Forton: Bulgaria's retail property market saturated, opportunities abound on office segment in Sofia
Property investment, development opportunities abound in Sofia
After several years of pressure on landlords the Sofia office market has reached the tipping point from which investment and development offer a sizable opportunity. The pre-recession development spree has now brought significant volume of institutional quality stock to the investment market and with yields at competitive levels compared to Central and Eastern Europe in general a return of international investors is expected.
Across the country Sofia remains the most active leasing market but the big cities, especially the second largest, Plovdiv, are seeing an increase in their share in the total volume of the leases. Office take-up in 2014 amounted to 154,000 sq m which was the highest result for the last six years. Leasing activity continues apace and is expected to record a new increase compared to the last year.
Demand from the outsourcing sector has the most positive impact on the prime market segment, resulting in gradual rental growth and decreasing vacancy rates. It also provides grounds for developers to start new office projects or to restart some which are currently on hold.
The existing stock of modern office space in Sofia stands at 1,709,153 sq m (class A and B). Around 100,000 sq m are expected to be delivered by the end of 2015 but this space is estimated as insufficient to meet occupier requirements for prime space in the medium term.
The largest project with delivery date this year is Capital Fort with 42,000 sq m of leasable office space. The building is located near a metro station on Tsarigradsko Shose Blvd. and came into operation in the second half of the year.
Because of the specific tenant requirements, leasing activity is concentrated in the office zones alongside the main boulevards such as Tsarigradsko Shose, Bulgaria, Todor Alexandrov, Nikola Vaptsarov as well as in the suburbs and the area near Sofia airport. However, the restart of large projects such as City Tower (34,600 sq m leasable office
Headline rents for class A offices in Sofia remain stable
space) will draw again occupier attention to the Central Business District (CBD) area. The office building is developed by GEK-Terna and is expected to be delivered in 2017.
Since last year, some office markets outside Sofia have also become interesting for the tenants. Business process outsourcing (BPO) and IT companies, which have already established their operations in Sofia, found their next office locations in the second-tier cities as Plovdiv, Varna, Burgas, Ruse etc.
The headline rents for class A offices in Sofia remain stable in the range of 10.5-12.5 euro/sq m/month with the highest levels commanded by the CBD submarket. However, as a result of occupier demand for quality space and the concentration of such projects alongside the main boulevards, the rents in these areas are also approaching the upper level for the segment. A slight increase is expected over the next couple of quarters.
The recovering office market encourages developers to start new projects not only in Sofia but also in other big cities where the supply of quality offices is relatively low. A good example is Plovdiv where around 21,000 sq m are under construction. The pipeline in Sofia amounts to over 170,000 sq m after a number of new projects have been started or unfrozen.
Offices provide an attractive investment opportunity in view of the stable rents and the high occupancy rates, especially in the prime market segment. So far, activity has concentrated on underperforming or distressed assets with class A specification in established markets. With regard to technical specifications occupancy there are properties available for sale that can meet an international investor requirements.
Bulgarian market relatively saturated
After years of strong development activity, the retail market, in particular in Sofia and other big cities, is relatively saturated. At the beginning of 2015 the total stock of shopping centers for the country is 763,000 sq m with over one third of this space concentrated in the capital city where 10 malls and three retail parks are operating.
Sofia remains Bulgaria’s most active leasing market for office properties
For the time being the only new project planned for delivery in 2015 is Plaza West – with gross leasable area (GLA) of 26,050 sq m, in the west of Sofia.
The stronger potential now is in the restructuring of underperforming shopping centers so that they could find their place on the market again. Such example is the first mall in Sofia – City Center Sofia, acquired in 2014 by Revetas Capital and currently is in process of repositioning under the guidance of Forton as exclusive leasing agent.
Sofia office space yields competitive compared to CEE
For the Sofia market, 2014 was the last year of strong development activity with the delivery of two schemes – Sofia Ring Mall (GLA 69,000 sqm) and Mega Mall (GLA 25,250 sq m). As new projects came on the market, the pressure piled on the existing ones to retain their footfall and turnover. This competitive environment is likely to put off developers but in the meantime will offer cherry-picking opportunities for institutional investors as dominating centers within certain catchment areas cement their market positions.
What is true for Sofia is also true for secondand third-tier city markets. Throughout most of them competition has produced leading projects which have managed to capture the new demand from international and vibrant national retail brands.
