Download Bulgaria and Romania

Not on the map for commercial
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05 / 2016
Country
Facts
REAL ESTATE
Bulgaria and Romania –
Real Estate Country Facts
Imprint:
Publisher and media owner: UniCredit Bank Austria AG
http://www.bankaustria.at
Editor: Bank Austria Real Estate Consulting & Investment, Karla Schestauber, Tel. +43 (0)50505-54784
Layout: www.horvath.co.at
Date: 29 April 2016
A joint publication of Bank Austria Real Estate, Political Risk & Country Analysis, UniCredit Research
and Immobilien Rating GmbH (IRG)
Imprint and disclosure pursuant to Sections 24 and 25 of the Austrian Media Act can be found under http://www.bankaustria.at/en/legalinformation-imprint.jsp
Legal notice – please read this important information:
This publication is neither a marketing communication nor a financial analysis. It contains information on general economic data, real estate
market data and related assessments of real estate market developments. Despite careful research and the use of reliable sources, we cannot
assume any responsibility for the completeness, correctness, up-to-dateness and accuracy of information contained in this publication.
The publication has not been prepared in compliance with the legal provisions governing the independence of financial analyses, and it is not
subject to the ban on trading subsequent to the d­ istribution of financial analyses.
This information should not be interpreted as a recommendation to buy or sell financial instruments, or as a solicitation of an offer to buy or sell
financial instruments. This publication serves ­information purposes only and does not replace specific advice taking into account the investor’s
individual personal circumstances (e.g. risk tolerance, knowledge and experience, investment objectives and financial circumstances).
Past performance is not a guide to future performance. Please note that the value of an investment and the return on it may rise and fall, and
that every investment involves a degree of risk.
The information in this publication contains assessments of short-term market developments. We have obtained value data and other
­information from sources which we deem reliable. Our information and assessments may change without notice.
2 I Real Estate Country Facts 05/2016
Bulgaria and Romania – off the radar
of international property investors?
Strong worldwide demand for
commercial real estate
With interest rates extremely low and in
some cases negative, real estate is a
much-sought-after asset class. Major
global investors such as pension and
sovereign wealth funds have significantly
increased the proportion of real estate
in their investment portfolios. Demand
for core properties in core countries is
particularly strong. This has led to sharp price increases in these
markets, which in turn has pushed prime yields down to all-time
lows in some locations.
Attractive returns on real estate in Bulgaria and Romania
As a result, investors in search of yield must be willing to take on
additional risk, and should turn their attention (once again) to
non-core real estate markets such as Romania and Bulgaria. Both
countries offer attractive yields – prime office yields are around
7.75% in Bucharest and 8.5% in Sofia, those on shopping centres
are at around 8% and 9% respectively, while those on logistics and
industrial properties are about 9% in the Romanian capital and
11% in the Bulgarian capital.
The value of commercial real estate transactions concluded in the
two countries showed signs of recovery in 2014, although investment dipped again the following year. According to figures from
Cushman & Wakefield, investment in Bulgaria shrank from around
EUR 270 million in 2014 to below EUR 230 million last year, and
from EUR 1.090 billion to about EUR 530 million in Romania.
Have investors lost interest in both countries?
CBRE’s EMEA Investor Intentions Survey 2016 revealed that the
attractiveness of the CEE region has risen sharply compared to
that of the quite expensive West European markets. This year, for
the first time, Central and Eastern Europe (including Southeastern
Europe) took top spot for real estate investment in a comparison
of regions and countries. This showing should also benefit Bulgaria
and Romania.
Economic performance in both countries is currently very healthy.
Each posted strong growth last year, although at 3.7%, Romania’s
economy expanded more quickly than that of Bulgaria, where
growth came in at 3.0%. Our economists expect growth to accelerate
further in 2016 and 2017, to 4.3% and 3.8% respectively in Romania,
and to 3.4 % and 3.6 % in Bulgaria. Private consumption is an
important economic driver in both countries. Nevertheless, due to
strong consumption, Romanian imports have risen more quickly
than exports, leading to a deterioration in the current account deficit,
while in Bulgaria economic growth has increased more evenly. With
this in mind, investors in Romania should keep an eye on exchange
rate fluctuations; meanwhile, Bulgaria’s stable currency board ensures
a fixed exchange rate against the euro.
Strong private consumption has boosted retail sales in both countries, and this has also had a positive impact on demand at shopping centres. Tenants favor shopping centres in premium locations
and with a balanced tenant mix – consequently, the gap between
high-end and lower-quality shopping centres is set to widen.
The office segment in Bucharest has seen rapid growth, with a
very strong project pipeline, while less new space is being built
in the Bulgarian capital. These new developments are generally
category A properties with excellent technical facilities and good
transport links. With vacancy rates relatively high, competition
will intensify, and the losers will be older, poorly equipped offices
in unattractive locations. The increasing importance of Bucharest
and Sofia as outsourcing locations is fueling demand for new office
space – the Romanian capital is ranked 41st and the Bulgarian
capital 52nd in the 2016 Tholons Top 100 list of outsourcing
destinations worldwide.
Both countries’ logistics markets are dominated by built-to-suit
constructions, meaning that very few speculative properties are
coming onto the market. This has resulted in low vacancy rates,
and rents are stable or increasing slightly.
We are convinced that the real estate markets in Bulgaria and
Romania have potential, and we will be more than happy to assist
clients with attractive projects. In close collaboration with UniCredit
Bulbank and UniCredit Bank Romania we are well positioned to
offer tailored financing solutions.
Kind regards
Karla Schestauber
Real Estate Country Facts 05/2016 I 3
Real Estate Country Facts
Bulgaria:
new law on pre-school and school-age education, with the aim
of increasing competition and improving educational standards.
The energy sector reform gained traction with the implementation
of improved regulatory practices and stabilization of the financial
position of NEK (the company controlling state-owned assets in
the sector), paving the way for market liberalization.
