Survey findings published today by the real estate firm Colliers International highlight that economic problems within the Eurozone (EZ) continue to be felt in Eastern Europe, but the impact on local office markets differs by sub-region.
Damian Harrington, Regional Director of Research for Eastern Europe, Colliers International commented:
- Changes to economic growth are always an accurate indication of the future direction of take-up within a market. If GDP growth rates decline, history shows us take-up volumes also fall in line with these changes but there is a time lag of between 6-12 months. So with steady GDP growth forecast for Russia in 2013, we expect a continuation of robust take-up volumes over the year ahead in Moscow and St Petersburg. Whereas in Warsaw, despite the Polish economy forecast to post robust GDP growth of around 2.5% in 2013, this represents a year-on-year decline and we expect lower take-up in the latter half of the year. Combined with a strong increase in the development pipeline, a short-term supply spike is likely, keeping Warsaw vacancy rates on their recent upward path. This could see prime rents in the market fall toward the end of the year.
Whilst CEE markets could see a decline in take-up activity in the latter half of 2013, there is one additional factor which could significantly impact these markets looking further forward to 2014. Eastern European office markets operate on a five year lease cycle, and the last three years of total take-up strongly reflect leasing volumes from their respective period five years earlier. If 2009 take-up is an accurate precursor to 2014, we could see a 33% fall in take-up activity in 2014, if economies do not rebound.
The most probable impact, particularly in markets with active pipelines that have been strongly pre-let, is increased occupational pressure on lower quality existing stock. Given the growing preference for modern and functional office space, existing buildings that are no longer fit for purpose, especially those in areas of high vacancy, will become surplus to requirements unless significant refurbishment takes place. How markets perform, will depend on how well the future pipeline is managed.”
Key findings include:
Central and Eastern European economic growth declining - Over 2012, the Budapest office market showed the only downward rental movement in the CEE region with a fall of 10% over the year. Net effective rents in Bratislava and Prague remained largely flat over the year, as they have done for the past three years. Only Poland witnessed an increase in net effective rents, despite an increase in vacancy over the year which resulted from a significant increase in completions.
Despite ambitions for a return to strong growth, economic growth is forecast to decline in Central and Eastern Europe (CEE) during 2013. Poland, the economic powerhouse of CEE in recent years, is likely to see GDP growth halve to around 2.5%. GDP growth is forecast to fall to around 1.5% in Romania and Slovakia, and remain flat in the Czech Republic and Hungary. Rents will come under downward pressure in all markets over the year ahead, but to varying degrees. Warsaw is the market most likely to see a decline in prime net effective rents. Bucharest, Budapest and Bratislava are already at or close to the bottom of their rent curves so should not see too much of an impact, despite high vacancy in both Bucharest and Budapest. History suggests Prague rents should remain stable unless there is a significant fall in demand.
Improving conditions in South East Europe - Further afield in the markets of South Eastern Europe (SEE), economies look set to bounce back from flat to negative 2012. Croatia, Serbia and Bulgaria are all set to benefit from an upturn in economic growth in 2013, with positive GDP growth of 1-3% forecast for the year ahead. Things could get even better for Croatia if the country has a successful EU accession. This should result in stable vacancy and rental rates although short-term stock adjustments in Zagreb and Tirana may see vacancy rise, putting downward pressure on prime rents. Greece, however, is set to suffer another tough year as the economy continues to restructure.
Russia & Ukraine maintain positive growth outlook - In Russia, the story continues to be positive with GDP growth of 3.5% forecast for the year ahead, matching the rate of growth in 2012. The two Russian cities of Moscow and St Petersburg are the most likely to see this translate into downward vacancy as take-up stays ahead of new supply, although rental growth is most likely in Moscow in 2013. A short-term spike in new supply in Kyiv, however, is likely to lead to a short-term increase in vacancy, putting downward pressure on rents.