Emea Real Estate Market Outlook 2021 | Slovakia

m o c . e r b c

E M E A REAL ESTATE /

l r u t r o h s RESEARCH

C B R E MARKET OUTLOOK SLOVAKIA 2 CONTENTS

01 04 ECONOMY LOGISTICS The economy is seen contracting at a record pace this year before Automotive, as the most dominant part of the industrial & logistics rebounding strongly in 2021. The gradual easing of pandemic-associated segment in Slovakia, outperformed the expectations from the pandemic restrictions, coupled with EU funding, should ramp up domestic activity. beginning of the year. All 4 OEM´s are currently active. The most However, the unpredictable course of the pandemic poses a key downside dominant drivers of leasing activity are 3PL providers and e-commerce risk. retailers. 02 05 INVESTMENT RETAIL The investment activity in 2020 was mostly driven by the industrial As the most affected segment across the whole real estate market in segment, followed by office and retail. We recorded 17 transactions. Slovakia, retail is still slowed down. Shopping centers with worse expectations than retail parks.

03 OFFICE The vacancy rate is increasing, due to the strong pipeline and projects under construction. We have identified a new trend in sub-leases when the largest tenants mitigate the costs this way.

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0 1 R E COVER ECONOMY 4 UNEMPLOYMENT GROWTH WAS DAMPENED BY GOVERNMENT MEASURES

MACROECONOMIC OVERVIEW SLOVAKIA GPD GROWTH DEVELOPMENT 10% The COVID-19 pandemic was a determining factor in economic performance and Before COVID-19 After COVID-19 affected both domestic and foreign demand. After a gloomy second quarter in which we 5% saw a historic decline in GDP, the third quarter brought a rocket recovery. However, the recovery at the end of the year was affected by restrictive measures associated with a 0% growing number of infections. Restrictions should primarily affect the service sector during the winter. The industry should continue to develop relatively well, as it remains -5% untouched by European constraints and stable economic conditions in East Asia also provide help for long-term demand. FORECAST -10% MAJOR INDICATORS 2019 2020 2021 2022 2023 2024 2025 Source: Oxford Economics 2019 2020 2021 2022 2023 Gross Domestic Product (y-o-y % change) 2,3% -6,2% 4,3% 6,1% 3,4% UNEMPLOYMENT Consumer Price Index (y-o-y % change) 2,7% 1,9% 1,4% 1,9% 2,1% The labor market was not spared from the impact of the pandemic, However, the negative impact of COVID-19 was relatively low, due to the contribution of state Private consumption (in billion €) 49,80 49,40 50,10 52,00 53,40 measures that were aimed at job protection. Our estimates are therefore more optimistic than they were in spring when we expected more significant negative development in the Unemployment rate (%) 5,8% 6,9% 7,1% 6,1% 5,8% labor market. OUTLOOK We expect a return to GDP growth next year at a rate of 6%, with a visible recovery, Source: Oxford Economics starting from spring 2021. By the end of 2021, we can also expect the arrival of the European funds from the EU Recovery Fund program (New Generation of the EU), with GDP its results being visible already in 2022. In 2021, the unemployment rate could reach The economy grew by 11.6% quarter on quarter in the third quarter, and the year-on- 7.1%, with a subsequent gradual decline, visible mainly from 2022. This will go hand in year decline slowed down to -2.4%. The recovery came after a sharp drop in the second hand with more modest wage growth compared to the dynamic growth of recent years. quarter, which was hit hard by the pandemic and recorded a year-on-year decline in Our forecast, therefore, assumes an increase in consumer prices in 2020 reaches an economic activity by 12.1%. On average, the economy fell from January to September average of 1.9%. In 2021, we expect lower growth in consumer prices, at 0.9%. The by 6% however, the end of the year brought a second wave of infections and associated announced measures should help maintain favorable financing conditions and support measures to slow down the spread of the virus. economic recovery and price stability over the medium term.