Population: 7.2 mn
Area: 111,000 km2
Capital: Sofia
Currency: Bulgarian Lev
Scale (km)
0
Romania
Another big problem in Bulgaria is the public perception of a
slow democratic process as well as very low level of trust in
the institutions (recent polls have indicated that public trust in
parliament is a mere 10 %). In this regard, the country’s political
battle lines are characterized by discussions over the possibility
of reforming the electoral system to improve transparency and
reduce corruption. Accordingly, on January 21, 2016, Bulgaria’s
parliament gave the green light to introduce electronic voting
at future elections and referendums, a move expected to help
Bulgarians living abroad to cast their ballot in future elections
and encourage young and educated people to vote.
Ruse
Varna
Serbia
Sofia
FYR
Macedonia
100
Plovdiv
Black
Sea
Burgas
Khaskovo
Turkey
Greece
Political Overview
Since November 2014, Bulgaria has been governed by a minority
centre-right coalition formed by the conservative party GERB
(the winner of the October 2014 elections) and the right-wing
Reformist Bloc (RB). The government has the support of the
nationalist Patriotic Front (PF) and the left-wing ABV (giving it a
total of 137 of the 240 seats in parliament), and is led by GERB’s
leader, Boyko Borissov, who was appointed as the new PM.
 The new coalition made clear its will to review the domestic
judicial system and the welfare system in order to ensure the
rule of law, crack down on corruption and improve people’s living
conditions. In this regard, in September 2015 it managed to
approve amendments to healthcare legislation to contain the
surge in spending on hospital treatments as well as to adopt a
Outlook
Macroeconomic data and forecasts
2014
GDP (EUR bn)
GDP per capita (EUR)
Bulgaria
2015e
2016f
2017f
42.8
44.2
45.6
47.9
5,936
6,171
6,406
6,760
Real GDP (% chg.)
1.5
3.0
3.4
3.6
Inflation (CPI) %
–1.4
–0.1
–0.1
1.4
Unemployment rate %
11.4
9.1
7.8
6.5
Current account/GDP %
1.2
1.2
1.9
1.2
FDI/GDP %
2.0
3.4
3.6
3.7
Budget balance / GDP (%)
–3.6
–2.9
–2.2
–1.8
Public debt / GDP (%)
26.4
26.4
29.9
29.3
Foreign debt/GDP (%)
92.1
77.3
73.1
68.3
Source: UniCredit Research / e … estimate; f … forecast
4 I Real Estate Country Facts 05/2016
 On economic policy, PM Borissov underlined his desire to step
up efforts to promote economic growth and improve the business
environment (mainly through the increase of FDI inflows, by
reducing the administrative burden and ensuring a better regulatory
framework). Indeed, many foreign investors have complained of
a lack of transparency in dealing with official bodies, as well as
excessive bureaucratic procedures and difficulties in dealing with
the relevant authorities. In this regard, in February 2016 the
parliament adopted the new Public Procurement Law, introducing
a national legal framework for public procurement by public
entities, sector entities, and entities awarding special contracts
in the field of defense and security. As part of its fiscal consolidation program, in early February 2016 the government also
drafted a procedure for restructuring the finances of indebted
municipalities in order to resume privatization, which were
halted in 2013 – 14.
Although the country’s economy is stable, several risks remain,
mainly the possibility of another change of government, due to
the current administration’s lack of a parliamentary majority
that could affect the passage of reforms in the country.
Romania:
and protect the independence of the judicial system; ii) improve the
efficiency of the public administration in the service of citizens; iii)
introduce electronic voting and iv) shift the focus in the education
process to conveying information, creating life skills and reducing
bureaucratic tasks that weigh on teachers
Population: 20.1 mn
Area: 238,000 km2
Capital: Bucharest
Currency: Romanian New Leu
Scale (km)
Ukraine
Hungary
 As regards the country’s foreign policy, PM Ciolos confirmed
that Romania’s priorities are to develop and consolidate the
country’s role in the EU and NATO, but also to promote and
support the aspirations of neighboring Moldova for European
integration. Other priorities for Romania are i) joining the Schengen
Area, ii) expanding strategic partnerships inside Europe and
above all with Asian states and iii) consolidating economic
cooperation whilst incentivizing foreign investments in the
country, especially greenfield projects. One of the crucial goals
of Ciolos’ administration is also to improve the absorption
potential of EU funds (€ 23 bn in structural funds from the EU
budget for 2014 / 20 and € 18.5 bn in rural development and
agricultural funds) and to reduce red tap
100
Moldova
Oradea
Timisoara
0
Sibiu Brasov
Galati
Bucharest Constanta
Serbia
Craiova
Black
Sea
Bulgaria
Political Overview
Since November 17, 2015, the country has been led by a government
(elected by 389 votes in favor to 115 against) headed by PM Dacian
Ciolos (a former agriculture minister and, more recently, Agriculture
Commissioner at the European Commission). The government is
supported by the Social Democratic Party (SDP), the National Liberal
Party (NLP), the National Union for the Progress of Romania (UNPR)
and the Democratic Union of Hungarians in Romania (UDMR). The
cabinet is a technocratic government1 and has been appointed to
lead the country until the next election in November/December 2016.
 Once elected, PM Ciolos presented the political programme of his
cabinet to parliament, underlining the need to i) tackle corruption
1) The government is composed of a mixture of experts, diplomats and civil society activists, with two deputy
prime ministers, 16 ministers, 3 ministers-delegate and the prime minister‘s chancellery chief.
 In terms of the economy, according to the strategic priorities
for 2016 published by the government on March 11, 2016, the
main objectives are foreign economic relations, and revising,
increasing and prioritizing public investment projects (including
for infrastructure) with the purpose of creating jobs and increasing
productivity, as well as drafting Romania’s long-term economic
development plan.
Outlook
The country is stable with good economic growth. However,
in the medium-term, restoring popular confidence in political
parties, fighting corruption and increasing country’s EU fund
absorption rate will remain crucial for sustainability also for
the next government.
Macroeconomic data and forecasts
2014
Romania
2015e
2016f
2017f
GDP (EUR bn)
150.2
159.8
168.8
181.7
GDP per capita (EUR)
7,532
8,037
8,513
9,192
Real GDP (% chg.)
