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MARKET OVERVIEW REPORT BOSNIA AND HERZEGOVINA 2017 OVERVIEW & 2018 FORECAST Summary Recent Trends Market Prognosis Hotel, retail and industrial/logistics market recorded highest investment We see retail and HTL as the most active sectors volumes in 2017. No new significant developments were delivered to in terms of development volumes in the coming the office market in the past year, but the investment activity was the year. Road and air infrastructure expansion in highest in this segment. Banks have continued freeing up capital and pipeline will attract new investments, especially in cleaning their balance sheets by disposing of NPL portfolios secured HTL and industrial/logistics market, while private by mortgages on properties of low quality, but a large amount of consumption increase should encourage retail industrial/logistics and office buildings are still locked as distressed development in smaller BiH cities. assets. Economic Overview Summary & Prognosis The economy of Bosnia and Herzegovina (BiH) recorded a 3.0% yoy GDP growth in Q4 2017 compared to the same quarter of the previous Economic Growth (GDP, %) year. The slightly faster GDP growth is based on revival of exports in steel, energy and other heavy industries, as well as in growing sectors such as tourism. On the other hand, the economy in BiH is heavily 3,2 dependent on external funding for the chronic budget and account deficits. 3,0 3,0 3,0 3,0 The inflation rate in Bosnia and Herzegovina was recorded at 0.00% in December 2017. However, it is projected to grow at a stable 2.20% 2,9 rate by 2020. The number of employed persons was 790k in January 2018 which is a 3.1% yoy growth, while number of unemployed persons was recorded at 475k in January 2018 and or a 7.0% yoy drop. Nevertheless, according to Labour Force Survey, number of unemployed persons is much lower, estimated at 211k in 2017. The Unemployment rate (% of active reason for such discrepancy is grey economy and low transparency on population) labour market. 43,2 Moody’s credit rating for BiH stands at B3 with stable outlook for three consecutive Reports since July 2012. Standard & Poor’s credit rating for BiH hasn’t changed for six years and stands at B with stable 41,7 41,6 outlook. The mentioned credit ratings are 5 grades below investment 41,3 41 level. Fitch credit rating agency doesn’t cover BiH. In general, a credit 40,6 rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Bosnia and Herzegovina thus having a big impact on the country's borrowing costs. BiH growth forecast is set at 3.0% trend by 2019 due to rising exports, low inflationary pressure and increase in private consumption. Inernational Monetary Fund recently issued a First Review of Inflation (CPI, %) Extended Fund Facility Arrangement with BiH in which it was concluded that: “BiH has made progress in lowering internal and external imbalances and enhancing growth potential.” 2,4 2,2 2,2 Further opportunities for improvement which should be solved in order 1,8 to stabilize GDP growth in the long run are: political fragility based on -1,0 ethnic tensions, structural weaknesses and bureaucratic barriers. -0,4 Average gross earnings (€/month) Private consumption (% yoy) 674 5,8 664 658 659 658 658 644 621 3,0 3,2 3,0 2,8 1,5 2010 2011 2012 2013 2014 2015 2016 2017 Source: Agency for statistics of Bosnia and Herzegovina Source: Colliers International on Oxford Economics 2 Research and forecast report | 2017 | Bosnia and Herzegovina | Colliers International Office Market Supply & Demand Pipeline Office stock in BiH is mostly located in Sarajevo, the capital of BiH, Three office buildings are currently in pipeline, all where majority of international companies have their headquarters. of them brownfield projects which were not in use Significant stock is also located in Banja Luka, the capital of Republika since construction: Srpska entity and in Zenica, Tuzla, Bijeljina and Mostar, cities with more than 100,000 residents. Government of Federation of Bosnia and Herzegovina acquired an 8,829 sq m unfinished Current office class ‘A’ and class ‘B’ stock in Sarajevo amounts to office building in Mostar for €2.97m or €336/sq around 120,000 m² GLA (gross leasable area). Of this, class ‘A’ office m from Gospodarska Banka Mostar. The space accounts for 67% and class ‘B’ and ‘B+’ account for the construction of the building started 30 years remaining 33%. ago, but only to the level of concrete shell. The demand for office buildings comes primarily from numerous Additional €4.86m is required for the completion government institutions due to complex BiH government system, of the building which will house four banks, insurance companies and other global corporations present in Government Ministries. BiH. IT and domestic start-up companies have recently started to Office part (7,000 sq m) of Sarajevo City Centar record growth in demand