The long and winding road

The Serbian real estate market’s 15 minutes of fame are not over. The global crisis is clearly affecting the country’s progress, but the long-term figures still look promising. We are here to stay, the majority of the international players declare. Here is why

Mladen Petrov

At a business mixer at the Warsaw Hyatt Regency hotel, three businessmen in sharp suits, with pints of Guinness in their hands – it’s St Patrick’s day after all – are talking business. “I’ve just returned from Serbia,” seems to be the perfect conversation opener. The two most used words during the conversation are growth and opportunities. Someone mumbles for a second about the red-tape in Serbia. Sounds promising, is the general conclusion. But do these words – growth and opportunities – still  accurately describe the Serbia of April 2009? It seems that, despite the global downturn, Serbia, after the bitter wars of the 1990s, is hungry for more. And it is now dreaming of turning into a success story.

The key for Serbia, as the Belgrade-based journalist Colin Graham reports, is to ensure that political stability continues. In mid-March, one of the country’s main opposition parties said that it would begin an election campaign, even though the current government was only formed in July last year. Although President Boris Tadić has said that fresh elections are not an option at the moment, given the need for Serbia to remain steady in turbulent, international market conditions, the mere suggestion of political upheaval will lead investors and bodies such as the European Union to cast a wary eye in Belgrade’s direction. But as things stand, the property market looks to benefit from an administration that seems determined to secure EU membership.

Promising numbers

Serbia is considered to be a good investment destination thanks to its favourable demographics, strategic positioning for markets in Europe, Asia, and the Middle East, and attractive yields. “Annual gross investment yields range dfrom 8 pct for shopping centres, 9 pct for offices and 12 pct for industrial in Q4 2008. European investors have ranked Serbia among the top 25 investment opportunities globally,” claims Dragan Radulovic, managing director of CB Richard Ellis in Serbia.

The road to success, however, is long and winding, but in 2008 Serbia achieved further growth. In 2008, Serbian GDP rose by 6.1 pct, after recording a remarkable 7.5 pct growth in 2007. The positive GDP growth trend started in 2000, since when the average annual GDP growth has been 5.5 pct. The country has also been enjoying an increasing amount of foreign direct investment, of which the real estate sector accounts for almost 20 pct. On the list of top twenty investors in Serbia for the last six years there are five from the real estate sector. The Slovenian-based Mercator, Africa Israel Group, Globe Trade Centre and Engel Group of Israel and Metro Cash 
& Carry have together invested almost EUR 1 bln in real estate projects. The investment volume is most likely to increase, with other international players, such as Plaza Centers, having already joined the competition with ambitious portfolios of projects.

According to data prepared by the Forton International advisory firm, in the first three quarters of 2008 the FDI inflow came to EUR 1.6 bln, with 18 pct of that inflow going into real estate. The other good news in 2008 from Serbia was the 17.5 pct increase in salaries (the national average monthly salary now amounts to EUR 380) and inflation, which was kept under the expected level of 7.8 pct. In fact, the only serious disappointment was that the high unemployment rate that remained unchanged at 14 pct. For 2009, the government has made GDP growth of 3.5 pct and 8 pct inflation two of its key targets. Macro-economic analysts, however, are much more sceptical than the government, with some believing that GDP growth this year might even go down to zero.

Reality bites

Given the turbulent times, however, some corrections to the market should be expected to occur. In the opinion of Miljan Pavlovic, consulting services manager at the Belgrade office of Forton International, two rather difficult years lie in store for the Serbian real estate market. “In the current situation many investors will postpone their development plans, as the securing of financing now represents the biggest single obstacle for developers. Many of them are actually trying to exit and sell the projects, but asking and expected prices and yields are usually wildly divergent.”
 The recent market news seems to confirm Mr. Pavlović’s words. In February, Africa-Israel Investments, the developer of Airport City – Belgrade’s largest office park (73,000 sqm) – announced that it is negotiating the sale of its flagship project to a Greek-based investment fund for a reported EUR 150 mln. The company, however, is not putting up for sale the remaining, yet unused, plots next to the project, reserving them for future development.

Retail expectations

Looking at the numbers might lead one to conclude that the two booming real estate sectors are retail and offices. Analysts agree that Serbia still has a long way to go, even when compared to its emerging neighbours. While in Zagreb the stock of modern retail space per 1,000 inhabitants stands at 200 sqm (according to CBRE data), in Belgrade, a city of over 1.6 mln inhabitants, the ratio is way below 100 sqm. According to the data of the Statistical Office of the Republic of Serbia, the turnover of retail trade has undergone a steady growth, but no new retail space was delivered to the market in the second half of 2008. Existing schemes, therefore, have zero vacancy being recorded. Over the year no change in prime rents took place, eventually standing at EUR 40-60 sqm per month.

The Ušće shopping centre (50,000 sqm GLA) was opened at the end of March in New Belgrade. This EUR 150 mln investment is now the biggest mall in the city. The pipeline for Belgrade also includes Visnjica Plaza (48,000 sqm GLA, Plaza Centers, scheduled for completion in 2010), Delta Holding’s Delta Planet shopping centre (100,000 sqm, 2011) and a 52,000 sqm project in the Ada Huja district, which is to be carried out by the BRIF strategic investment fund. Plaza Centers will also be developing Belgrade Plaza – a mixed-use, 100,000 sqm project, which will feature a shopping and entertainment centre, a luxury hotel and an office tower. High streets in the capital remain attractive for retailers. The reconstruction of the Robne Kuće department stores will provide over 65,000 sqm of retail space for lease. The rental rates along Belgrade’s high streets, with the most famous of these being Kralja Milana and Knez Mihajlova, remain stable at around EUR 100-200 per sqm. 

Outside Belgrade, developers and retailers are looking at Kraguevac, Niš, Novi Sad and Subotica. Currently, there are big shopping centre developments underway in Kragujevac (Kraguevac Plaza by Plaza Centers, 70,000 sqm, completion in 2010), Subotica (60,000 sqm by GTC by 2010) and Novi Sad (32,000 sqm by Immoeast to