3.0
3.7
4.3
3.8
Inflation (CPI) %
1.1
–0.6
–0.8
3.2
Unemployment rate %
6.8
6.8
6.7
6.5
Current account/GDP %
–0.5
–1.1
–1.8
–2.0
1.8
1.7
1.8
1.9
Budget balance / GDP (%)
FDI/GDP %
–1.4
–1.1
–2.9
–3.1
Public debt / GDP (%)
39.8
37.9
39.8
39.5
Foreign debt/GDP (%)
63.1
56.9
54.1
46.9
Source: UniCredit Research / e … estimate; f … forecast
Real Estate Country Facts 05/2016 I 5
Real Estate Country Facts
Bulgaria: Economic growth accelerates
and is broad based
The rate of economic expansion doubled in 2015, compared to
2014, reaching a new post-crisis high at 3.0% yoy. What’s more,
2015 was the first year on record when all components of GDP
made a positive contribution to growth, highlighting the start of
a more broad-based recovery phase for the economy.
Broad increase in inflows
%
16.0
Domestic banks, net
C/A
Other Capital, net
Capital flows
FDI, net
Net EU transfers
12.0
8.0
GDP growth to
stabilize at a higher level
yoy %
5.0
Net Exports
3.0
2.0
1.0
1.3
0.0
Public consumption
Private consumption
4.0
3.0
4.0
3.4
Fixed Investments
GDP, real growth
3.6
– 8.0
– 12.0
2010
2011
2012
2013
2014
2015
1.5
Source: BNB
0.2
0.0
– 1.0
– 2.0
– 3.0
– 4.0
2012
2013
2014
2015
2016F
2017F
Source: NSI, MOF, UniCredit Research
Sharp increase of outsourcing dynamics
It was the labor market which produced the most encouraging news
flow last year. The unemployment rate eased to 7.9 % in 4Q15
(from 8.3% in 3Q15 and 10.6% a year ago), underpinned by a 2.4%
yoy gain in the number of jobs. The economy added 51K new jobs
with the bulk of new hiring coming from relatively well-paid jobs,
in IT and other business services sectors, which benefited from the
sharp acceleration of outsourcing dynamics last year.
Capital inflows rose markedly underpinned by a very healthy
combination of robust export expansion and lower energy prices,
which helped the goods and services trade balance shift to a
record surplus (1.5% of GDP) last year, from 0.5% deficit in 2014.
Improving capital flows also drew support from the solid rise in net
EU transfers, as the absorption of EU funds significantly improved,
while FDI posted a moderate upturn to 3.4 % of GDP, as more
foreign companies invest in the export-oriented manufacturing
and business services sectors.
6 I Real Estate Country Facts 05/2016
Perhaps even more importantly, the surge in capital inflows was
not accompanied with a fresh increase in external indebtedness, as
gross external debt fell to 77.3% of GDP at the end of 2015, from
92.1% a year ago and 105% at its peak in 2009. The contraction of
foreign debt was led by private non-financial companies and banks,
while the public sector’s external liabilities posted only a marginal
decline.
Public debt extremely low
Stronger-than-expected GDP growth, together with concrete efforts to improve tax compliance helped push up fiscal revenues
by 9.5 yoy, while higher EU transfers contributed at the end of the
2007–2013 disbursement period. More restrained expenditure
growth helped increase latitude for greater government spending
(up 39.8% yoy) while still keeping the budgetary position in check.
The deficit narrowed to 2.9% of GDP from 3.6% a year ago, while
the general government debt position was largely unchanged at
26.4% of GDP, leaving Bulgaria as one of the outperformers in the
EU (average of 86% of GDP as of 3Q2015).
Employment growth pushing consumption
Looking ahead, we expect the recovery to continue. The combination
of a renewed energy price slump and a stronger-than-previously
forecast labor market recovery should help private consumption to
rise even more. Consequently, we revised our GDP growth forecast
upward to 3.4% in 2016 and 3.6% in 2017. Alongside private
consumption we also expect exports, albeit to a somewhat lesser
degree, to provide most of the fuel for growth in 2016. A somewhat
less supportive external environment in 2017, as the euro firms and
energy prices begin to recover, will constrain the pace of export expansion, but this will be more than offset by stronger investments
and private consumption growth at home.
We expect private consumption growth to accelerate from 0.7%
in 2015 to 3.2% in 2016. This will be above all attributable to the
improving labor market, which will help households to become
more confident about their jobs and income prospects. After 51,000
employees were added to payrolls in 2015, the economy is on
course to add broadly the same number of new jobs this year. Wage
growth is expected to be another supportive factor to the labor
market recovery this year, while in an environment of a continuing
decline in perceived job insecurity, we also see households using
Employment growth accelerated
120
100
13.8
12.9
80
12.0
13.0
11.4
39.1
26.5
20
39.6
49.0
10.6
10.6
58.1
55.7
12
72.0
9.9
8.3
42.8
7.9
31.4
1.8
10
8
6
4
–4.2
– 20
– 40
10.7
1,5
40
16
14
13.0
60
0
Unemployment rate, % (rs)
yoy change of number of employees, thousands
–20.2
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15
2
0
Source: NSi
more credit to finance consumer durables. Non-negligible pent-up
demand, at the same time, will also help retail credit to increase,
while the economy is slowly emerging from a prolonged and painful
period of financial restructuring among households. Still low inflation,
on the other hand, will continue to support the purchasing power of
household income, although not on the scale seen so far this year,
as the tailwind from lower energy prices is set to fade.
The sharp acceleration of export volumes, which rose by 7.6% in
2015, will soften to 5.5% this year. be followed by some softening
to 5.5% growth this year. After gaining strength last year on the
back of a solid improvement in EU funds absorption, we expect fixed
investment to take a breather in 2016. Importantly, we expect private
sector fixed investment to gain some momentum in both 2016 and
2017, after being slightly negative for most of 2015. The latest data
on newly issued housing permits indicate that the contraction of
residential investment, which has been a heavy drag on fixed investment over the past several years, may have bottomed out. We expect
that residential investment will return to positive yoy growth rates
at some point next year. Rising housing permits, improved price and
availability of mortgage loans, and the more favorable prospects for
household income should, in our view, clear most of the remaining
hurdles to the recovery in residential investment.
