compliance with specific hygiene rules (2-metre spacing between tables, a limited number of people at the table, and others).
In districts with a lower prevalence of COVID-19, respirators inside can be replaced by face masks. In shopping malls, the temperature is no longer measured before entry and a negative COVID-19 test result is no longer required.
The limitation of the number of customers and the closure of seating sections and indoor playgrounds do not apply to shopping centres located in districts with a lower degree of warning.
Restrictions on the hospitality sector are also relaxed in these districts.
Mass events have a limited number of visitors limited by the level of warning in the district, but the highest limit is in burgundy districts, where indoor seating is allowed up to 25% capacity, but no more than 250 people, and outdoors up to 50% capacity, maximum 500 people. When standing, it is up to 50 people indoors and up to 100 people outdoors.
5 May 2021
Since 3 May, Slovakia has been divided into three levels of COVID automatic system warning, with most districts falling under the 1st and 2nd level of warning, which indicate the relaxation of the curfew and anti-pandemic measures. In the 1st and 2nd levels of warning, a negative test will no longer be required when entering shops and school facilities. In these districts, mass events with more than 6 people can now be organized, but under strict conditions.
The latest data for the first quarter of 2021 indicate strong demand from tenants in the industrial (especially manufacturing) sector and underline the trend of tenant relocations in the office segment. Both commercial real estate sectors are experiencing an increase in vacancy rates, but each for a different reason. For industrial real estate, it is caused by speculative construction (we record a year-on-year increase in space under construction by up to 45%), which increases the level of competition in major industrial hubs, thereby taming further growth in effective rents. Larger and smaller developers are announcing expansion plans, which are also supported by the willingness of banks to finance construction in this sector.
On the other hand, less competitive schemes in the office sector are under pressure, as they fail to prevent tenants from moving to more modern and ultimately less costly new projects. Older office spaces, which do not offer modern technologies, but can offer an interesting combination of price, size of space and location, also maintain their position. While banks have a lower appetite for financing real estate from riskier segments, they can be very competitive in financing the most attractive assets. The achievable LTV remains at 70%, but a higher share of own resources is needed for secondary projects.
19 April 2021
From Monday, April 19, the Slovak COVID automatic warning system has switched to burgundy colour and the III. degree of national warning. At the same time, new rules came into force, which relax several measures related to the COVID-19 pandemic. Conditions for the movement of persons outside of their districts have been relaxed, but they still need to hold a negative test.
Shops and services have opened with a maximum permitted capacity of 1 person per 15 sq m, but several establishments remain closed, such as F&B, fitness centres, art performances, wellness centres, indoor playgrounds, as well as seating areas of shopping centres. The possibility of applying for a rent subsidy has been extended until the end of June. The subsidy can be provided to the tenant in the amount in which the discount from the rent was provided on the basis of an agreement between the landlord and the tenant, but not more than 50% of the rent for the period of difficult use. Despite this measure, however, some tenants had to terminate their leases.
Hotels may open but cannot provide catering services in common areas and must com ply with stricter hygiene measures, such as increased frequency of cleaning and tidying, limited maximum room capacity of 2 adults or persons living in the same household, and negative test not older than 72 hours for guests.
Mass events with the participation of more than 6 people are also prohibited, but subject to strict testing criteria, there is an exception for one-off mass events, church services, meetings of state bodies or selected sporting events.
Work from home is no longer ordered but remains a recommendation. When traveling to work, it is still necessary to have a negative test and confirmation of working hours and place of work. Travel to work has an exception even during the night curfew between 8:00 PM and 1:00 AM.
The ambition of several tenants to sublet part of their premises or reduce the size of leased premises is unlikely to be affected, despite the reopening of offices. Adopting a more flexible approach to office leasing is key to attracting and keeping tenants.
6 April 2021
Since Monday (April 5), the number of so-called black districts, which belong to the highest warning level, decreased to ten. The pandemic situation continues to improve slightly, and the number of hospitalized patients is kept below the critical threshold of 3,000 patients. The total number of inactive cases, i.e. people who have already overcome COVID-19, is 587,640. However, the favourable development of the pandemic may have been negatively affected by the celebrations and traditions associated with Easter, and therefore any adjustments and relaxations of the measures will be approved in two weeks at the earliest. Thus, restrictions on movement only for necessary journeys, the obligation to wear a respirator or a ban on traveling outside the district without a permit remain in force nationwide.
Consumer sentiment is gradually improving, and prices continue to rise slightly, but still lag behind the inflation target. The annual rate of inflation measured by the harmonized index of consumer prices (HICP) reached 0.9% in February 2021, which represents an increase of 0.2 p.p. compared to January and is still well below last year's values. In total, in the first two months of 2021, consumer prices increased by 0.8% compared to the same period of 2020. The consumer price index increased in employees' households by 0.9%, in pensioners' households by 0.5% and in low-income households by 0.7%.
8 March 2021
At the beginning of March, measures to combat the COVID-19 pandemic were tightened, which also affects commercial real estate. All employees commuting to work are obliged to prove the necessity to work in a workplace with a confirmation from the employer specifying working hours and place of work, the permission for walks in nature outside of one’s district is abolished and the obligation to wear the FFP2 respirator in shops and public transport is introduced from March 8, 2021 and from 15 March 2021 also in all interiors (except the household). The measures will be valid at least until further notice, but no later than the end of the state of emergency, i.e. 19 March 2021.
