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17 September 2018

“When commercial real estate market is in question, the trend of both sentiment indices (i.e. Occupier and Investor) has an upward trajectory in the region, including Hungary, Romania, Croatia and Bulgaria, mostly in the segment of office space. Essentially, this means that the demand for quality office space is increasing and, consequently, so is the interest of investors for this type of real estate,” Zvonimir Petrovic, Regional Director for Valuations and Business Planning at BDO Serbia says for BIZLife.

He adds that the situation is similar in Serbia as evidenced by “increased number of foreign investors’ inquiries for professional property valuation services, tax consulting and due diligence services received by BDO offices in the region lately“. “Investors, and especially institutional investors, have clear criteria when considering investment in terms of the segments, i.e. the type of a commercial real estate (retail, office, industry), as well as area and location. Besides the increased demand, the investors have benefited from quantitative easing in the form of injecting money directly into the EU economy by the European Central Bank in the previous years, which influenced the drop in interest rates. Thus from the aspect of funding the situation is also favourable”, said Petrovic.

What is the situation in the Serbian market?

— During 2017 there was a certain level of consolidation in the Serbian real estate market resulting from the takeover of Belgrade Business Center by GTC Group and shopping mall “Mercator” by “MPC Properties”. This pertains to entire properties and professional investors, while individual commercial spaces rarely change owner as companies prefer to lease commercial space and thus minimise assets employed and maintain flexibility. The following projects are currently underway in the office segment in Belgrade: “Green Heart” (over 24,000 m2, Novi Beograd), “N House” (10,700 m2, Novi Beograd), “Kula Usce 2” (“Usce Tower 2”, 23,000 m2, Novi Beograd), “Business Garden” (16,000 m2, Stari Grad), “Ziegel House” (5,000 m2, Vracar), which will additionally raise the volume and the quality of the supply in our market.

What is the level of commercial real estate rents in Belgrade?

— Regarding the level of commercial real estate rents in Belgrade, it can be concluded that it has been relatively stable in recent years, and on a monthly level it ranges from €25-29/m2 for retail space in shopping malls, while in the main streets it amounts from €40-60/m2 for larger spaces and even exceed €100/m2 for smaller spaces. Class-A office space rents range from €14-16.5/m2, for Class-B rents range from €11-12/m2, while for industrial property rents go from €4-5/m2. As an illustration, Class-A office space rents in the region are as follows: Bucharest €18/m2, Budapest €23/m2, Sofia €14/m2 and Zagreb €15/m2.

What do investors pay attention to when buying? What kind of property is worth buying?

— The profitability of investment in real estate primarily depends on supply and demand, investor’s business policy and risk tolerance. Namely, the value of a commercial real estate, like any other type of asset, is derived from its ability to generate future cash flows or contribute to their generation, in this case rents. The value amount itself is the function of cash flows which can reasonably be predicted and expected rates of return on investment. The same formula can be used for calculating realised rate of return as a function (ratio) of expected annual rental income and purchase price of commercial real estate. This rate represents a unique combination of yield and risk – one may use an analogy of two sides of the same coin. For example, expected rates of return on investment (the so-called capitalisation rates) in retail, office and industrial space in Belgrade amount to about 8%, 8.5% and over 9.5%, respectively. It can be observed that these expected rates of return increase as a perception of investment risk increases, which, in fact, is a universal law that applies to any other type of investment.

On the other hand, investors’ expectations are also affected by global macroeconomic trends. In the latest BDO report “Horizons” on global M&A (mergers and acquisitions) activities, it has been noted that the activity in the real estate sector has slowed down compared to 2017 due to the increasing economic and political uncertainties, such as US-China trade war and the trend of interest rate increase in the United States. However, this declining trend of purchase and sale of real estate companies should not be considered merely on a standalone basis as there is evident growing development and construction of new properties, both in Serbia and globally. Innovations in work styles and ways of doing business are noticeable both in the office segment (e.g. spaces adapted for “coworking”, relatively new trend which allows independent professionals - freelancers, to work in a shared environment), and in industry segment (development of 3PL and 4PL and significant expansion of the range of services offered by logistics companies) and in retail (a greater focus on tourism and catering facilities). We can conclude that the answer to the question which real estate is the profitable to invest in depends on many objective and subjective factors, which is why investors engage valuation experts.

Published in BizLife Magazine, September 2018