Stable currency board
Bulgaria has a currency board. With large FX reserves and a current
account surplus supplemented by EU funds and foreign direct investment, the currency board is working well. This means that EUR
FX risk is non-existent for investors in BGN assets.
Romania: Very strong growth
but rising fiscal risks
Economic growth accelerated to 3.7 % in 2015 due to strong private consumption (6.1 %) and fixed investment growth (7.5 %).
A combination of VAT cuts and increases in the minimum wage
fuelled household spending and sentiment, leading to an acceleration of credit growth in local currency. The growth rate
of retail sales accelerated into double digits, fueled by higher
demand, but larger sales translated mostly into bigger imports,
while local production benefited less. As a result, the trade deficit
with goods widened again after a gradual narrowing in the past
years. Despite a larger surplus for services, the overall trade deficit
contributed to a bigger current account deficit (1.1 % of GDP).
A surge in inflows of EU funds at the end of the 2007 – 2013
disbursement period helped fixed investment accelerate strongly,
but Romania managed to attract just two thirds of its structural
funds allocation.
Fiscal adjustment continued, with the budget deficit falling to just
1.1% of GDP and public debt declining to 37.9% of GDP, well below
the EU average. Adding to EU funds, FDI inflows led to a positive
extended basic balance that allowed the local currency to trade in a
narrow range of EUR-RON 4.40–4.50 for most of the year. External
deleveraging continued, with external debt falling to 56.9% of GDP,
while FX reserves remained very large, covering almost six months
of imports.
Real Estate Country Facts 05/2016 I 7
Real Estate Country Facts
Imports growing faster than exports
yoy (%), pp
7.0
Net export
Private consumption
Public consumption
GDP
Fixed Investment
Change in inventories
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Local elections in June 2016
– 1.0
– 2.0
– 3.0
2013
2014
2015
2016P
2017P
Source: NBR, UniCredit Research
Wage and credit growth support
household consumption
GDP growth will exceed 4 % this year if the 2016 harvest is a
bumper one, but could slow in 2017 to 3.8 % as a growing share
of consumption will be covered by imports. Romania will remain
one of the fastest-growing countries in CEE and the output gap
will be closed by mid-2016. That said, export growth will probably
fall behind that of other central European countries amid a dearth
of new production capacities. Growth risks affect services as
well. Transport, one of the largest contributors to C /A inflows,
may suffer if the Schengen area is suspended and border controls
are reinstated.
Wage and credit growth
support household consumption
20.0
15.0
Retail sales (3MMA, % yoy)
Real wage growth (% yoy)
Consumer credit in RON, inflation-adjusted (% yoy)
The technocratic government that will lead Romania through two
rounds of elections this year has managed to rein in public spending
and to avoid democratic slippages. Local elections, to be held on
5 June, will set the tone for general elections in November-December
2016. The one-round, first-past-the-post system currently in place
gives a big advantage to the social democratic PSD, the former
ruling party. PSD (in coalition with small populist parties) could
win general elections, despite trailing the liberal PNL in polls,
as its electorate is more disciplined. Moreover, the PNL does not
attact the pro-reform, protest vote that carried President Klaus
Iohannis to his surprise win in December 2014. That said, a narrow
loss would still allow the PNL to form a governing coalition with the
Hungarian minority party UDMR and maybe the Popular Movement
(PMP) of former President Traian Băsescu.
In terms of economic policies, the differences between a PSD and
a PNL-led coalition are likely to be small. The next government
will inherit a budget that is heavy on pro-cyclical spending, with
a deficit expected to exceed 3% of GDP in 2017 unless additional
belt-tightening measures are taken. While the budget deficit could
be capped at 3% of GDP this year, a similar result in 2017 would
require economic growth to exceed 4.5% and tax collection to
improve markedly. Authorities count on both but their forecasts are
probably too optimistic.
Budget and external deficits widening
For the first time since the financial crisis, Romania is facing a
widening of budget and external deficits at a time when countercyclical policies would require caution. Lacking a framework to
improve tax collection of the kind that is in place in Bulgaria
or Hungary, Romania may have to increase taxes in 2017 to
keep the deficit below 3 % of GDP. At the same time, the trade
deficit will widen this year due to strong consumption and weak
10.0
5.0
0.0
– 5.0
– 10.0
While banks expect a recovery in activity, the Giving in Payment
Law1 may increase loan down-payments and costs, leading to a
slowdown in mortgage lending that may cool off the recovery in
residential construction. The Giving in Payment Law may lead to
tighter financial conditions, but the impact on outstanding loans
could be smaller than feared. The law may be declared unconstitutional since it retroactively changes loan contracts. If not, those
who decide to use it may lose access to the mortgage market for
a long time.
Jan. 13
July 13
Jan. 14
July 14
Source: NBR
8 I Real Estate Country Facts 05/2016
Jan. 15
July 15
Jan. 16
1) The law stipulates that an individual borrower may give the purchased property to the bank to settle his/her
debt, regardless of whether the property’s value covers the outstanding value of the loan. The law is applicable to
existing loans, including those granted with a state guarantee under the “First Home” programme.
exports. While the larger C /A deficit may be covered by FDI and
EU fund inflows, the net external financing capacity will fall in
2016. Adding volatile risk appetite worldwide, EUR-RON could
trade in the upper half of the 4.40 – 4.50 range for most of the
year, with the NBR likely to intervene if FX volatility increases.
Inflation set to reach
upper limit of target range
%
4.5
Consumer price inflation
Inflation target
Target range
3.5
The NBR’s recent hawkishness contrasts with the stance of other
CE central banks. The NBR adjusted its inflation forecast upward2
and signaled it could tighten monetary policy due to a positive
output gap and lax fiscal policy. While the NBR may tighten the
corridor by 1pp, postponing rate hikes would support the gradual
conversion of FX loans into RON and prevent more volatility on
financial markets. If the central bank considers that the economy
is overheating, it could use prudential regulation to cool off credit
growth. Thus, we do not expect rate hikes in 2016.
2) The forecast for headline inflation is 3.4% yoy for the end of 2017, close to the upper limit of the 1.5 –3.5%
target range. At the same time, core inflation is expected to rise to 4.3% by December 2017, the highest level
since June 2011.