Prime yield as well as prime rent for the most attractive properties remain stable across the entire commercial real estate sector in the first quarter of 2021. Office buildings maintained a prime yield of 5.75% and a prime rent of 17 euros per square meter per month in the most attractive zone Central Business District. However, building owners are forced to provide competitive incentives to attract new tenants.
The curfew and the closure of much of retail during this quarter have turned into a freeze on rental activity in shopping centres, and the full impact of the pandemic on rental conditions will not be visible until the economy reopens. Prime yield for shopping centres remains at 6% with a negative outlook.
In the industrial sector, the prime yield for logistics halls was reduced to 6% in the fourth quarter, and we record the same yield in the first quarter of 2021, with a positive short term outlook. Despite the strong position of this sector and the high demand for new premises, we observe aggressive pricing strategies of landlords, which so far hinders the growth of rents for the most attractive properties above 4 euros per square meter per month in all major locations.
22 February 2021
Despite the fact that Slovakia has had significant restrictions on the mobility of citizens for 10 weeks, there has not yet been a significant reduction in the number of new positive cases for COVID-19. The situation is becoming confusing also due to parallel PCR and antigen testing, where there are frequent duplications that cannot be eliminated from the statistics. The number of patients in hospitals continues to grow slightly. As of February 21, there were 3,963 patients with confirmed COVID-19 disease in hospitals, which reduces the chances of reopening in the coming weeks.
While the current measures have only minimal effects on industry and logistics, we expect the problems in retail to deepen and the number of tenants who became insolvent due to persistent revenue shortfalls to increase. The office leasing market remains active, although we are seeing an increased number of inquiries for subleasing space from larger tenants due to extended work from home.
In terms of vaccination, Slovakia is one of the leading countries in Europe, and the availability of vaccines is preventing a faster rate of vaccination. Currently, almost 7% of the population is vaccinated with the first dose and 2% of the population with both doses. We expect the pace of vaccination to accelerate, together with increased supplies of vaccines in the coming weeks and months, which should have a gradual effect on stabilizing the situation.
According to estimates of the National Bank of Slovakia, the pandemic in 2020 caused an economic contraction of 5.2%, while 0.2% growth in the fourth quarter exceeded analysts' forecasts. According to the Statistical Office of the Slovak Republic, the inflation rate in 2020 compared to the previous year was on average 1.9%, which is the lowest value in the last three years. At the turn of the year, consumer prices were driven mainly by prices in telecommunications, restaurants and hotels, and medical goods. The number of unemployed continues to increase month-on-month, reaching an unemployment rate of 7.81% in January. The further development of unemployment will depend on the pandemic and related measures.
8 February 2021
The highest, fourth degree of the Slovakia’s national warning system came into force. In practice, this means a curfew, with exceptions, mandatory wearing of face masks outdoors, allowing only food take-aways and deliveries, opening of only essential shops and services (including gardening supplies or clothing repair) and a mandatory home office wherever possible. A visit to a bank, optician, tobacco shop, post office or commute to work is subject to a COVID-19 test that is at most seven days old. Almost 180,000 people are vaccinated, of which only a little over 30,000 people received the second dose, which ranks Slovakia among the EU average.
The measures should generally be more lenient than those introduced during the first nationwide testing in November. Nevertheless, the fourth quarter continued the trends set in the second half of last year.
There were two office building completions in the fourth quarter of 2020 in Bratislava: Pradiareň 1900 by YIT and Tower 5 by Grafobal Group, increasing the total stock by 26,300 sq m. Vacant stock increased to 214,000 sq m while the vacancy rate reached 11.2% as a result of lower leasing activity and the completion of new projects. Some companies are considering downsizing due to the expansion of remote working which might create an additional pressure on the occupancy rate.
Retail property development saw a slowdown in 2020, expanding Slovakia’s shopping centre stock by less than 70-thousand sq m; a number that includes Novum Prešov, which only opened about one third of its retail areas in 2020. However, we record a strong development and investment pipeline planned for 2021.
Total industrial stock grew by 8% year-on-year as the adoption of online shopping accelerated the built-to-suit development for e-commerce companies seeking to expand their distribution centres. The total leasable space under construction was more than 190,000 sq m. Total quarterly take-up recorded a 143% year-on-year growth, reaching 154,400 sq m. Overall, gross take-up in 2020 recorded a 16% growth compared to the year before, reaching 494,700 sq m. Historically, a similar volume of leased space was recorded only in 2016, when the increase in demand was related to the start of production of the Jaguar Land Rover carmaker. The outlook for industrial property remains positive since it remains the most liquid segment of real estate in Slovakia.
11 January 2021
The increased mobility of the population during the holidays has translated into a rapid increase in the number of patients hospitalized for COVID-19, which has now exceeded the critical threshold of 3,000. The continuing high test positivity rate indicates that the situation will continue to be serious in the coming weeks.
Vaccination of health professionals and critical infrastructure workers has currently started in 55 hospitals with a relatively favourable pace. In the second phase of vaccination, which is scheduled for January, at-risk and elderly population will be vaccinated. In the third phase, scheduled for February, teachers, marginalized Roma communities, the homeless and asylum seekers will be vaccinated. Vaccination for the rest of the population over the age of 18 is due to start in March.
Lockdown persists and with it its economic consequences. However, the latest available data from the Statistical Office of the Slovak Republic monitoring the economic activity in November so far look optimistic. After nine months of decline, Slovakia’s industrial production in November 2020 increased by 2.2% year on year. Construction output was 9% lower year-on-year in November 2020, the slowest pace of decline in eight months.