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0 2 R E BALANCE INVESTMENT 6 DESPITE NEW CHALLENGES INVESTMENT VOLUME REMAINS SOLID

INVESTMENT ACTIVITY OVERVIEW INVESTMENT ACTIVITY IN 2020 INVESTMENT ACTIVITY IN 2020 BY The total investment volume transacted in 2020 reached € 516 million and was spread BY USE REGIONS among 17 transactions. The first half of 2020 with almost 90% of the total transacted Bratislava volume reflects the COVID-19 situation on the market throughout 2020. The pandemic 7% 11% Office outbreak in March 2020 negatively influenced the construction processes, with 49% 40% 13% Košice speculative constructions being postponed (if not withdrawn) too. 3% Industrial Senec Retail Žilina 37% Hotel 5% 35% INVESTMENT ACTIVITY BY YEARS Others € 876M € 826M € 676M Source: CBRE Research € 543M € 516M - 24% The majority of real estate investments took place in the Bratislava region. We (Y-o-Y) identified 4 large transactions over € 50 million there. All of these transactions were closed in the Bratislava region within the two best performing segments (office & 38 20 26 25 17 industrial). 2016 2017 2018 2019 2020 The largest transaction was the sale of Goodman logistics portfolio containing Total Investment Volume Number of Transactions industrial parks in Senec and Košice, by Goodman International to GLP and Source: CBRE Research amounted to € 105 million. Another significant transaction in the industrial segment was the sale of Palmira Logistics Park in Senec by Palmira Capital Partners to GIC In general, the dominance of the office and industrial segments continued during and amounted to nearly € 100 million. Both of these transactions contributed with a 2020 followed by the retail segment. The industrial segment dominated with a share total of € 205 million (40%) to the overall transaction volume. Within the industrial of 49% of total investment volume, closely followed by the office segment with 37% segment, we also recorded one transaction in the 4th quarter. It involved the sale of and the highly affected retail segment with only 11%. HORECA (hotels, restaurants & an industrial complex in Kežmarok worth more than 10 million. In the current catering services), as the most affected segment, accounted for about 3% of total situation, we assume that even during this year there will be the highest demand for investment volume. In terms of year-on-year comparison of investment volume, we industrial and logistics properties, despite the lack of premium quality developments record a decrease of 24%. ready for disposals- the trend which we perceive more often these days.

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INDUSTRIAL PRIME YIELD DEVELOPMENT SHOPPING CENTRES PRIME YIELD DEVELOPMENT

8,75% 8,75% 8,50% 8,50% 7,20% 7,00% 7,00% 7,00% 7,90% 7,75% 6,90% 6,50% 7,50% 6,00% 6,00% 7,00% 5,75% 5,50% 5,75% 6,50% 6,25% 6,15%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CBRE Research

Source: CBRE Research Singaporean investors have the largest share of invested capital in 2020 with a total share of 40% of the total investment volume. Their share is represented by 2 significant The office segment registered 2 dominant transactions closed in 2020, being also the transactions from the first half of the year, totally amounted to € 205 million. most active segment of them all (in terms of the number of deals transacted). One of INVESTMENT ACTIVITY BY YEAR INVESTMENT ACTIVITY BY COUNTRY these transactions were closed in Bratislava, namely the sale of Rosum Offices by Penta PERIOD OF ORIGIN Investments to Austrian European City Estates and the sale of the BCT 1 by Penta Investments to Occam Real Estate. Both of these transactions contributed a total of 40% Slovakia almost € 90 million. 12% 1st half Czech republic OFFICE PRIME YIELD DEVELOPMENT 12% 2nd half Austria 88% 11% 7,40% 7,25% 7,25% 7,25% 7,00% 6,90% 6,75% 37% Singapore 6,25% 6,00% 5,60% 5,50% Source: CBRE Research 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 OUTLOOK Source: CBRE Research In 2020, the prime office yield even fell to 5.5% for the office properties. A partial correction can potentially occur within secondary real estate, but also at secondary The most significant retail transaction in 2020 – the disposal of Duben SC by SIRS to locations. The condition of retail is currently far from ideal, however, retail parks, which Atrium, reached the transaction amount of almost € 40 million. We recorded another 2 are less demanding on hygiene measures in times of pandemic, may be an interesting disposals of retail parks in Slovak regions. The overall investment volume in the Retail investment product in the coming months. With the increasing e-commerce penetration segment reached € 56 million in 2020. rate on the retail sales we also expect strong demand on industrial & logistics.