2.5
1.5
0.5
– 0.5
– 1.5
– 2.5
– 3.5
Jan. 14
July 14
Jan. 15
July 15
Jan. 16
July 16
Jan. 17
July 17
Source: NBR
Real Estate Country Facts 05/2016 I 9
Real Estate Country Facts
Office markets in Sofia and Bucharest
picking up in spite of high vacancy rates
There was a surge in construction of office space in Sofia and
Bucharest in the boom years prior to the global economic and
financial crisis. This increase also continued in the aftermath of the
crisis, albeit at a significantly slower pace over time. The project
pipelines in both capitals – especially in Bucharest – are quite full.
New construction comparatively low in 2015
By the end of 2015, there was a total of 1.8 million m2 of modern
office space in Sofia and around 2.7 million m2 in Bucharest. New
construction in both cities was relatively modest last year, at about
100,000 m2 in Sofia and 90,000 m2 in Bucharest. This was down
on the records set in previous years – even at the height of the
financial crisis, the supply of office space grew sharply, as projects
already under construction were completed, not postponed. This
resulted in significant destabilization of both cities’ office property
markets, and the consequences are still being felt today.
Office market development Bucharest & Sofia
2000–2015
5
Bucharest
Sofia
4.5
Office space in m2 mn
4
3.5
3
2.5
2
Office space per capita, 2015
m² per capita
Geneva
20.27
Warsaw
Zurich
18.92
Budapest
2.53
1.84
Frankfurt
16.26
Sofia
1.28
Munich
14.87
Moscow
1.25
Milan
9.72
Bucharest
1.07
Hamburg
7.77
Zagreb
1.13
Paris
7.67
Kiev
0.62
Vienna
6.09
Belgrade
0.40
Bratislava
3.68
Istanbul
0.32
Prague
2.49
Source: Immobilien Rating
Substantial differences in quality of office space
In some cases, the quality of office space in the Bulgarian and
Romanian capitals falls short of rising expectations. As a result,
there is still demand for suitable office properties in Sofia’s and Bucharest’s prime segment, including in the outsourcing sector, which
accounts for a growing proportion of new lets in both cities. However,
this is putting pressure on older, less well equipped space in not so
good locations. Around 70,000 m2 of new space is forecast to come
onto the market in Sofia in 2016 – a slight fall compared with last
year – while in Bucharest over 350,000 m2 could be completed,
which would represent a substantial year-on-year increase.
1.5
1
0.5
15
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
20
20
00
0
Forecast new space, 2016/2017
(selected developments)
Total usable
space, m²
Status
City
Bucharest One
50,000
under construction
Bucharest
Office space per capita in Sofia and Bucharest is still low compared
with major West European cities, and close to the average for East
European capitals.
Oregon Park (Phase 1)
45,000
under construction
Bucharest
Anchor Plaza Metropol
35,000
under construction
Bucharest
AFI Business Park 4 und 5
32,000
completed
Bucharest
City Tower
34,500
under construction
Sofia
Bratislava leads the way in Central and Eastern Europe in terms of
office space per capita, but it still lags far behind cities such as the
nearby Austrian capital, Vienna.
Millenium Centre
23,000
under construction
Sofia
Source: CBRE/ Immobilien Rating
Project
Source: Immobilien Rating
The project pipeline is strong in both cities, especially in Bucharest, although it remains to be seen how much space is actually
10 I Real Estate Country Facts 05/2016
completed in 2017. In any case, predatory competition is set to
intensify and the losers will be old, poorly equipped offices in
unattractive locations.
Slight drop in vacancy rates
The effects of the international economic and financial crisis led to
high vacancy rates in both capitals – in Sofia they peaked at about
30%, twice the rate in Bucharest. Rates have dropped slightly in the
last few years, to around 12% in Bucharest and about 24% in Sofia
at the end of 2015. In general there are significant differences in
vacancy rates in the various submarkets in each city.
European office vacancy rate in % 2015
There were significant corrections in office rents in Bucharest, and
even more pronounced changes in Sofia, in the aftermath of the
crisis. At the end of 2015, top monthly rents for office space in Sofia
were around EUR 12.5/m2, compared with up to EUR 20/m2 in
2008.
In the Romanian capital, top rents slipped from EUR 22/m2 per
month in 2008 to EUR 18/m2 per month at the end of 2015. Incentives and benefits, such as rent-free periods or high-quality fixtures
and fittings, are still an important factor for potential tenants. No
substantial changes in rents are expected in either Sofia or Bucharest this year.
Top office rents
30
2007 – 2015
25
24
20
Sofia
Bucharest
22
15
10
5
20
18
16
14
So
fia
K
Za iev
M greb
o
B sc
Am uda ow
st pes
er t
d
Pr am
a
Ist gue
an
b
Lis ul
W bon
Bu ars
ch aw
Be ares
Br lgra t
at de
isl
a
Du va
b
M lin
a
Co Bru drid
pe ss
nh els
St ag
oc e
kh n
ol
m
Pa
Ro ris
m
e
Os
Lo
lo
B
nd
er
on V lin
W ienn
es a
tE
nd
0
Prime rent EUR/m2/month
Vacancy rate in %
Rents generally stable
Source: Immobilien Rating
12
In Sofia’s small office market, large increases in the quantity of new
space have a direct impact on vacancy rates, although the current
modest level of new construction suggests that rates will largely
remain stable until the end of the year. New construction is picking
up again in Bucharest, but pre-letting rates are high, so it is still
unclear what effect this will have on the level of vacancies.
Office vacancy rates
2007–2015
35
Sofia
Bucharest
30
Vacancy rate in %
25
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
20
07
10
Source: Immobilien Rating
Certifications now the norm in Romania
and Bulgaria
In the past, certified buildings were the exception in Southeastern
Europe, but nowadays certification by internationally recognized
bodies is a must. This is reflected in continuous improvements in
the quality of office buildings. For global businesses, renting/buying
only certified, high-quality office space is an important consideration
when it comes to choosing locations.
Developers often attempt to obtain several certifications simultaneously, in particular BREEAM, LEED and DGNB, which facilitates international comparisons. However, the comparability of the different
certificates themselves is in some cases limited.