Total investment in the commercial real estate sector amounted to EUR 502 million in 2020, a year-on-year decrease of 27%. Industrial real estate was the most attractive sector for investors with a share of approximately 49% of total investment. The office sector reached a total volume of transactions of 183 million euros this year, and we expect an increase in investor interest in this segment after the completion of several upcoming projects after their successful lease. The retail market was hit hardest this year by a decline in mobility and a consequent decline in turnovers of shopping centres. The biggest drop in sales was recorded by shopping centres near business centres due to the higher rate of work from home. Retail transactions in 2020 amounted to only around 56 million euros, mostly transactions from the first quarter. As for the source of capital, the largest share of total investments in 2020 had Asian investors (40%), followed by Slovak (37%), European - with the exception of the Czech Republic and Slovakia (12%) and Czech investors (10%).
7 December 2020
Slovakia will receive the coronavirus vaccine in January at the earliest. After the New Year, the European Medicines Agency will decide on the registration of vaccines from two pharmaceutical companies, the consortium BioNTech and Pfizer and Moderna Biotech Spain. There will be an assessment as to whether the data provided on pharmaceutical quality and the results of the studies are adequate and sufficient.
If vaccines are approved, workers in direct contact with those infected will be vaccinated first. Some of them who have already recovered from the coronavirus will not be vaccinated. Widespread vaccination will be on a voluntary basis. Experts estimate that vaccination of the general population could begin at the end of the first quarter of next year.
While the impact of vaccination on Slovak retail will be generally positive, we cannot expect a major shift in the consumer behaviour of the population. Businesses that got into financial trouble during the pandemic will continue to have difficulties and a weaker market share compared to the sectors and concepts that flourished – sporting goods, variety discount chains, hobby markets, electronics, gardening supplies, etc. Every retailer who has managed to effectively implement omnichannel sales is in a significantly better position during and after this pandemic.
E-commerce should build on its accelerated growth and indirectly support logistics in the coming year. At the same time, the beginning of the year should better indicate the future of working from home for large employers who currently sublease their office space. Regardless of this factor, we expect more significant leasing activity in this sector in 2021.
Based on the newest Cushman & Wakefield survey, we have seen a stable development in prime rents as well as prime yields across all types of commercial real estate in the last quarter of this year. Prime rent is EUR 17 / sq m for office, EUR 4 / sq m for industrial and EUR 65 / sq m for retail real estate. Prime yield is 5.75% for office properties (central business district) and 6% for shopping centres. For industrial real estate, the prime yield decreased to 6%. In the office sector, we expect a stable development of rents and yields in the near future.
The COVID-19 pandemic in Slovakia is declining in intensity and the 7-day moving average has fallen from the highest recorded value of 2,547 so far on 3 November to 1,314 on Sunday 22 November. The number of active cases is also declining and, compared to the record value of almost 57,000 cases, it has already decreased by approximately 9,000 cases. In addition to epidemiological measures, these results are also affected by the onset of rapid antigen testing, the results of which are not included in the statistics. Therefore, the Government is preparing another traffic light system, which should make the decisions on further tightening or loosening of individual sectors of the economy clearer to the public. There are several proposed indicators determining the position of a district on the traffic light system and these should include an assessment of the situation by the regional public health authorities. Therefore, timely and transparent information on the resulting epidemiological situation will be crucial.
From Monday, 16 November, theatres, cinemas and churches with a maximum capacity of 50 percent and fitness centres and swimming pools with a maximum capacity of six people, subject to a limit of 1 person per 15 square metres, were opened. According to ÚPSVaR statistics, the registered unemployment rate fell to 7.35% in October. Nevertheless, we expect an increased incidence of bankruptcies, especially in the gastronomy, hospitality and entertainment industries (excluding technology).
Slovakia succeeded with its three-round nationwide testing with COVID-19 antigen tests - the first one being in the most affected regions in northern Slovakia (91% participation, 3.97% positivity), the second one in the whole of Slovakia (participation of 3.6 million inhabitants, positivity 1.06%) and the third one in 45 districts with the positivity rate from the second round higher than 0.7% (participation of more than 2 million inhabitants, positivity 0.66%). A negative test certificate guarantees you an exemption from the curfew valid until 14 November. Prime minister Igor Matovič announced a high probability of further nationwide testing in the near future, noting that he could imagine the reopening of the economy with a daily increase of less than 1,000 cases.
The Government expects the continued closure of the interiors of restaurants, cinemas, fitness centres, ban on events, as well as the public assembly as such, at least until the end of this year, which would cause significant financial problems for tenants if they do not receive adequate state aid.
Among the positive news is the decision of the Volkswagen Group to increase the planned investment in its operations located in Slovakia to up to one billion euros, which should also support the associated industrial companies in Slovakia. In addition, the Government of the Slovak Republic is negotiating the establishment of an insurance fund for short-time work, the so-called Kurzarbeit, which should limit the decline in employment during short-term external fluctuations in demand. Together with the continuing year-on-year increase in Slovakia’s exports of goods (3.4% compared to September 2019), we also expect a favourable development in the industrial real estate market, specifically the demand of manufacturing enterprises for industrial premises in the medium term.
From Saturday 24 October to Sunday 1 November, curfew is in force. Exceptions mainly include:
• Travel to and from work
• Travel to purchase basic necessities (food, medicines, drugstore goods, refueling etc.)
• Visits to the post office, bank, optician, automobile repair shop etc.
