A glass half-full

We have now entered the recovery stage, with new signs of life emerging across The CEE region. For the office market this could mean the welcome return of tenants and new investment

What do the Slovenian real estate market, green architecture and the credit crunch have in common? These topics, in addition to many others, were discussed at Eurobuild CEE’s Central and Eastern Europe Office Market Conference, which took place on February 24th in the InterContinental Hotel in Warsaw. The fact that Lufthansa’s workforce was on strike did not prevent our German guests from coming to the conference, but their presence was another clear sign of the eagerly awaited recovery.

However, as the conference’s keynote speaker, the International Monetary Fund’s senior CEE regional representative based in Warsaw Mark Allen pointed out: “Yes, there is moderate growth to come, but anything could happen. For example, in the CEE region, despite the overall trend, unemployment is still rising,” Mr Allen noted. “Nevertheless, we are also seeing positive signs. Inflation is under control, bank confidence is coming back, equity markets are gaining strength.” The CEE region, despite all the question marks surrounding it, is still improving, with Hungary expecting to see growth as soon as 2011 after a few difficult years in a row. As for the Baltic states, “they are back to the 2003 level. Fiscal discipline is critical. The recovery in this part of the world will be dependent on the recovery in Western Europe, which remains slow,” Mark Allen concluded.

Jos Tromp and Chris Millen of CBRE, Daniel Harris, MGPA’s head for the CEE region, Markus J. Leininger, head of CEE corporate banking at EuroHypo AG, and Otis Spencer, executive vice president and director of portfolio management at Heitman, endeavoured to identify what will be hot on the investment market in the CEE region this year. In 2009, investment activity in the region was down 50 pct on the historical average to EUR 2.5 bln. And what about 2010? At the moment investors are currently mainly focusing on Moscow, Warsaw and Prague. Of course, investors and banks are not interested in anything that is not a prime location. According to Jos Tromp, CBRE’s head of CEE research and consulting, Central Europe is one or two quarters behind western markets, while the SEE markets would need more time to recover. “It’s time to start looking further afield, but the time to act is still a long way off,” declared Mr Leininger.

For his bank further means Southern and Eastern Europe, a region represented by Andrew Peirson, managing director of King Sturge Bulgaria, and Erik Mohorović, managing director of Verdispar International SEE in Croatia. For Bulgaria, in addition to over-supply, the next problem is the poor quality of the project. “International tenants are forced to occupy buildings that do not meet their requirements. The market still hasn’t realized that less is more and that over-the-top design won’t do the trick,” comments Andrew Peirson. 
The vacancy rate in Sofia is expected to reach 20 pct by the end of 2010 – a figure unknown on the Zagreb office market, which enjoys the much more modest vacancy rate of 3 pct. “Office stock remains low and basically there is no over-supply risk. Banks, on the other hand, remain restrictive, which might help the market to select the best projects,” adds Erik Mohorović.

Meanwhile, the Warsaw office market is dealing with issues of its own. Does the increasing stock of quality office space in the major cities of Poland pose a threat for Warsaw? Not really, felt Mathieu Giguere, head of capital markets, at Cushman & Wakefield, Nicklas Lindberg, managing director of Skanska Property Poland, Waldemar Lesiak, director of the office and hotel projects department of Echo Investment, and Maciej Brożek, leasing manager of Torus. “The rush didn’t come to them so rapidly, so these markets had time to adjust and attract experienced developers. Healthy market fundamentals are all in place in such locations, with Łódź probably being the only challenging market,” explained Mathieu Giguere. According to the panellists, the big cities provide a good opportunity to build portfolios and due to their lower competition can still offer good rents, often comparable to Warsaw’s non-CBD rents. However, the general feeling was that these markets are still “harder to fill up”.

And yet, there is one promising type of tenant who has not done with expanding. Kraków and Wrocław have particularly benefited from BPO centres. Regional cities are more attractive for such centres than Warsaw, confirmed the participants of the panel entitled “The Bargaining Game”. The discussion, moderated by Anna Duchnowska of Polonia Property Funds,  brought together tenants such as Beata Daszyńska-Muzyczka of BZ WBK Bank, Paweł Buchman of Telekomunikacja Polska, Katarzyna Peto-Ziemkiewicz of Capgemini Polska, property managers like Virginie De Baere of Jones Lang LaSalle, and developers in the form of Karimpol’s Andrzej Lany. These tenants were of the feeling that when it comes to rents, the bottom has yet to be hit, and have asked developers for greater transparency when it comes to rents and greater savings.

Although the end of February is usually a time of bad weather, the participants of the final discussion – Thomas Beyerle, head of global research for Aberdeen Immobilien, Sarolta Csikos, head of office leasing at TriGranit, Brian Burgess, managing director of Savills, and Reinhard Schertler, the owner of S+B Gruppe – preferred to talk about the sun. Is it finally rising? Perhaps. According to Thomas Beyerle, Romania’s recovery still has a long way to go, while Poland is showing all the positive signs. “It’s a good time to build as long as you can afford it,” added Reinhard Schertler. TriGranit also remains optimistic: “We avoided the bubble on the office market in Budapest and things are starting to improve,” reported Sarolta Csikos. “If we weren’t optimistic, why would we enter such exotic markets as Slovenia?”

For the less optimistic present, after the conference there was at least a glass of wine waiting to make them feel a little better. ν (MP)