The most active occupiers remain big international retailers such as H&M, LC Waikiki, the brands of Inditex and LPP etc. However, some of them are already operating in the big cities and now are looking for locations in regional centers with over 100,000 residents. The newcomers such as the polish shoe brand CCC are still focused in the major cities.
After the change of the ownership of Praktiker and bauMax in the last year, now the DIY sector is in process of restructuring. The bauMax stores have been rebranded to HomeMax and are being repositioned in the home improvement segment.
Over the last few months there were a number of new openings in the sector. In Sofia the first Mr. Bricolage store (4,500 sq m) in a shopping center started operations in Sofia Ring Mall. A new Praktiker is already under construction in Varna while the former store of the DIY chain in Retail Park Varna has been occupied by IKEA for its first order and collection point on 2,500 sq m.
The fast moving consumer goods (FMCG) sector is dominated by discount chains as Lidl and Kaufland, both part of the biggest European retail group Schwartz. The other fast expanding brand is Billa, part of the retail group REWE.
The strong increase of the supply and the cautious expansion of most retailers over the last few years have put rental levels under pressure. However, since the end of 2014 the levels have stabilized around 20 euro per sq m/month for prime space in the shopping malls in Sofia. The prime locations on main streets such as Vitosha Blvd. in Sofia also registered no price changes over the last few quarters and remained around 44 euro per sq m/month.
There were several significant acquisitions of shopping centers in 2014, as investors chased down distressed assets. The deal for City Center Sofia was followed by that for Galleria Plovdiv and, in the beginning of 2015, by that for another shopping center with construction on hold in Plovdiv - Markovo Tepe Mall.
The supply potential in the retail real estate market lies in restructuring of underperforming shopping ceters The retail market, in particular in Sofia and other big cities, is relatively saturated
The industrial real estate market in Bulgaria offers a large field for new project development while the opportunities for investment remain limited. The total industrial stock in the region of the capital city Sofia amounts to 835,000 sq m but the most part of this space is old, in a poor condition or of small size.
On the other hand, the limited availability of modern space combined with Bulgaria's improving economic performance provides an opportunity for new projects in the industrial segment. Before the crisis, a number of projects for new industrial and logistic parks were on the drawing boards and most of them are still there. Now that there is evidence of occupier demand for modern space and potential for rental growth, the appetite for new speculative developments is also on the increase.
Sofia and the developing industrial areas around it remain the key target for most of the investors in logistic space. The area is at-
tractive as the largest consumer market in Bulgaria, also as cross point of three Pan-European Transport Corridors – IV, VIII and IX. To the west of the city German manufacturer of automotive climate controls Behr-Hella Thermocontrol opened in 2015 the first phase of its factory in the government-owned industrial zone in Bozhurishte.
The projects to the east of Sofia are mainly logistic developments such as East Ring Logistic Park and Industrial Park Sofia East.
Away from Sofia, most of the demand is concentrated in the light industry, tailoring and automotive segments. The demand drivers are international manufacturers in search of cost-efficient ways to grow their operations through outsourcing or offshoring. They are interested in the industrial zones around the second largest city Plovdiv. Among the large factories already operating in the region are these of ABB, Liebherr, Schneider Electric. Sensata and SMC Automation were the latest new arrivals to the Plovdiv area. Regional cities with industrial traditions and human resources are also in the investor focus, especially of the automotive industry, with Teklas Bulgaria in Kurdzhali and Nexans Autoelectric in Pleven being the most recent examples.
After a slight increase in prime rents in Sofia region, prime logistics space is traded at 3.75 euro per sq m/month with even higher levels in 2015 expected as demand firms up and supply remains low. Rental growth is underpinned by the low vacancy rate (around 2% as of Q1 2015) and the shortage of speculative space. A number of projects are under development but due to their relatively small size even after their completion the supply will remain insufficient to meet the occupier growth.
The outsourcing wave in the light industry sectors – sewing, automotive and metal processing continues and this is a good reason to expect that the interest in purchases of land for industrial developments will continue. Currently Bulgaria offers over 10,000 ha of pre-developed industrial and logistics land plots in private and state industrial zones, for build-to-suit or build-to-own projects.
Opportunities for investment in industrial property are limited
Due to its location, predictability, available working force and easy access to major transport corridors, Bulgaria has also the potential to become hub for the light industry in Southeast Europe.