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0 3 R E TURN OFFICE 9 VACANCY RATE EXCEEDED 11%, DUE TO STRONG NEW SUPPLY IN Q4

OFFICE MARKET OVERVIEW VACANCY

In the first half of 2020, we recorded low leasing activity, due to the traditionally weaker The vacancy rate across the office market increased significantly compared with the first quarter and subsequently the situation around the COVID-19. Tenants were affected previous year to 11,13%. This rapid increase was occurred due to newly delivered by the „wait and see“ approach, mainly the largest ones. We identified strong demand in projects with large remaining vacant areas available to lease. The lowest vacancy has Q3, thanks to postponed decisions from the first half. The last quarter of 2020 was been recorded in the city center district at the level of 6.47%. The vacancy rate in the traditionally the strongest one in terms of leasing activity. largest submarket reached 14,13% by the end of 2020. The highest vacancy rate was recorded in the Outer city submarket at the level of 14,31%.

MODERN OFFICE STOCK TOTAL STOCK BY SUBMARKETS TOTAL STOCK BY OFFICE STANDARDS 2 000 000 15% 12% 8% 25% City Centre 9% 34% A-class 1 000 000 Inner City 6% 30% Outer City B-class 3% 15% CBD 66% 0 0% 2015 2016 2017 2018 2019 2020 22% Southbank Total stock Vacancy rate

Source: CBRE Research Source: CBRE Research Bratislava modern office stock stands at ca. 1.92 million sq m as at end of 2020. UNDER CONSTRUCTION Modern office stock includes A and B class buildings completed or refurbished to international standards. Total office stock comprises 64% of A-class office buildings, We record 10 projects under construction, with planned completion before the end of while the remaining 33% of the total stock represents B-class office buildings. In 2020, 2022. Their total area is almost 200,000 sq m of new supply in the class A standard. almost 75,000 sq m of new office supply was added to the market, which represents 5 The pre-lease ratio of these projects represents approximately 10%. Each of these new buildings within the A-class category. In terms of size, the largest submarket is CBD projects respects the new standards of office space according to the current pandemic with almost 600,000 sq m of lettable area. situation.

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TOTAL LEASING ACTIVITY TOTAL LEASING ACTIVITY BY SECTOR In the first half of 2020, there was a noticeable decrease in the leasing activity by 50 % IT on the office market in Bratislava in y-o-y comparison. Tenants preferred a „wait and Finance & Banking see“ approach what negatively affected the leasing activity. After the stay home 8% 16% 10% campaign, we identified strong demand in the third quarter, which was reaching Professional services