• Visits to the doctor and attending funerals
• Stays in the countryside or on the outskirts of the city
There is also a week-long ban on moving between districts.
These measures will significantly complicate the situation for retailers, gastronomy and hospitality businesses, where we expect a reduction in footfall and sales until the measures are relaxed, if the nationwide testing is successful. This is set to happen in early November over two weekends. Employers do not have a government-restricted workplace regime, but we are seeing a further increase in working-from-home.
Across sectors, there is an increased risk of labour shortages due to the detection of positive cases of COVID-19 among employees. This is already happening in the regions where the pilot nationwide testing took place. However, these are the regions most affected by the pandemic, so the rate of shortages in other parts of Slovakia are unlikely to be as significant. The industrial sector, in which a physical presence is essential, could be affected the most.
The Central Crisis Committee has proposed to the Government of the Slovak Republic a package of new measures to slow down the growth in the daily number of COVID-19 cases. They come into force on 15 October.
Wearing face masks is now obligatory in the urban areas of municipalities and cities. In non-urban areas face masks must be worn where the minimum 5 metre distance between people (not living in the same household) cannot be achieved.
Secondary schools need to move to remote and online learning, while eight-year grammar schools, primary and nursery schools are to continue as they were.
Mass events are strictly prohibited, except for marriages, baptisms and funerals, with a limit of 1 person per 15 sq m indoors. This limit also applies to commercial operations and shops. F&B businesses may only serve drinks and food outdoors or provide takeaways.
Grocery stores and drugstores return to priority opening hours, reserved for seniors only between 9 am and 11 am, however, they may also shop outside these hours.
Art performances, swimming pools, saunas, aqua parks, fitness and wellness centres will not be able to open.
These measures should be in place until the seven-day moving median of positive cases reaches 500 or less.
The Government has not yet introduced any new compensatory measures for the F&B sector, sports or culture sectors, but has announced their preparation. Rental subsidies continue to be paid but are not linked to service charges or the turnover component of the rent, which was introduced by a part of the retail operations in shopping centres during the renegotiation after the first wave of the pandemic. Crisis measures and declining population mobility are likely to lead to further declines in sales in these sectors and in retail.
Offices and workplaces are not affected by the new measures, but we expect an extension of the work-from-home regime for large employers. Industrial real estate continued to show strong demand in the third quarter, and the current situation may further support online retailers that rent distribution space. Exceptions may be where there are local outbreaks that create problems with production continuity.
In view of the growing daily number of positive COVID-19 cases, the Government has announced a tightening of measures, which will apply from 1 October. These include a ban on organizing all mass events where the most outbreaks of infection occur. Exceptions will include only the ceremonies of weddings, baptisms and funerals. This will mainly affect the revenues of hotel and restaurant operators.
According to the Statistical Office of the Slovak Republic, hotel occupancy rate was higher month-on-month in July, but still 20% lower than in the same period last year. In addition, restaurants and bars will only be open between 6 am and 10 pm. The Government is preparing a compensation mechanism to cover losses for culture and sports.
Measures specific to commercial real estate include limiting the number of visitors to shops and shopping centre units to a maximum of one person per ten square meters. Stores must also limit the number of trolleys used.
It will also be mandatory to wear face masks outdoors at a distance of less than 2 meters between persons who do not live in the same household.
The partial regime of work from home for most of the largest employers in Bratislava continues, which has a direct impact on the sales of services and gastronomic businesses in their vicinity. For some office tenants with expiring contracts, we expect a reduction in leased space after renegotiation, which, together with the completion of new projects, may increase the total vacancy rate in Bratislava above the 10% limit in the second half of this year.
Cushman & Wakefield Slovakia has concluded quarterly reporting on prices in the commercial real estate market in Slovakia. According to our estimates, we are seeing price stabilisation, which also persists in the retail real estate market, both on the rent side and on the yield side. The most competitive shopping centres can achieve a prime monthly rent of 65 euros per square metre, logistics halls 4 euros per square metre (smaller units reach 5 euros per square metre) and office real estate 17 euros per square metre.
Footfall in shopping centres and retail parks in Slovakia has returned to normal, except for projects partly dependent on neighbouring office projects, as a large part of major companies maintain the concept of partial home office.
Less office investment liquidity in the city centre caused a limited increase in prime yields from 5.75% to 6.00%. However, prime yields in the office sector remain at 5.75% due to the strong position of the newly created CBD submarket. Overall, prime yields have stabilised after the slight uptick earlier this year and their further development will depend on the development of the economy and investment sentiment.
According to the Statistical Office of the Slovak Republic, a significant improvement in turnovers in the industrial sector was recorded in July. The year-on-year decrease reached only 1.5% compared to 33.9% in May. Prices of consumer goods increased by 2.2% year-on-year in August, while prices in the restaurant and hotel sector increased by 2.3%. The construction sector records a continuing year-on-year decline in turnovers.
From 1 September 2020, Croatia, France, Spain, the Netherlands, Belgium and Malta are excluded from the list of so-called less risky countries. All persons who enter the territory of the Slovak Republic and during the previous 14 days visited a risky country are ordered to isolate at home until they obtain a negative RT-PCR test for COVID-19, which may be performed at the earliest on the fifth day of isolation.
It will be possible to organise group events indoors only for up to 500 people at one time and outdoors for up to 1000 people at one time, while wearing face masks will continue to be mandatory at group events both indoors and outdoors.