Certification ensures that office developers are well placed to compete
for new tenants and that they offer premium quality. This also allows
developers to acquire tenants from older, less well equipped offices,
even though such properties face increased vacancy rates as a result,
and their continued utilization becomes significantly more difficult.
15
10
5
Source: Immobilien Rating
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
20
07
0
Broadly speaking, it can be assumed that certification and sustainability will be increasingly important even for renovation and
refurbishment projects, or – as in many other cities – old properties
will be taken off the office market altogether and put to other uses,
such as residential space or hotels.
Real Estate Country Facts 05/2016 I 11
Real Estate Country Facts
Industrial and logistics markets in
Bulgaria and Romania characterized by
rising demand and low vacancy rates
Falling vacancy rates
Due to steady demand and a lack of supply, vacancy rates at
industrial and logistics properties in both Sofia and Bucharest have
gradually declined in the last few years. The rate in the Romanian
capital was over 12% in 2010 but had dropped to about 5% by the
end of 2015, and another slight fall is also on the cards this year.
20
Sofia
Bucharest
16
12
8
4
15
20
14
20
13
20
12
20
11
20
10
20
09
20
20
08
0
07
In both Bulgaria and Romania, logistics space is concentrated in the
wider metropolitan areas around the respective capitals. At the end
of 2015, there was approximately 1.4 million m2 of logistics space
in the region around Sofia, and a further 50,000 m2 could be added
in the Greater Sofia area this year. Bucharest had around 1 million m²
of logistics space at the end of 2015, which could be supplemented
by up to 140,000 m² of new space in the Greater Bucharest region
this year – the first substantial increase for some time.
2007 – 2015
20
Demand has been on the increase for some time now, and this has
highlighted even more clearly the shortage of high-quality space
that meets the requirements of modern logistics operations. As a
result, there are signs of a rebound in speculative construction –
albeit as a smaller proportion of overall construction .
Vacancy rate warehouse & logistics
Vacancy rate in %
As in the office sector, the global economic and financial crisis also
left its mark on the industrial and logistics market in Romania and
Bulgaria. Before the crisis, speculative projects accounted for a large
proportion of developments, but afterwards the situation changed
completely and new construction for speculative reasons almost
came to a total standstill. The majority of new builds were specifically erected for own use.
Source: Immobilien Rating
Rental prices largely stable
At the end of 2015, monthly rents for logistics properties in Sofia
averaged around EUR 3.75/m2 – a moderate year-on-year increase.
Rents in Bucharest were virtually unchanged at end-2015, and the
average of EUR 3.50/m2 per month was only slightly lower than in
the Bulgarian capital. With vacancy rates low and demand expected
to remain high, rents look set to largely move sideways until the
end of 2016.
Average rents warehouse & logistics
2007 – 2015
Vacancy rates in Sofia’s logistics market were even lower at the end
of last year, at about 2%. Stable demand means the rate should
remain low this year as well.
6
Sofia
Bucharest
Rent in EUR/m2/month
5
4
3
2
1
Source: Immobilien Rating
12 I Real Estate Country Facts 05/2016
5
20
1
4
20
1
3
20
1
2
20
1
1
20
1
0
20
1
9
20
0
8
20
0
20
0
7
0
Relatively large stocks of old warehouse space
Achievable rents always depend on the size of the property in question,
and smaller premises are often somewhat more expensive than
very large units. As in other East European countries, Romania and
Bulgaria have large stocks of old warehouse space. These outdated
properties are available for around EUR 2/m2 per month. There
is some demand for such space owing to the shortage of suitable
properties. But modern retailers would never seriously consider
renting such premises, and instead choose built-to-suit solutions on
account of the lack of appropriate alternatives.
Consequently, attractive opportunities to fill such gaps are still a
defining feature of the industrial and logistics markets in Bulgaria
and Romania. That said, many developers are still hesitant, and
cautious when it comes to speculative projects.
Real Estate Country Facts 05/2016 I 13
Real Estate Country Facts
Substantial increase in space intensifies
competition at shopping centres in
Bulgaria and Romania
Bulgaria
No new shopping centre openings in 2015
The most recent addition of significant volumes of shopping centre
space in Bulgaria – and the largest increase since 2010 – came in
2013 and 2014. Six centres were built with a combined lettable
space of around 245,600 m2, bringing the total to approximately
952,300 m². Last year, however, no new shopping centres opened
anywhere in Bulgaria, so the stock remained unchanged.
New shopping centre openings in
Bulgaria (selected), 2013– 2015
Lettable area, m²
Opening
City
Paradise Mall
Property
~ 81,300
2013
Sofia
The Strand
~ 30,000
2013
Burgas
City Mall
~ 21,000
2013
Stara Zagora
Sofia Ring Mall
~ 71,800
2014
Sofia
Mega Mall Lyulin
~ 24,000
2014
Sofia
Panorama Mall
~ 17,500
2014
Pleven
Last year, the upbeat mood on the retail market prompted the
restructuring and repositioning of some existing shopping centres, as
well as the resumption of work on projects that had been temporarily
suspended and and centres that were already under construction.
SC projects in Bulgaria (selected), under
construction/project/restructuring
Property
Lettable Scheduled
area, m²
opening
Status
City
Plaza West Mall
Park Centre (R)
~ 25,600
2016 under construction
Sofia
~ 23,600
2016 under construction
Galeria Plovdiv (R)
Sofia
~ 45,800
2017 under construction
Plovdiv
Markovo Tepe Mall (R)
~ 50,000
2017 under construction
Plovdiv
Sun City Centre
~ 40,000
2017
project
Burgas
Danube Mall
~ 31,800
2017
project
Ruse
Grand Plaza Mall
~ 37,500
2018
project
Ruse
Shumen Mall
~ 20,000
2018
project
Shumen
Key: (R) Restructuring
Source: Immobilien Rating; RegioPlan
Source: Immobilien Rating; RegioPlan
In Sofia, shoppers currently have a choice of around 15 shopping
centres with a combined total of some 420,000 m2 of lettable
space. The density of shopping centre space increased sharply in
2014 and 2015, and is now about 342 m2 per 1,000 inhabitants.
