After years of stagnation, the last couple of years have witnessed a steady increase in interest in the Central European real estate market. An increasing amount of developments are under way, there is more money in global funds than ever before and all the major investment funds are active in the region. Poland has been the pacemaker in Central Europe for years and last year the Czech market also showed improvement. And although the office market is a little overheated in Warsaw, there is still space for office development, particularly in Poland’s secondary cities, according to regional developer TriGranit.
‘There is room for improvement,’ says Árpád Török, chief executive of TriGranit. ‘These are maturing markets but still behind the Western European markets when looking at the office stock per capita ratio. In Warsaw, the volume of office space per capita now stands at around 3m2, compared with 1m2 in Poland as a whole. If you compare this to major German cities, where the amount of office space per person is 15m2, you can see there is still some opportunities for growth.’
The region’s healthy and stable economies in recent years have also been outperforming the west, particularly Poland and the Czech Republic. But a major driver has been the trend for western European countries to move some of their business units to cheaper eastern European locations, taking advantage of lower operating costs and their educated workforces. Near-shoring is a growing trend and Central Europe has become the ‘traditional’ European destination for the BPO sector, says Török. ‘In particular the secondary Polish cities such as Krakow, Wroclaw and Lodz are popular, due to the large pool of cheaper but well-educated workers with strong language skills.’
Alongside western European countries, a growing number of Central European companies are also demanding higher quality working environments in order to be able to attract the most talented workers. Technology companies such as Logmeln, Ustream and Prezi are leading the way. The improving economic climate is also creating a growing need for more and better offices from local tenants. Nevertheless, the BDO sector remains the distinctive driver of demand. Today, the BPO sector accounts for some 50% of existing Polish regional office stock. IT, accounting, R&D and finance are the most likely business units to be near-shored.
One in four BDO jobs is located in Krakow, where the foreign business service centres have a combined workforce of nearly 36,000. However, Tricity is a new rising star in the BPO sector which has so far been overlooked by investors, says Török. Tricity, the northern metropolitan region comprising Gdansk, Gdynia and Sopot, now has more than 47 business centres which employ more than 15,000 people. Its R&D units are particularly strong, with a workforce of some 1,800. In Poland as a whole there are 532 business service centres based on foreign capital and these are estimated to be responsible for generating some 20% of the new jobs in Poland between 2014 and 2015. According to some research, 150,000 office jobs could be created in Poland’s secondary markets in the next few years, representing a significant boost to the country’s GDP.
‘This is why TriGranit is a strong believer in offices in the secondary cities in Poland,’ says Török. ‘Take our Bonarka for Business complex in Krakow. The first phase offices (A-D) have had 100% occupancy since their opening, building E was completed last year and F is scheduled for delivery in the second quarter of 2016. We are also just launching building G. By the time the project is completed, it will have GLA of 100,000 m2 with an overall investment of some € 200mln.’
But the office market is not all about Poland. There are positive developments elsewhere in Central Europe too. Hungary is waking up, says Török. It’s 2016 office pipeline may reach the highest volume since 2010 at about 90,000 m2, while net absorption in 2015 reached 176,000 sqm. This is not only having a positive impact on vacancy rates, but on rents as well. The Hungarian office investment market is concentrated in Budapest where most of the liquidity comes from local investment funds. ‘Budapest, with a rapidly decreasing vacancy rate and strong net absorption, coupled with an improving economy and investment market is a place developers will be looking at,’ says Török. In Budapest, vacancy rates have dropped from around 20% to 12% over the past three years. With limited stock and improving office market fundamentals, yields in the country have continued to compress and are now 7%, compared with 7.25% a year ago.
For CE as a whole, Török says 2016 will be a year of differentiated evolution. ‘There will be lower rental growth in the next couple of years due to net supply overwhelming demand, especially in Warsaw and Prague,’ he says. The relatively low pipeline means Budapest will see the largest rental growth in the CEE region, at some 0.8% a year. Bucharest may follow suit in certain submarkets, even though development activity there is higher and vacancy has increased slightly over 2015 Q4. In Hungary, the office pipeline for 2016 is limited and most of the stock coming to market is partially or completely pre-let. Romania too has good potential, Török says. Bucharest is behind Budapest in terms of the office space per capita ratio and economic growth will be strong in the Bucharest region as well as some secondary cities, he says. ‘All this, combined with the growing population in the university cities will create favourable conditions for development in certain selected submarkets.’
Source: The article was published in the Property EU Top 100 Investors Magazine, March, 2016