According to the Statistical Office of the Slovak Republic, the seasonally adjusted three-month moving average of the economic sentiment indicator increased again by 9 points to 83.5 in August. Confidence has risen sharply in trade, as well as in industry and among consumers, and slightly in services. Nevertheless, it has decreased in construction. In the 2nd quarter of 2020, compared to the same period last year, the prices of dwellings increased by 9.7%.
The Ministry of Health has published a new pandemic plan, in which it sets out precise procedures and tasks for state administration bodies, local government bodies and expert bodies that manage, ensure and perform activities in connection with the protection of public health. Instead of the moving median, the Ministry of Health will be guided by the hospital bed occupancy. According to the pandemic plan, Slovakia is currently in phase 1 (phase of deterioration of the epidemiological situation), therefore the reprofiling of the hospital bed capacities is being prepared and preparatory measures for the repatriation of citizens from abroad are also being implemented.
According to the plan, the recommendation to introduce restrictions on business operations and services is linked to the so-called red or critical epidemiological situation in the region, which will be evaluated by the so-called traffic light system using relevant data. In the red phase, work from home is ordered and work meetings will be replaced by online conference calls.
From 1 September 2020 to 1 October 2020, a ban on mass events with more than 1000 participants outdoors, including sporting events and mass events indoors with more than 500 participants is planned.
The Government plans to discuss with employers the introduction of a regulation ordering the confirmation of registration with the relevant regional public health office and a negative RT-PCR test for COVID-19 before allowing the workers coming from high-risk countries in the company premises.
In the future, we do not expect a widespread negative impact on the commercial real estate sector, as the pandemic plan considers mainly the regional or individual response to possible outbreaks.
The COVID-19 pandemic has a stable course in Slovakia and is under control in terms of public health. The Slovak economy is recovering from the trough of the business cycle, which was achieved in the second quarter. This is also indicated by the data of the Statistical Office of the Slovak Republic, according to which the seasonally adjusted moving average of the economic sentiment indicator (ESI) increased again by 9.7 points to 74.5 after a historical decline in the last three months. The best results are recorded in the services and industry sectors. The construction and consumer sectors are also picking up. Year-on-year, however, this indicator still records values lower by 20.8 points.
Construction prices in June 2020 increased by 3% compared to the same period last year. Construction prices have increased by an average of 3.1% year-on-year since the beginning of the year.
Industrial real estate recorded a strong second quarter with a total lease of almost 120,000 sq m. Most new leases took place in western Slovakia in the distribution sector. Despite strong demand, due to an increase in tenant mobility, there is virtually zero net increase in total leased space compared to the previous quarter. We also record an increase in the vacancy rate by 2.3 percentage points to 9.14%, mainly due to newly completed speculative areas in western Slovakia. We expect continuing healthy demand and stable development of industrial real estate prices, as well as the level of rents.
The European Union aid package for Slovakia for the years 2021 to 2027 was approved at a record value of €44 billion. As this money will be granted on the basis of submitted projects, there is a risk of forfeiture. Between 2021 and 2023, Slovakia will have up to €7.5 billion available from the coronavirus recovery fund.
The coronary crisis also had the expected impact on leasing activity in the office sector during the second quarter. A total of 31,000 sq m of office space was leased, which represents a year-on-year drop of approximately 60%. The good news is the increase in total occupied areas by 21,000 sq m compared to the first quarter. Occupied areas also increased for the third quarter in a row. At the same time, we record the highest share of net demand in the last seven quarters.
Nevertheless, we record an increase in the vacancy rate to 9.82%, as the increase in new supply in Bratislava is higher than the increase in total occupancy. Two major projects have been completed: Nivy Tower and Einpark Offices. The traditional increase in leasing activity at the end of the year should help absorb the additional over 60,000 sq m of space, which should be added by the end of the year.
In the investment market, we record a strong first half of the year thanks to the completion of transactions from 2019, with the total volume of completed transactions reaching a value of approximately €450 million. Investments in industrial real estate accounted for more than half of the volume, which confirms the continuing demand of investors for this segment.
A consortium of experts in the field of epidemiology presented new measures, which came into force on Monday, 6 July. Mass sports events must ensure that every other row is emptied, which is a reaction to a football match in Dunajská Streda, where visitors ignored the mandatory chessboard seating. There can still be a maximum of one visitor per ten square metres indoors and a maximum of one visitor per five square metres outdoors.
Bulgaria and Montenegro, which have seen an increase in coronavirus cases, have been removed from the list of less risky countries. However, Netherlands, Belgium, France, Italy, Spain, Ireland, Japan, Australia, New Zealand, South Korea and China have been added to the list.
Rental subsidies for compulsorily closed operations during a pandemic are already being paid gradually. According to the Ministry of Economy, up to 100,000 entities are eligible, but so far only a fraction of them have submitted an application. One reason may be the still outstanding agreements between landlords and tenants on the amount of the discount. Another problem is the need to sign an electronic application for both parties, for which it is necessary to have an activated electronic mailbox for delivery. According to NASES, some applicants do not have the application for signing or have an outdated version. According to some users, electronic signing itself is also confusing.
On Saturday, 20 June, the Government lifted the ban on Sunday shopping, which was introduced in connection with the suppression of the coronavirus pandemic in the Slovak Republic. Stores will continue to have to pay attention to increased hygiene and sanitation. From July, public events with more than a thousand participants will be allowed, with a maximum seating capacity of 50%. Secondary schools and the second stage of primary schools are also opening. Pupils and students will not have to wear a facemask during lessons.