This rise mainly reflected the opening of the city’s two largest malls
to date, the 81,300 m2 Paradise Centre (2013) and the Sofia Ring
Mall (2014) with 71,800 m2 of space. Both belong to the new generation of lifestyle and entertainment centres and have extensive
leisure facilities (including an event centre, cinema, pool, bowling
alley, rooftop amusement park and sports centre). The two centres
are located in the south of Sofia, about a 15-minute drive apart.
In addition, the 24,000 m2 Mega Mall in Sofia’s Lyulin area, in the
northwestern part of the Bulgarian capital, also opened its doors
in 2014. As a result, there is an ample supply of space in Sofia’s
shopping centre market, even though purchasing power is low by
European standards. Competition has intensified, resulting in fewer
development projects, and this has also highlighted the differences
between premium-category shopping malls (which combine ease of
access, practicality and a well-balanced mix of retailers) and those
that are in category B locations and/or are suffering due to a lack of
investment.
14 I Real Estate Country Facts 05/2016
These include Plaza West on Sofia’s northwestern ring road, which
was scheduled to open in 2014; construction has restarted following
a change of owner. City Centre, the city’s first modern shopping
centre, was built in 2006 and is currently undergoing extensive
renovation. It will be renamed Park Centre and is due to open again
in 2016/2017. At present, no other shopping centres are under
construction or at the planning stage in Sofia.
Shopping centre vacancy rates down slightly,
and rents stable
Following the substantial increase in space in 2013 and 2014,
vacancy rates at Sofia’s shopping centres have stabilized once
more, and stood at 11.5% at the end of 2015. Rates are expected
to move sideways or decline slightly in the next two years due to
the lack of new developments and the upgrade of a number of
existing shopping centres. Monthly rents at shopping centres in the
Bulgarian capital were stable at year-end 2015, ranging from EUR
7–25/m2 /month depending on the size of the units. Prime yields
dropped by 0.25 percentage points in the course of last year, to
9.00%, and a further moderate fall is possible.
400
300,000
300
250,000
200,000
200
150,000
100,000
100
50,000
Shopping centre space per 1,000 inhabitants
400,000
350,000
0
en
a
en
um
Sh
ev
or
ag
aZ
St
ar
Pl
e
ss
as
rg
Bu
Ru
a
rn
Va
di
v
0
ov
The makeover of Vitosha Boulevard – the final section was completed in 2015 – to create a pedestrianized zone has significantly
enhanced the location’s attractiveness. Consequently, demand
for space from both local and international retailers has risen,
pushing the vacancy rate down to 6 % at year-end 2015. From a
low starting point, prime rents have increased somewhat and are
500
Shopping centre space in m2
Shopping centre space per 1,000 inhabitants
Pl
Redesign of Sofia’s main shopping street leading
to lower vacancy rates
450,000
fia
The Strand in Burgas (opened in 2013, 30,000 m2) and the
18,000 m2 Mega Mall in Ruse (opened in 2010) have closed
after only a few years. Meanwhile, the Galeria Varna was sold
in 2015 and is due to be converted into a health centre. The
Markovo Tepe Mall (50,000 m²) and Galeria Plovdiv (45,800 m²)
are also under new ownership. Both properties are set to be
relaunched and are due to reopen in 2017.
Bulgaria –
Shopping centre space – Cities 2015
So
Outside Sofia, competition is also becoming stiffer. In 2014 and
2015 only one centre came onto the market, the 17,500 m2 Panorama Mall in Pleven. However, a number of centres closed or were
converted. In some cases, malls are being revitalized or repositioned by new owners.
currently between EUR 30 / m2 and EUR 46 / m2 per month. This
trend of rising prime rents and falling vacancy rates is expected
to continue in 2016. Prime yields on the city’s premier shopping
streets are stable at 8.75 %.
Shopping centre space in m2
Closures, conversions and changes of ownership
shaping shopping centre development outside Sofia
Source: Immobilien Rating; RegioPlan
Real Estate Country Facts 05/2016 I 15
Real Estate Country Facts
Romania
Over 200,000m² of new shopping centre space in
Bucharest in only three years
After a subdued year in 2014, when only around 56,000 m2 of new
shopping centre space was built (the lowest increase since 2005),
Romania’s retail property market is picking up speed again. Last
year, three new centres opened and three extensions were completed. The additional 217,500 m2 brought total shopping space to
around 2.1 million m2, of which more than half is in Bucharest and
the Transylvania region.
The stock of space in the Romanian capital increased by around
70,700 m2 with the construction of Mega Mall, one of Bucharest’s
biggest shopping centres, in the east of the city. The other two new
openings were the 61,000 m2 Timișoara Shopping City, located in
the city of the same name, and the 45,000 m2 Coresi Shopping
Resort in Brașov. The latter is the city’s first modern shopping centre, while the Timișoara mall is the first new centre to open there in
over a decade.
New shopping centre openings in
Romania (selected), 2015
Property
Lettable area, m²
Opening
City
Mega Mall
~ 70,700
2015
Bucharest
Shopping City
Timișoara*
Coresi Shopping
Resort
City Park Mall (E)
~ 61,000
2015/2016
Timișoara
~ 45,000
2015
Brașov
~ 20,200
2015
Constanţa
Shopping City Deva (E)
~ 10,600
2015
Deva
Severin Shopping
Centre (E)
~ 10,000
2015
Severin
Key: (E) Extension; *Opening in two phases: October 2015 and March 2016 (included in full in 2015)
Source: Immobilien Rating; RegioPlan
The strong growth in the supply of space, as shown in the table
above, illustrates the positive sentiment on the Romanian retail
market. This is being fueled by increased turnover in the retail
sector (growth of 9% in 2014/2015), rising consumer confidence
and solid economic indicators.
Developers attracted by undersupply in some secondand third-tier cities
Besides Bucharest, where shopping centre space is already in
sufficient supply, development projects in 2015 were mainly
implemented in second- and third-tier Romanian cities (such
as Timișoara and Brașov), some of which are undersupplied.