historical heights. The fourth quarter showed traditionally the strongest demand, driven 11% 16% Consumer Goods by 3 transactions over 6,000 sq m. Manufacturing & Construction 11% Public 60% 14% 14% 200 000 Pharma & Medical 40% Source: CBRE Research Other 100 000 20% RENTAL LEVELS 0 0% The prime rent for premium office space in Bratislava remained at €17.00/sqm/month. 2015 2016 2017 2018 2019 2020 The achievable office headline rents in the City Centre and CBD location are in the Total Leasing Activity Renegotiation % range of €12.00-15.00/sq m/month. In non-prime locations, the average headline rents are within the range of €8.50-13.50/sq m/month. Source: CBRE Research OUTLOOK Total leasing activity in 2020 was mainly driven by the CBD submarket with more than We expect the vacancy rate to increase, due to the ongoing COVID-19 pandemic, and 70,000 sq m leased. The share of renegotiations in CBD represents 41%. Leasing activity also a lot of projects under construction, which will be delivered in 2021. We assume in City center, Outer city, and Inner city was around 30,000 sqm each. Southbank, as that rents will be stable maintaining the same levels, as in 2020. On the side of the the smallest submarket in terms of size, also reached the lowest leasing activity in 2020. tenants, the largest advantage will be longer rent-free periods. At CBRE, we think that Renegotiations were the most dominant with a 78% share. The largest transactions home-office work is not sustainable in the long run and that the employer should pay occurred in CBD and City center, totaling 12,000 each. Both of these deals were attention to the premises in which its employees work. The long-term trend in the transacted in 2nd half of the year. The size of the average deal is 650 sqm, which is 2% construction of office buildings is the certification of sustainability of buildings (LEED, less, than in 2019. The best performing sector, in terms of leased sq m, was IT and BREEAM). Buildings are becoming increasingly the center of technological progress and finance with 15% each. development, and in the times of the pandemic, the emphasis is mainly on the cleanliness of the air environment, open-space, and many other conveniences to increase the quality of the environment for employees.

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0 4 R E SILIENCE LOGISTICS 12 IN 2021, THE TOTAL STOCK WILL EXCEED 3,000,000 SQUARE METERS

INDUSTRIAL & LOGISTICS MARKET OVERVIEW Even despite the ongoing pandemic crisis, there is still a number of I&L projects under The industrial & logistics market was the least affected segment by COVID-19 within the construction. Eight developer-led projects are currently under construction with planned commercial real estate sector in Slovakia. New challenges brought new opportunities, completion in 2021, offering a total lettable area of 248,560 sq m. Five developments and the market swiftly adopted them. Since the pandemic outbreak began, we have under construction with a total lettable area of 151,797 sq m are located in GBA. identified some drops in leasing activity during the second and third quarters of 2020. VACANCY RATE BY REGIONS Fourth-quarter, however, kicked back with leasing activity, and thus we recorded the TOTALSTOCK BY REGIONS strongest Q4 performance since 2016. In nowadays, the industrial & logistics segment still remains the most stable out of the segment we do monitor in Slovakia. The main GBA 10,91% driver remains e-commerce and 3PL activities connected to online, retail, and 37% 10% 9,30% pharmaceutical segments. Automotive was undergoing transformation even before the 6% Western Slovakia 8,19% COVID-19 outbreak, however, the pandemic situation did affect this important sector’s 6,47% leasing activity in 2020 even more. Staying positive, all 4 Automotive OEM´s are currently operating and new projects were assigned to 3 out of them during 2020, Central Slovakia confirming the importance of Slovak plants within the portfolio of their mother companies. 47% Eastern Slovakia TOTAL STOCK Source: CBRE Research 3 000 000 10% 8% VACANCY 2 000 000 6% The overall vacancy rate increased to 7.71% (+172 bps y-o-y) by the end of the fourth 1 000 000 4% quarter. The trend of low vacancies from previous years when the available leasable 2% 0 0% space represented less than 5% of the overall stock has been changing. On a quarterly 2015 2016 2017 2018 2019 2020 comparison basis, the vacancy had increased by 62 bps. The lowest vacancy rate is currently in the GBA region, thanks to strong demand provided by high-quality assets, Source: CBRE Research Total stock Vacancy rate mainly in Senec. The industrial & logistics market in Slovakia comprises approximately 2.95 million sq m NEW SUPPLY of modern, A-class buildings completed or refurbished to international standards. The industrial & logistics market is divided into four submarkets, Greater Bratislava Area Twelve industrial buildings were completed in the year 2020, adding 215,882 sq m of (GBA), Western, Central, and Eastern Slovakia. Approximately 47% of the total stock is the lettable industrial area to the existing stock. Eight projects were completed in H1 located within ca. 40 km from the capital city of the country in the Greater Bratislava 2020, while the four projects were developed in H2 2020 (three in Q3 2020 and one in area. 37% of total stock is located in fast-growing Western Slovakia and the other 16% Q4 2020). Out of twelve industrial developments finished in 2020 three were completed represents Central and Eastern Slovakia. in the Greater Bratislava area.

