1 Research H1 2020 | Croatia | and Forecast Report Colliers | International CROATIA MARKET OVERVIEW H1 | 2020 RESEARCH AND FORECAST REPORT 2 CONTENT | Croatia Croatia | H1 2020 Summary 3 Economic Overview 4 Office Market 6 Forecast Report Colliers | International Retail Market 8 Research and Industrial and Logistics Market 10 HTL Market 12 Investment Market 14 Residential Market 16 About Colliers 18 3 Research SUMMARY H1 2020 Recent Trends Market Forecast Croatia | and To counter the spread of COVID-19, major After a sharp drop in 2020, the economy is Forecast Report Colliers | International containment measures were introduced in expected to start recovering in 2021, with Croatia, as in other parts of Europe and the GDP growth of around 7.5%, according to world. Real GDP is expected to contract the European Commission. sharply in 2020 (close to 11%) and to Investors' demand is expected to remain partially recover in 2021, leaving the output strong for prime properties, although some below its pre-crisis level. investors are looking for distressed In H1 2020, commercial real estate opportunities. Pricing is expected to be investment transaction volume exceeded mostly affected by the changes in the €210 million, with the majority of deals underlying performance of the properties. done in Q1 2020. Yields remained at the Class A office buildings should be able to same level as in 2019. ride out a short and sharp economic shock Although many companies shifted towards provided there is a strong recovery in 2021. remote work amid lockdown, average rents Due to limited pipeline, the vacancy rate is for Class A offices in Zagreb remained expected to remain stable stable due to low vacancy and limited supply. Expansion in the retail sector is mostly expected from food retailers. A shift While shopping centres and high street towards online shopping will continue. were mostly affected by preventive measures, grocery-based schemes proved Expansion in the industrial/ logistics sector more resilient. is expected to continue. With increased Growth of the industrial/ logistic sector, the interest and activity from developers, the least developed CRE sector in Croatia, expansion of modern stock is expected in continued with several new openings. the next years, especially with new build- Demand is still strong, as most of the stock to-suit (BTS) projects. is owner-occupied and outdated. The Although a significant drop is expected, a strongest demand comes from companies tourism summer season of 2020 might turn in the grocery, omnichannel and pharma better than expected at the start of the related product fields. pandemic. A strong rebound is expected in As the measures introduced to prevent the 2021, and a return to the 2019 level is pandemic started to loosen in May 2020 forecasted in 2022 or the latest in 2023. and tourist activity picked-up, the major The residential real estate market demand hotel operators began to open their will be affected by the state of the capacities partially. economy, primarily employment level and Number of apartment transactions wages. There is strong interest from foreign decreased in H1 2020 for 23% compared developers, especially for large-scale to the same period of the year before, while development projects in Zagreb. asking prices in major cities remained at 2019 levels or slightly increased. 4 ECONOMIC OVERVIEW Croatia | Summary Forecast When the COVID-19 pandemic reached After sharp drop in 2020, economy is H1 2020 Croatia, the economy was in a more expected to start recovery in 2021. resilient position than it had been at the European Commission forecasts GDP drop onset of the 2008 global financial crisis. of 10.8% in 2020, followed by GDP growth The estimate from the Croatian Bureau of of 7.5% in 2021. Statistics shows that the quarterly GDP in Forecast Report Colliers | International Domestic demand is expected to be the real terms increased by 0.4% in the first main driver of both the drop in GDP in the quarter of 2020, as compared to the same first half of 2020 and its recovery thereafter. quarter of 2019. Private consumption should recover Research and The Croatian government has tried to quickly with the reopening of the economy, mitigate the negative economic impact as large scale layoffs appear to have been from COVID-19 by the anti-coronavirus slowed down, thanks to the government's package to support the economy and wage and employment support measures. citizens estimated at around 10% of The government has made progress on its Croatian GDP. plans for euro adoption. It formally entered The seasonally adjusted unemployment the exchange rate mechanism ERM-2 and rate had been trending down prior to the should now maintain a stable currency. coronavirus outbreak, but this pattern has Entrance