Slovaks can now travel to Poland without restrictions. Citizens of EU member states may cross the territory of Slovakia without the consent of the Ministry of the Interior, but they are obliged to cross the territory of the Slovak Republic without stopping no later than 8 hours after entry.
With the end of the quarter, we bring up-to-date information on prime rents and yields for the most attractive premises in individual sectors. In the office real estate sector, we did not see any changes in prime rent, but we see a pressure on the incentives provided. Prime yield for office buildings in Bratislava increased slightly to 5.75% in the second quarter, reflecting the expected increase in vacancy. However, buildings with an average lease length exceeding 5 years can achieve a yield of less than 5.50% in the best locations. We record prime yield for shopping centres at 6.00% in the current quarter, due to rising saturation in Bratislava and a negative outlook for the sector not only due to the COVID-19 pandemic.
In the industrial real estate market, we record a stable level of prime and secondary rents and yields across the submarkets. High liquidity and positive development in the industrial real estate segment causes a convergence of prime industrial yield with prime retail yield.
After 90 days, the National Emergency has ended, but the State Emergency situation remains in place to ensure the continuity of special regimes for parts of the economy. The ban on exercising the right to peaceful assembly has also been lifted since Wednesday, 10 June.
According to current information, the footfall of most shopping centres is around 60 - 80% compared to the period before the COVID-19 pandemic, while individual operations are able to achieve 50 - 200% of revenues 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.
The largest cinema networks operating in Slovakia, Cinema City and CINEMAX, announced the reopening of their cinemas in the second half of June. We assume that this will have a positive impact on the overall footfall of shopping centres and their revenues.
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.
Among the positive factors influencing retail in Slovakia is the agreed Government support in rental relationships, potential confirmation of optimistic scenarios for the unemployment rate, low interest rates, and in the case of certain concessions of landlords (such as incentives, rent discounts, but also changes in the tenant mix of their centres). We can envisage the stabilisation of retail by the end of the year and a possible revival of investment activity in this sector next year. One of the most affected retail segments is restaurants, due to the loss of tourism revenues and long-lasting restrictions on occupancy after reopening. A separate category is retail operations in office buildings, whose revenues are gradually increasing with the return of employees to offices, but lag behind the levels from the beginning of the year by more than 30% on average.
The number of active cases of COVID-19 shows a long-term declining trend and Slovakia has started to open borders with the Czech Republic, Hungary and Austria without restrictions, which began on Friday, 5 June at 08.00. All retail outlets, including those in shopping centres, may be open subject to epidemiological measures.
The office real estate market enjoys the gradual return of companies to their premises. We have recorded a slight increase in demand for new leases compared to previous weeks. However, these are mainly companies with a lease period ending in the next 12 months, which are trying to find premises that better meet their requirements, using a wide range of available premises. Tenants are increasingly considering the level of operating expenses, while some tenants are interested in reducing the leased area. Negotiations show a stronger position for tenants, especially in terms of incentives and contributions.
During the second quarter, we have not yet recorded changes in the prime office rent in any of the Bratislava submarkets. More attractive rental conditions can even lead to faster occupation of vacant premises and thus stabilise the income of landlords who are able to provide more advantageous rental conditions. Development of office real estate under construction continues uninterrupted.
Confirmation of the Government's expectation of a decline in the unemployment rate in May could also have a positive impact on the commercial real estate market.
On 28 May, for the first time since the outbreak of the pandemic, Slovakia reached a 7-day moving median of new COVID-19 cases of 0. Slovaks can now travel to Hungary, Poland, the Czech Republic, Austria, Croatia, Slovenia, Switzerland and Germany for up to 48 hours without quarantine or submission of a negative test on return to the Slovak Republic. This measure only applies mutually to the Czech Republic and Hungary. From 1 June, the voluntary return of children to primary schools (only for 1st to 5th grade) and kindergartens applies. Fitness centres, swimming pools and other indoor sports facilities are also opening.
The industrial real estate sector remains the least affected sector of the real estate market, where rental forgiveness is rather the exception, especially in the area of logistics and distribution. Possible rental forgiveness is in most cases compensated by the extension of leases. We record reduced demand for new industrial premises, similar to other sectors. Tenants are waiting for further developments and economic impact and approach new contracts with caution, preferring shorter leases. Developers temporarily halted speculative construction, reflecting a decline in demand for new premises.
According to ACEA, EU demand for new passenger cars fell by 38.5% in the first four months of the year due to the negative impact of the coronavirus on the March and April results. However, after a significant slowdown in industrial production in the last two months, there is a resumption of production hampered by lower foreign demand. Most car manufacturers currently run a maximum of two shifts, with the exception of the PSA plant in Trnava, which has already rolled out three-shift production.
In the office and retail real estate market, we are seeing a slight recovery in demand resulting from the relatively successful return of tenants to their premises, but retail sales in office buildings lag significantly behind standard revenues due to the increased number of employees working from home.
According to the Government of the Slovak Republic, the consistently low numbers of new coronavirus cases brings the reopening of the rest of the economy closer than the set plan. On Monday 25 May, however, there was a protest by fitness centre owners, who must continue to close indoor facilities. According to the Union of fitness centres in Slovakia, they employ up to 20,000 people in 2,300 facilities.
The Ministry of Economy committed to rent contributions for a period of approximately 2 months of mandatory closure of retail operations, and this is to become a reality at the beginning of June. Landlords can provide any discount of up to 100% of the rent and the State will contribute half of the sum. Landlords who choose not to reduce the rents by 100% will not be able to terminate the contract or increase the rent to the tenant for the entire period of repayment of the remainder of the lease, which may be up to 48 months. The purpose of this condition is to discourage landlords from either low or no discount.