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TOTAL LEASING ACTIVITY TOTAL LEASING ACTIVITY BY SECTOR The demand for industrial and logistics space in the year 2020 reached 490,846 sq m, representing a small decrease of 9% compared to the year 2019, on the other hand, it 3PL still makes the year 2020 the fourth-best year of the last decade. We identified other 14% 60,000 square meters leased within B-class category assets. Almost 50% of all Automotive transactions were finalized in Q4 2020 with the demand for industrial and logistics space 17% reaching 228,196 sq m (+203% q-o-q, +137% y-o-y). The main reason behind the 49% E-commerce reported downturn in 2020 is a significant drop in demand in Q2 2020 (-30% q-o-q, - 185% y-o-y) as the effect of the national lockdown due to the COVID-19 pandemic that 4% Retail did not fully materialize in the first quarter. 16% Others 800 000 60% 600 000 40% Source: CBRE Research 400 000 20% RENTS 200 000 0 0% The achievable headline rent across the country range between €3.20 – €4.90/sq 2015 2016 2017 2018 2019 2020 m/month, moreover, achievable headline rent in production facilities is higher by up to € 0.5 – 1.0 per sq m. Thanks to increasing big-box demand we do expect a slight decrease Total Leasing Activity Renegotiation % in average rent caused by more aggressive conditions for these projects as well as scale. Source: CBRE Research The typical lease incentives are 1 month for 1-year of the lease term. Total leasing activity in 2020 was spread among four regions of Slovakia. 342,000 square meters was leased in GBA as the most dominant region in terms of leasing activity OUTLOOK historically. GBA dominates with a share of 70% of total leasing activity when almost half We expect the demand will be traditionally driven by e-commerce, the automotive sector, of this amount of square meters were transacted in Senec. Western Slovakia represents and logistics. There is quite a significant pipeline of projects under development and the fastest-growing region, reached 22% of total leasing activity in 2020, which presents mainly thanks to good preparation of the parks for big-box demands, as well as raising a almost 110,000 square meters transacted. Central and Eastern Slovakia reached 8 % of competitive environment, we might see a slight decrease in average rent throughout total leasing activity, while we identified only 11 transactions out of 74 in total in 2020. 2021. Despite several projects being developed on a speculative basis, we do not expect 3PL providers dominated in terms of tenant category with almost 50% on the total the vacancy rate to grow dramatically, since the activity from the tenant’s side seems to volume of square meters leased. be there from early this year.

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0 5 R E GAIN RETAIL 15 DESPITE THE PANDEMIC, CONSTRUCTION OF NEW PROJECTS CONTINUES

RETAIL MARKET OVERVIEW SATURATION Slovakia comprised more than 2.35 million sq m including shopping centers (SC) and There have been limited new completions in 2020, increasing the saturation of each city retail parks (RP). Shopping centers represent over 1.54 million square meters, while only marginally. We expect major changes in terms of the retail saturation of cities in late rapidly growing retail parks provide 0,81 million square meters. Almost 700,000 square 2021 with the opening of Stanica Nivy in Bratislava. The highest increase occurred in meters of retail space is located in the Bratislava region, which represents 29% of the Prešov with the opening of Novum Prešov (27,000 square meters). Another change will total space. On the other side, the Banská Bystrica region provides only 7% of total retail bring the extension of Eperia Prešov (7,500 square meters). space. The high saturation rate itself doesn’t necessarily mean that there is no room for additional retail schemes. It rather underscores the importance of future, but also TOTAL STOCK AND SATURATION (SQ M PER 1,000 INHABITANTS) existing, developments to be focusing on specific target groups and have a clear strategy. 2 500 000 480 460 2 000 000 440 SATURATION BY REGIONS (SQUARE METERS PER 1,000 INHABITANTS) 420 1941 1 500 000 400 1 520 1 546 1 402 1463 1 000 000 380 1 230 2017 2018 2019 2020 2021 (f) 2022 (f) 898 Total stock Saturation 830 Source: CBRE Research