This trend is continuing, with Timișoara (in western Romania, close
to the Hungarian border) and Brașov (in southeastern Transylvania)
still the centre of attention. In Timișoara, the country’s third-
16 I Real Estate Country Facts 05/2016
largest city, the amount of shopping centre space is set to more
than double by 2017/2018 with the opening of Shopping City in
2015 / 2016, completion of the mixed-use Centrum Timișoara
(currently under construction), and the modernization and extension
of the Iulisu Mall. As a result, the city will be among the locations
with the highest density of retail space per 1,000 inhabitants,
alongside the likes of Constanta and Iași.
The pace of growth is similarly rapid in Brașov: the city’s first modern
shopping centre, the Coresi Shopping Centre, opened in 2015, and
the start of construction of new space at three locations has also
been announced (35,000 m2 at Korona Gallery, 45,000 m2 at AFI
Europe and expansion of the Carrefour hypermarket).
SC projects in Romania (selected), under construction/project/restructuring
Property
Lettable
area, m²
Status Scheduled
opening
City
Park Lake
~ 70,000 under construction
2016 Bucharest
Veranda Mall
~ 25,000 under construction
2016 Bucharest
Timișoara Centrum
~ 50,000 under construction
2017 Timișoara
Iulisu Mall (R+E)
~ 80,000 under construction
2017/18 Timișoara
AFI Europe Brașov
~ 45,000
project
2017/18
Victoria Lifestyle Centre
~ 42,000
project
Brașov
n.m. Bucharest
Korona Gallery
~ 35,000
project
n.m.
Piatra Neamt Shopping
City
Mega Mall Satu Mare
~ 29,500
project
n.m.
Brașov
~ 27,000
project
Piatra
Neamt
n.m. Satu Mare
Promenada Mall (E)
~ 25,000
project
n.m. Bucharest
Key: (E) Extension; (R+E) Restructuring and extension
Source: Immobilien Rating; RegioPlan
Density of shopping centre space in Bucharest to reach
about 517m2 per 1,000 inhabitants by the end of 2016
In Bucharest, about 95,000 m2 of space will be built in 2016 –
70,000 m2 at Park Lake and 25,000 m2 at Veranda Mall. The
scheduled opening of Park Lake in fall 2016 will lead to a
particularly sharp increase in competition in the east of the city,
due to its proximity to two large centres with wide catchment
areas (Mega Mall is only 5 – 10 minutes away by car). Including
the planned increases in 2016, Bucharest’s stock of shopping
centre space is forecast to reach 905,000 m2 next year, up from
810,000 m2 at the end of last year, for a density of 517 m2
per 1,000 inhabitants (2015: 462 m2). This means the city’s
shopping centre market will be highly saturated. The growth in
space in Bucharest could slow in the near future, with attention
shifting predominantly to the modernization of older shopping
centres and expansion of centres that are performing well. Only
the 25,000 m2 extension of Promenada Mall is currently at the
planning stage. Slated for 2014, the start of construction at
Victoria Lifestyle Centre (42,000 m2) in northwest Bucharest is
still on hold and has been postponed indefinitely.
Shopping centre vacancy rates and rents stable, prime
yields down slightly
Monthly rents at Bucharest’s shopping centres are between EUR
10/m2 and EUR 65/m2 per month depending on the size of the
units. Vacancy rates are holding steady, at 5–15%. Prime yields
in the Romanian capital’s shopping centre segment fell by 0.5
percentage points year on year in 2015, finishing the year at about
7.75–8.25%. Another small decline is anticipated in 2016 owing
to stronger interest among investors.
Dominance of shopping centres causing problems for
Bucharest’s shopping streets
Rents in shopping streets in the Romanian capital were unchanged
year on year in 2015, and stood at about EUR 30 – 65 / m2 per
month at year-end. Bucharest still does not have a particularly
lively high-street culture and shoppers prefer to head to shopping
centres instead. At present, some 15–20% of high-street retail
space is empty. The rate is likely to remain unchanged or drop
slightly in 2016 owing to steady demand in the retail sector. Top
yields reached 8.75– 9.25% at the end of 2015.
Romania – Shopping centre
space – Cities
Shopping centre space in m2
800,000
800
700
700,000
600
600,000
500
500,000
400
400,000
300
300,000
200
200,000
100
100,000
Shopping centre space per 1,000 inhabitants
Shopping centre space in m2
Shopping centre space per 1,000 inhabitants
900,000
0
ţi
ov
aș
Br
la
Ga
va
a
nţ
aio
Cr
i
ta
ns
Iaș
Co
a
ar
oc
ișo
m
-N
ap
ar
uj
ch
Cl
Bu
Ti
es
a
t
0
Source: Immobilien Rating; RegioPlan
Real Estate Country Facts 05/2016 I 17
Real Estate Country Facts
Contacts:
UniCredit Bank Austria
UniCredit Bank Romania
UniCredit Bulbank
Real Estate CEE
Lukasz Motyl
(international clients)
Tel: + 43 (0)50505-55142
[email protected]
Real Estate Finance
Gabriela Dragulin
Tel: + 40 (0)21 200 1783
[email protected]
Real Estate
Ana-Maria Barakova
Tel: +359 2 9232 852
[email protected]
UniCredit Bank Austria
Immobilien Rating GmbH (IRG)
UniCredit Bank London
UniCredit Network CIB International
Real Estate Research
Karla Schestauber
Tel: + 43 (0)50505-54784
[email protected]
Market Research
Alexander Stögbauer
Tel: + 43 (0)50601-51904
[email protected]
UniCredit Research
Dan Bucşa
Tel: + 44 (0) 207826-7954
[email protected]
Political Risk & Country Analysis
Francesca Nenci
Tel: + 39 02 886 28950
[email protected]
Helmut Schneider
Tel: + 43 (0)50601-51863
[email protected]
UniCredit Bulbank
Real Estate
Anton Höller
Tel: + 43 (0)50505-55980
[email protected]
Werner Zimmel
Tel: + 43 (0)50505-62600
[email protected]
Authors:
18 I Real Estate Country Facts 05/2016
UniCredit Research
Kristofor Pavlov
Tel: + 359 2 9269-390
[email protected]