A reduced pipeline and lack of available financing is likely to result in lower office vacancy levels across Central & Eastern Europe (CEE), according to the latest research from global property adviser CBRE.
The office pipeline under construction (U/C) has remained subdued across CEE and without significant pre-leases developers are struggling to secure financing. Warsaw is the exception to this trend, where several speculative projects have started during 2011.
Vacancy levels range from 6.7% in Warsaw up to 22% in Sofia and Belgrade. The most significant decline to vacancy during 2011 took place in Sofia (-350 basis points (bps)). Kyiv (+410 bps) and Zagreb (+390 bps) are still trending the other way.
Jos Tromp, Head of CEE Research & Consultancy, CBRE, commented: "Despite declining vacancy across CEE, the general consensus is that most markets are still somewhat imbalanced. Warsaw's office market seems to be rather solid, and despite a growing pipeline under construction, appears able to keeping vacancy rather low. Solid demand and strong absorption are the backbone to this."
The CBRE CEE weighted average prime office yield (including Eastern Europe (EE)) compressed further during the second half of 2011 (H2) to 8.7%. This is 65 bps lower when compared to the end of the fourth quarter (Q4) of 2010 and is 12 bps down on Q2 2011. Compression was mainly driven by prime yield movement in EE, while prime office yields remained mostly stable in Central Europe (CE) during H2 2011. Altogether, prime yields in CE have compressed by 52 bps since the lowest point in the cycle, after they decompressed by 170 bps in the period Q1 2008 Q1 2010.
Patrick O'Gorman, Director of CEE Capital Markets, CBRE, commented: "As the search for high quality assets has continued and a lack of product in markets such as Poland and the Czech Republic becomes visible it is not unthinkable that yields may compress further for the best assets in these markets. In addition, Budapest, Bratislava and Bucharest still offer some room for compression for which improving occupational market fundamentals seem to be the prerequisite. All of this is obviously dependent on the wider macro-economic picture."
Occupational market activity decreased again during H2 2011. Take-up figures in Warsaw, Bucharest and Prague went down by 20-40% compared to H1 2011. This occurred while total leasing activity in Warsaw reached a record during 2011, indicating that renewals are still playing an important role across the region. The fact that vacancy did not rise substantially in Bucharest and Prague is mainly driven by the limited amount of projects under construction.
Jos Tromp added: "A recovery in demand is most likely in markets that have a strong outsourcing component and on the other hand are less dependent on European economic growth. Germany's solid economic performance during 2011 is giving confidence that there will be a positive spin-off on demand for countries such as the Czech Republic and Slovakia, however, the outlook remains uncertain for 2012."
Claudia Chistova, Head of Office research, CBRE in Russia comments the results of the report: "During 2011 the situation on Moscow office market was stable. Occupier activity remained strong especially for the central areas of the city, while the delivery of new projects dropped considerably. The overall vacancy rate decreased and stood at 14% by the year end. Prime rents grew further during 2011 in line with the trend observed in 2010. By the year end the prime rents increased by 30% and reached $1,200 per m² / year net of OpEx and VAT. In 2012 we expect stable demand for high quality office space in the best locations and increase in rents for this space. In 2012 the level of new delivered office space is expected to be even less than in 2011, not more than 500,000 m². Due to the lack of new supply, the vacancy will continue to decrease. Certainly, the volatility of European markets suggests risks for Russia's real estate market. In addition to the uncertain macro-economic landscape, Ru