structure. remains in pipeline in 2018 as well. The There is a lack of premises with floor area above 1,000 sq m. construction of 74 m tower was finished in Therefore, the companies such as banks and government offices, 2009, but the office part is still in “roh-bau” which have a need for large office space, decide to buy or build their phase, while Swissotel will start operating the own buildings. hotel part in H1 2018. Two such projects were developed in 2017: Kumrovec, a 15,800 sq m GBA, 16 floor office tower in Čengić Vila neighbourhood in Sarajevo Koncern Agram, an insurance company opened an office building in was acquired by Syrian entrepreneur in Banja Luka, capital of Republika Srpska in June 2017. Investment September 2017. The office building in the 20,900 sq m building with 11 above ground and 3 constructed in 2008, but was never used. The underground floors was worth €28m or €1,340/sq m. Total office new owner invested €4m and is announced to NLA is 9,500 sq m. open 10,000 sq m of office space in Q2 2018. Union Banka, the only government owned commercial bank, The building was rebranded and named Capital acquired a 5,410 sq m office building from Hidrogradnja in tower. Skenderija, downtown Sarajevo neighbourhood in April 2016. The distressed asset deal was worth €5.6m or €1,034/sq m. The Sarajevo office market key figures 2017 building was renovated to a B class office building and the bank Total stock in m2 120,000 m² started to use it as its headquarters from January 2018. "A" class buildings stock 80,000 m² Rents & Vacancy rate "B" class buildings stock 40,000 m² Vacancy <15% The monthly rents range between 12 and 18 EUR/m²/month for class Average Monthly Rent A class €12-€18/m2 ‘A’ office space and between 9 and 13 EUR/m²/month for class ‘B’ 2 office premises. The monthly rent in Sarajevo suburban areas ranges Average Monthly Rent B class €9-€13/m 2 between 5 and 9 EUR/m /month. The rents haven’t changed Source: Colliers International compared to 2016. Total average vacancy of Class ‘A’ buildings ranges between 10% and Pipeline office project: Capital Tower 20%. Estimated average vacancy in ‘B’ class buildings stands between 5% and 15%. Prognosis Both rental levels and vacancy rate are expected to remain stable during the next year. We expect that Middle East and Turkish investors as well as government institutions will continue with investment and development activities. Source: Klix.ba 3 Research and forecast report | 2017 | Bosnia and Herzegovina | Colliers International Retail Market Supply & Demand Improved macroeconomic indicators such as GDP and wage growth Shopping centre stock have positively affected the retail sector of BIH and Sarajevo. 150.000 1.000 However, high youth unemployment (which forces emigration) and political uncertainty are causes for concern. 120.000 800 BiH retail market consists of contemporary shopping malls with 90.000 600 international brands, located in bigger cities and local owner-occupied 60.000 400 department stores that are a combination of F&B, fashion, furniture and DIY stores, located in both bigger and smaller cities. 30.000 200 Food retailer market was very active in 2017. Konzum, Croatian 0 0 retailer and the second biggest food retailer in BiH left the market and was replaced by Mercator. Both retailers are a part of Agrokor concern which has entered a restructuring process after becoming insolvent in April 2017. Meanwhile, Bingo, largest BiH food retailer, has further GBA (m²) Shopping Centre stock (m²/capita) strengthened its leading position and opened several big-box stores with solid pipeline ahead. The remaining top retailers such as Robot Source: Colliers International have also increased their turnover and profits as a result of continued growth trend of private consumption. Rents & Vacancy rate Year 2017 was relatively quiet with no new shopping mall The monthly weighted average rent ranges from developments, while big-box market saw several new developments in 2 secondary and tertiary cities. €13 to €20 per m depending on each modern mall. In addition to base rent some tenants Retail developments in 2017 (usually the anchor tenants) pay the turnover rent. Name Investor, Country City Type GBA (m²) Average vacancy rate in the modern shopping Bingo Bingo, BiH Mostar big-box/retail park 14,460 malls is around 10%. Vacancy rate in other malls ETNA Edo-Slad, BiH Gračanica department store 12,000 is much higher. Belamionix Belamionix, BiH Gračanica big-box 6,000 Prime shopping malls in BiH Robot Robot, BiH Velika Kladuša big-box 6,000 Monthly rent/m² per category (range) Bingo Bingo, BiH Donji Vakuf big-box 5,000 Sports source: Colliers International Restaurants and caffe Paper and Book Pipeline Leather and Shoes Household and Electro On the other hand, pipeline is relatively strong with 150,000 sq m Food and Tobacco under construction or in concept phase: Sarajevo Big Box, Termalna Fashion Rivijera and BBI Galerija.