As the measure came late, many tenants in a weaker financial standing have already withdrawn from contracts and some landlords have already foregone the entire rent during the crisis, for example in exchange for extending the contract. The extent of take-up will depend on the specific text of the legislation, but in particular the possibility of a 50% state contribution is expected to be widely used.
According to the latest statistics from the Central Office of Labour, Social Affairs and Family, the registered unemployment rate in Slovakia rose to 6.57% in April from 5.19% in March. This represents a year-on-year increase of 1.67 percentage points. Unemployment is expected to continue to rise throughout the second quarter.
On Monday, 18 May, the Government announced a further acceleration of the opening of the economy, in connection with the favorable development of the COVID-19 pandemic in Slovakia. As of 18 May, the 7-day moving median of daily infected persons out of quarantine was 3. In the last, fourth phase, scheduled on 20 May, reopening of shopping centres (without indoor playgrounds) is planned, in which until now only selected key retail operations, including opticians, grocery stores, drugstores, pharmacies, post offices, etc. were allowed to open. Restaurant interiors will also be accessible. Cinemas will be limited to 100 people. The space reserved for one customer in the store will be reduced from 25 square meters to 15 square meters.
According to the preliminary agreement of the Government, the State should contribute to the tenants with the same share as their landlords. The tenant will be able to repay the rest in the next 48 months. During this period, the landlord will not be able to increase the rent or terminate the contract.
From Sunday, 17 May, Austria abolished systematic inspections on its side on the so-called internal borders with Switzerland, Liechtenstein, Germany, the Czech Republic, the Slovak Republic and Hungary. For Slovak citizens, all other measures apply when crossing the border into Austria - for example, a negative test for COVID-19 not older than 4 days or a 14-day mandatory domestic quarantine. Regarding citizens entering Slovakia, the National Council of the Slovak Republic approved intelligent domestic isolation as an optional replacement for State quarantine. Additionally, a person visiting foreign country for less than 24 hours will not have to undergo quarantine. The bilateral opening of the borders with Austria and the Czech Republic is the subject of negotiations but is expected in the first half of June.
The second and third phases of the opening of the economy began together on 6 May as a result of the positive development of the COVID-19 pandemic in Slovakia. In the mentioned two phases, operations of the services sector, accommodation, retail as well as catering on external terraces were opened. Taxi services, outdoor tourist attractions, museums, galleries and libraries can also operate.
The Government is currently negotiating to accelerate the launch of the fourth phase, which includes shopping malls, cinemas, theatres, mass events, schools and kindergartens, and all indoor operations. The date of 20 May is being discussed, but the exact date will depend on the number of newly infected, from which the 7-day moving average adjusted for people who are isolated in a quarantine facility is derived. On Tuesday, 12 May, it was at a value of 4.
The international credit rating agency Fitch downgraded Slovak government bonds from A+ to A with a stable outlook due to the expected negative economic development associated with an increase in the country's debt to 60% of GDP in 2020. Other countries that have recently been downgraded by Fitch include the United Kingdom, Hong Kong, Italy, South Africa, Nigeria, et al. Government bond yields have a long-term correlation with mortgage interest rates, and therefore we expect the commercial real estate market to follow their development. Increase in interest rates may signal an increase in the costs associated with borrowing, which in turn reduces the potential internal rate of return. The decline in government bond yields increases the attractiveness of investing in commercial properties.
Our outlook for prime rents and yields in the commercial real estate sector has not changed since the last publication.
On 4 May, the Government announced an acceleration of the opening of the economy, which was initially planned over four phases. According to the new rules, the second and third phases will be implemented together, starting on Wednesday 6 May. The Government has thus responded to the favourable course of the pandemic in the last week. As of Monday 4 May, the 7-day moving average of new cases was 4.
However, the Prime Minister still has a negative attitude towards the accelerated opening of shopping centres, so the expected faster recovery of high street operations compared to shopping centres is becoming a reality. Despite joint efforts and petition from retailers and landlords, the Government failed to provide initial help that was specific to retail, an industry directly affected by the pandemic. To keep retail alive and going, the existing contracts will have to be renegotiated to reflect changes in consumer behavior in the country. Incorporating turnover rents more widely is one example.
Some shopping centre owners insist on full performance of the contract by tenants. Many centres agreed on rental discounts for several months or issuing credit notes on invoices already issued. Changes in leases complicate the situation for landlords, which causes a postponement of the opening of projects planned for this year. HB Reavis has already announced the postponement of the opening of the ambitious Stanica Nivy project to next year.
Regarding the investment market, we continue to see the continuation of acquisitions initiated before the pandemic, but their closing and pricing will depend on the ability of current owners to minimise the impact of the crisis on long-term asset returns. Retail and hospitality, which are most affected by the crisis, also account for the smallest share of investments in commercial real estate in Slovakia. Assuming low interest rates and the availability of capital, we can see a faster recovery of the investment market, mainly in logistics and office properties.
Parliament approved amendments to a law on COVID-19 impacts, according to which, the landlord may not unilaterally terminate the real estate lease by 31 December 2020 due to the tenant’s delay in paying rent. This includes payments for services that are usually associated with the lease due in the period from 1 April to 30 June 2020, that are a result of COVID-19. The landlord's claim does not expire, instead is postponed to next year. Nevertheless, landlords are at a disadvantage due to the negative impact of this measure on their cash flow, which some address by introducing an advance payment. Some landlords have already granted rent-free periods of several months. According to the Government, this is only a short-term solution, and it is still negotiating further measures in retail.