into Eurozone is expected from now gone into reverse, with the 2023. unemployment rate rising to 9.1% in June Inflation at the start of 2020 was at 2.0%, 2020 (compared to 6.9% in February pushed up by increases in the cost of 2020). housing and transport fuel. But with the According to the Croatian Bureau of drastic fall in oil prices and the weak Statistics, the average monthly net salary in demand outlook, Oxford Economics May 2020 amounted to 6,655 HRK (€870), expects inflation in Croatia to average 0.6% which represented a real increase of 0.4% in 2020 and 0.9% in 2021. over the month before. The Croatian economy remains burdened Major credit ratings for Croatia stand at: with high taxes. However, the government Fitch BBB- (stable outlook), Standard & has announced a new round of tax Poor's BBB- (stable outlook), Moody's Ba2 reforms in 2021. (positive outlook). Therefore, Croatia's rating is seen as investment-grade by two of three major credit rating agencies. Croatia - Credit rating (as of July 2020) Agency S&P Mood'y Fitch Rating BBB- Ba2 BBB- Outlook stable positive stable Source: Trading Economics 5 Research and H1 2020 Figure 1: 5,0% | Croatia ECONOMIC GROWTH (GDP, 4,0% Forecast Report Colliers | International ann. var. %) 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% Figure 2: 130 RETAIL TRADE TURNOVER – 125 SEASONALLY AND WORKING- 120 DAY ADJUSTED INDICES (2015=100) 115 110 105 100 95 90 85 Nominal Real Figure 3: 25,0% UNEMPLOYMENT RATE IN CROATIA 20,0% 15,0% 10,0% 5,0% 0,0% Sources: Figure 1: Croatian Bureau of Statistics | Figure 2: Croatian Bureau of Statistics | Figure 3: Croatian Bureau of Statistics 6 OFFICE MARKET Croatia | Supply & Demand Rents and Vacancy Rate The office sector was looking positive at the The lower availability of office spaces in H1 2020 start of 2020. However, in H1 2020 Covid- Zagreb was apparent even before the 19 outbreak and the Zagreb earthquake earthquake. However, it exacerbated the disrupted the market. impending lack of quality Class A offices (vacancy less than 5%), especially those As a result of Covid-19, many occupiers larger than 1,000 m2. Forecast Report Colliers | International have been negotiating rent deductions or rent deferments. Some landlords accepted The average vacancy rate remained at the extremity of the situation and granted below 5% in H1 2020, while the average short-term rent deferment or deductions in Class A net effective office rent remained Research and order to preserve occupier relationships. at €12.5/m² in Zagreb. We expect that the vacancy rate and average rents will remain Exposure was mostly limited to properties stable until new large-scale projects are dependent on the distressed companies delivered to the market. (e.g., airlines, tour/ events operators, tourism, some companies from Class A office buildings should be able to professional services, etc.), whereas those ride out a short and sharp economic shock with a strong IT, technical, government provided there is a strong recovery in 2021. bodies, medical/ pharmaceutical have Pipeline proved to be more resilient. The majority of projects under construction During the mandated restrictions of travel are developed by local investors. and gathering, many companies had their The most significant new office building employees working remotely (some still close to completion in H1 2020 was do). This brought a change of workplace Matrix B in Zagreb Business District East. solution paradigm for companies which Matrix B has 10,700 m2 lettable area, is may not require as much office space as developed by GTC and will be a second previously envisioned if they decide to building in the Matrix Office Park. continue working remotely. Demand for flexible office is therefore set to increase. Dalmatia Tower in Split is nearly completed and will by the end of 2020 On March 22nd, 2020, Zagreb was hit by become the tallest building in Croatia with the most powerful earthquake in its recent 27 floors. Office component will have history, with a magnitude of 5.5 on the approx. 30,000 m² of GFA. Richter scale. Several historic buildings in Zagreb city center were damaged and KFK Tehnika started the development of many tenants were unable to work in their new office scheme of approx. 15,600 m² offices due to structural damages to their GFA in Buzin, south Zagreb, along the respective office buildings. This created a Zagreb bypass road. The property will temporary demand hike for office premises house the Nova TV HQ and studios. in modern Class A office buildings. Croatian IT Company Infobip is developing their new campus building in Sv. Klara, south Zagreb. The Campus will have approx. 10,500 m² office area and is expected to be completed in late 2020. 7 Research and H1 2020 Figure 4: ZAGREB OFFICE