For­ton: Bulgaria's re­tail prop­erty mar­ket sat­u­rated, op­por­tu­ni­ties abound on of­fice seg­ment in Sofia

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Of­fices

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.

Hot spots

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.

Rents

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.

In­vest­ment

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.

Re­tail

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

Hot spots

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.

Rental lev­els

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.

In­vest­ment ac­tiv­ity

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

IN­DUS­TRIAL

Overview

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.

Hot spots

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.

Rents

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.

In­vest­ment

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.

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