The opening of shopping centres is scheduled for June at the earliest. Leasing of shopping centres under construction has slowed down, which may postpone the opening of new projects. Fast fashion stores will be hit the hardest, as they report oversupply of goods from unsold collections and ongoing production, which will lead to significant discounts after reopening.
Slovak companies are already preparing for the gradual return of their employees to their workplaces. They are likely to take advantage of rotating schedules and the partial preservation of working from home. They are also expected to strengthen hygiene practices, clean common areas more frequently, update their protocols for entering and moving around the office, and more. These measures will require increased operational costs. A detailed concept of an effective return to the ‘new normal’ was is detailed on our 6 Feet Office page.
In industry, there may be a slight stagnation in demand in the second quarter, as the assumption of an increase in the expansion of retail chains’ distribution centres and e-commerce is not being met. However, we are still recording new supply and new projects under construction.
The Government presented a 4-phase plan to reopen all retail operations, with the first one starting this Wednesday and the following phases commencing if the number of new coronavirus cases is favourable. As expected, the Government will not subsidise rents. Starting this Wednesday, shops smaller than 300 sq m can be opened. Restaurants will only be able to hand out meals through a window and the Government wants to launch special meal vouchers for seniors, which will only be valid for restaurant meals delivered by taxi providers.
Hospitality operators will only be able to offer long-term stays (without offering meals) and street markets will need to follow strict hygiene rules. Shopping centres are set to open in the last phase.
Based on inquiries of industrial landlords, we can conclude that occupational activity was not affected by the coronavirus crisis during the first quarter of this year. A significant part of the demand consists of new contracts, but we also record expansions. New projects completed in the first quarter (P3 Košice, Sihoť Park) are gradually being leased. We remain optimistic about the further development of prime yield in this sector and don’t rule out a possible narrowing of the gap with the shopping centre yield.
Office property recorded a solid leasing activity in the first quarter, with a healthy share of new contracts and expansions.
In the CE investment market, we see mixed sentiment towards yields. Industrial transactions should be least affected by the current crisis, while other segments expect some risk premium. Funds report existing capital for investment and consider buying opportunistic assets, but they must handle mainly retail (i.e. non-professional) investors who announce withdrawals.
Although we have seen a relatively slow growth of new cases of COVID-19 so far, the effects of increased mobility over Easter are likely to manifest in 1-2 weeks. Nevertheless, the Minister of Economy, Sulik wants to continue opening certain business operations and alleviating restrictions imposed by the Government. Prime Minister Matovic is against this, which has created some tensions in the new Government. As the Central Crisis Committee, composed of hygienists and epidemiologists, has the final word, we do not expect any substantial easing during the first 2 weeks after the end of Easter.
We expect a significant increase in the unemployment rate as some companies are forced to cut production or close due to lack of demand and restrictive measures. Thousands of companies have already applied for a state contribution in the event of a loss of revenue. Inflation will likely slow sharply and fall significantly below the ECB's 2% target.
By the end of the first quarter, we saw an increase in shopping centre prime yields of 0.15% to 5.90%, a cautious increase of 0.10% to 5.60% for office properties and a slight increase of 0.05% to 6.25% for logistics halls. We saw a drop in prime rent only in retail, which is a long-awaited movement due to the retail property saturation and pipeline surge. The market is currently mostly inactive and waiting to see what happens.
From 6 April, new measures adopted by the Slovak Government to combat the new coronavirus have come into force.
Measures include anyone entering the Slovak Republic must be isolated to designated facilities for the time necessary to carry out laboratory diagnosis of COVID-19.
During the Easter holidays the Government plans to restrict the free movement of people except for commuting to and from work, shopping, doctor visits or outdoor walks within the district.
In commercial real estate market, we continue to record delays in negotiations and contract signings.
Landlords are now primarily focused on the operations and contractual terms of the existing tenants.
In the shopping centre market we are not noticing a surge in new short-term rentals since existing tenants try to deliver goods ordered via the internet from their premises. Tenants are requesting rent holidays during the closure of their operations. Large tenants are demanding a switch to turnover rent after reopening, in exchange for an extension to the lease term.
For the time being, landlords in all segments have generally refused to accept non-payment of rents and have delayed most negotiations until they conclude negotiations with banks and the new legislative changes take place, allowing the Government to subsidise tenants.
The new Slovak Government will help companies and sole traders maintain jobs with measures that will cost €1 billion per month (around 1% of Slovakia's annual GDP) and bank guarantees for €500 million per month. This business relief is conditional on the beneficiaries undertaking not to lay off their employees.
The state will provide contributions to sole traders and employees in whose businesses have been forced to close as well as their direct suppliers. The sum of the Government’s contribution will depend on how far sales have dropped. The state will also reimburse 55% of gross wage to workers on quarantine or nursing leave.
In addition, the Government has agreed to conditionally postpone the payment of taxes and levies and the application of tax losses from previous periods.
The commercial real estate sector is witnessing the postponement of both investment transactions and rental contracts. Most existing construction projects are postponed for later periods as well. We are yet to see a change in pricing in connection with the pandemic. The retail sector however expects an already anticipated prime rent and yield correction in relation to retail saturation reaching a peak in the Capital.