UNDER CONSTRUCTION Nitra Bratislava Košice Banská Prešov Trenčín Trnava Žilina The largest retail scheme under construction is currently Stanica Nivy in Bratislava with Bystrica 70,000 square meters. This project is scheduled to open its doors in Q3 2021. The Source: CBRE Research second phase of Eurovea in Bratislava is currently under construction after it obtained a RENTAL LEVELS building permit in 2019. The extension will include a 25,000 square meters shopping Due to the recent pandemic situation, we don´t expect any retail rental growth in the center and the completion is scheduled for 2022. The largest regional retail scheme short-term. Average rental levels in the regional shopping centers oscillate around 19€/ under construction is Promenada Nitra with 25,000 square meters of retail space with per square meter, according to the shopping center index; a report summarizing the expected delivery in 2022. Several other schemes are in various stages of preparation performance of regional shopping centers published annually by CBRE. with certain pre-lease and permitting process.

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BRATISLAVA PRIME RENT DEVELOPMENT (€/SQ M/MONTH) FOOTFALL AND TURNOVER DEVELOPMENT 65 65 65 60 55 55 Shopping Centres Turnover Retail Parks Turnover 120% Shopping Centres Footfall Retail Parks Footfall

2015 2016 2017 2018 2019 2020 100% Source: CBRE Research 80%

BREAKDOWN OF TENANTS IN SLOVAKIAN SHOPPING CENTRES 60% 2% FASHION 5% 40% 5% SPECIALITY RETAIL 6% LEISURE 35% SERVICES 20% 7% FOOD & BEVERAGE 0% 8% ACCESSORIES SPORTS 9% ELECTRONICS 12% 10% FOOD HOUSEHOLD & FURNITURE Source: CBRE Research, based on data from retail schemes managed by CBRE, totalling Source: CBRE Research, based on data from retail schemes managed by CBRE, totalling 112,800 square meters of GLA 112,800 square meters of GLA OUTLOOK FOOTFALL & TURNOVERS Expectations from the start of the pandemic have been exceeded and retail segment After y-o-y increases in footfall and turnover figures in January and February, the performance has been rising since April. The bankruptcy of some stores was the result of following months revealed a significant drop in volumes. The most affected month was pre-pandemic problems. We will see some bankruptcies in gastro segment especially on April with an 80% decrease in footfall and even an 87% decrease in turnovers compared high street. Costs have increased for retailers due to the expansion of storage space and to the same month of 2019. After reopening, average footfall and turnover accounted the penetration towards the online environment. The sale of older collections was for 40% of the figures recorded in May 2019. The best performing month in terms of accompanied by large discounts. In 2021, we expect the arrival of new brands, mainly in footfall and turnovers was August, when turnovers reached a 2% y-o-y increase and the specialty retail sector. We register new fresh concepts, which may replace empty footfall reached only a 7% decrease in y-o-y comparison. Activity in retail schemes was spaces. We are expecting that some of the big international chains of the retailers will halted due to the second wave of pandemic and also due to strict government restrictions reduce the number of their store. This will cause vacancy increase, rent might drop but lasting till the end of the year. just in a short term period.

CBRE Slovakia Tomas Hegedus Managing Director [email protected]

Services and Advisory Lubor Prochazka Oliver Galata Michal Cerulik Branislav Golan Head of A&T & Head of Office Agency Head of Industrial & Logistics Head of Retail Agency Investment Properties [email protected] [email protected] [email protected] [email protected]

Research Natalia Barter Peter Slovak Director, Head of Client Strategy Research Analyst [email protected] [email protected]

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CBRE RESEARCH

This report was prepared by the CBRE Slovakia Research Team, which forms part of CBRE Research –a network of preeminent researchers who collaborate to provide real estate market research and econometric forecasting to real estate investors and occupiers around the globe.

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