Joining the club

With the introduction of the euro next year, Slovakia remains confident about the future. The figures look promising, but the stormy situation on the world’s markets gives pause for thought. How dangerous for this small country is the road that lies ahead?

Mladen Petrov

T

hey say that no news is good news. This seems to be true in the case of Slovakia, which so far has not joined the list of troubled economies, such as Estonia, Latvia, Hungary and Bulgaria. From the evidence of governmental assurances and the macroeconomic figures it is highly likely that Slovakia will also remain fairly stable throughout 2009. This, however, does not mean that the country, and its real estate market, will not feel to some extent any negative effects of the global crisis.

The year of the euro

This year was a very good one for Slovakia, which had one of the strongest growths in GDP in the EU. The Slovak economy grew 7.1 pct y-o-y in Q3 2008, slowing slightly from 7.6 pct in the previous quarter. For the year as a whole, GDP growth is most likely to come to around 8 pct, less than the 2007 record of 10.4 pct. 
 Slovakia’s impending entrance into the eurozone was officially confirmed this summer, and it was this crucial decision that is now generally believed to have shielded the country during the first months of the financial crisis. The euro will be officially introduced on January 1st 2009, with the official conversion rate then being set at 30.126 Slovak korunas to the euro. 
  “The adoption of the EU currency is a very positive sign for investors as it ensures a very high level of clarity on the market. The uncertainty related to the local currency’s rate would be eliminated,” believes Ondrej Vlk, a senior analyst at the Czech office of Jones Lang LaSalle. “However,” Mr Vlk adds, “the statement that because of the euro Slovakia will not be affected by the financial crisis is a big exaggeration. A large number of investors are already having a hard time securing credit for their projects.”

The limited access to credit is not the only problem Slovakia is dealing with. For many years Slovakia has been benefiting from its position as the world’s largest per capita car producer, with VW, DaimlerChrysler, Hyundai, Porsche and Audi having invested heavily in the country. Now, however, since car producers are suffering from dramatic falls in sales, the clouds are starting to gather. PSA Peugeot Citroën was one of the few companies which, although planning global job cuts, is not going to make redundancies in its new factory in the western Slovak town of Trnava. It is inevitable that Slovakia’s exports and foreign trade will suffer, with some businesses having already reduced production and staff due to lower demand abroad.

The government’s main concern, however, is not the cuts in the country’s vital automotive industry. The government has expressed fears that the global financial crisis may hurt the planned private funding of highway construction projects that it had been expecting to boost economic growth next year and positively influence the development of the poorer eastern regions of Slovakia. According to the 2009 state budget draft, Slovakia is expected to enjoy a 6.5 pct GDP growth next year, one of the highest in the EU. Nevertheless, this assumption was made before the crisis escalated in September. The latest correction by the Ministry of Finance is now talking about a growth of 4.6 pct.

Too many real estate question marks

Naturally, the uncertain outlook for financial markets and the global economy will weigh heavily on the CEE investment market in the coming year. This trend would most likely result in a limiting of transaction activity relative to 2007, affecting particularly large portfolio deals. A number of reports speak of a 30 pct fall in investment transactions globally – and Slovakia is hardly immune to this process. A few recent reports draw attention to the increasing role of the financial arrangements in the decision making process. According to the Bratislava Property H2 2008 report by CB Richard Ellis, prime investment yields in the Bratislava region in Q2 2008 for office buildings, industrial facilities and shopping centres were between 6.5 and 8 pct. The Slovak investment market currently is no different to that of any other CEE country, with the number of properties and projects for sale significantly higher than the number of potential buyers.

Corrected expectations

The Slovakian residential market is also experiencing some drama these days. Research carried out by King Sturge shows that in the Visegrad countries the highest prices of homes (in both the capital and the regions) are to be found in Poland, but the fastest increase in prices recorded was in Bratislava. The Slovakian capital is quickly catching up with the other countries, as the average price for a new home rose in H1 2008 by 23.9 pct to EUR 2,165 per sqm. “Prices are not growing anymore, because the current market cycle has peaked,” claims King Sturge’s Michal Padych. He goes on to add that: “Several projects are being sold with added benefits or price discounts. You can find projects in Slovakia offering discounts from 3 pct up to 40 pct. Prices will definitely not be growing in Bratislava like in recent years. The average sale price in Bratislava will be even lower because of discounts from selected projects and upcoming launches of middle segment projects.”

The high demand for new homes in the capital may have resulted in increasing prices, but the financial crisis has tempered the optimism of developers, as well as leading customers, to put important decisions on hold.

“We can’t say that the market is currently frozen. There are transactions, but there are also obstacles, especially when taking out a banking loan is involved, both for customers and developers,” feels Michal Padych, head of the residential department of King Sturge in Slovakia. “Naturally,” he continues, “with the ongoing situation we needed to correct our expectations regarding the growth of the residential market.” According to the report, which was published this summer, an annual price increase of 10 pct was forecasted for Bratislava, while the regions were expected to see a 15 pct price growth (the H1 2008 average price per sqm was EUR 1,404).

Currently, around 39 pct of the newly delivered residential units across the country are waiting for buyers. Some 85 pct of the new homes, or around 7,000 units, are located in the Bratislava region, which is constantly growing due to the job opportunities available in the capital. The downtown area is exclusively reserved for luxury developments, with prices starting from EUR 3,300 per sqm. At the beginning of 2008, developer Ballymore Properties introduced a new project called Eurovea with a price range of around EUR 6,500 per sqm.

One popular residential district is Ružinov (Bratislava II), the capital’s second most populated borough, with over 70,000 inhabitants, while new developments zones are also located in Bratislava IV (Devín, Devínska Nová Ves, Dúbravka, Karlova Ves, Lamač and Záhorsk