On the prospects for investment in commercial real estate in Europe. The difference between new and well-known markets.

Friends, I found an interesting article, so to speak a look from the outside on the investment potential of Slovenia. On the prospects for investment in commercial real estate in Europe and the difference between new and well-known markets, says the chief editor of the portal Prian.ru Philip Berezin.

– Philip, what economic or political background determines the attention of investors to European real estate?
– First of all, these are zero, and sometimes even negative rates on deposits, as well as minimum mortgage rates, from 1.5 to 3.0%, depending on the country, bank, object and status of a particular borrower. It turns out that it is unprofitable to keep money in banks, in stocks – often risky, and real estate seems to be a stable instrument that can be purchased on favorable terms. This is an argument for many investors.
It is clear that first of all they are attracted to large markets with a history and clear prospects. For example, according to the German Mortgage Banks Association (VDP), every second euro invested in 2018 in German projects worth over 10 billion euros was received from foreign players, and the share of foreign investments in the real estate market is 40% – that is, investors still looking at Germany.
On the other hand, this rush leads to a shortage of the market, higher prices and, ultimately, a decrease in profitability. Of course, rental rates are rising, but not so fast. In the autumn, PwC and the Urban Land Institute, analyzing the situation in the same Germany, concluded that prices, especially in large cities, are approaching critical when profitability becomes zero.

– In Slovenia, everything is different? That is, the situation is different from the German?
– Slovenia is hard, much harder than Germany, survived the crisis of 2008 and its consequences. In 2009, GDP declined by almost 8%, and until 2013 there was no growth. And real estate prices – both residential and commercial – generally began to grow in 2014. But now the Slovenian market is developing more dynamically.
The situation is similar in many countries of Southern and Eastern Europe. For example, in Croatia or Bulgaria. And I cite Slovenia as an example, because it started integrating into the “old” Europe earlier than other countries and more actively joined the EU in 2004 and switched to the euro, currently it is the only republic of the former Yugoslavia that is part of the Schengen zone. That is, it is ahead of the state with a similar story. In 2017, 36,000 real estate transactions were recorded in Slovenia. Total sales amounted to 2.3 billion euros, which was the highest since 2007. The total data for 2018 is not yet available, but in recent months the corresponding parameters have been even higher. But for five years in a row in Slovenia “everything was bad”, and the construction – residential, commercial – was not conducted. Of course, the fundamentally local market loses to German, French, English in most parameters. But for a particular investor at the moment it may be of interest to countries such as Slovenia. Because investments here can be more profitable at a reasonable, if I may say so, “European” risk.

– What kind of profitability can we talk about in Slovenia?
– The answer is, of course, the average temperature in the hospital … I will say this. The profitability of the shopping center in Slovenia – 6-7% per annum, is the average for a normally functioning facility. Two years ago, the numbers were one and a half to two percent higher.

– You said that real estate in Slovenia is not enough. In which segments?
– By and large – in all. There is a shortage of housing, offices, and logistics complexes, and, of course, shopping centers. Moreover, according to the estimates of the Slovenian Institute for Housing Policy, the shortage of apartments is felt primarily in Ljubljana, then there is not enough commercial space in the regions. Experts at Colliers International in 2015 predicted that retail would develop the most activity in the provinces.

– “But Slovenia is a very small country with a population of 2 million.” Who will go to these shops?
– The trend that investors are paying attention to is moving some citizens from relatively expensive Ljubljana to small cities and even rural areas. At the same time, the purchasing power of the population has been growing since 2014, inflation is now at around 1.5%, and unemployment is declining — in 5 years it has decreased by 2.5% to 7.7%. That is, people live better and are willing to spend more. Therefore, network companies – Slovenian, Croatian, German, Austrian – are interested in expanding their business and pay attention to cities with a population of 5,000 or more. Of course, trying to cover the maximum possible area.
Of course, there are no necessary areas in the province. There are two options – either to build an object from scratch, or to look for a room that for one reason or another has not been exploited in recent years, and rebuild it to meet the requirements of the future tenant. This is an investment idea, very successfully exploited.

– What are the main risks in such projects?
– The scheme for the investor is as follows: first finding a tenant, simultaneously selecting an object, concluding a long-term contract and only then construction work … Serious investments need to be started only after the future tenant legally confirmed his interest. The construction itself or the reconstruction under such a scheme is paid after construction. Initially, only the initial payment is made – in fact, a pledge that emphasizes the seriousness of the customer’s intentions.
So the risks of losing money at the start are minimized. But it is clear that you need to competently choose a place, a construction company, and a tenant. Plus, the success of the project in the medium term is always influenced by the global economy. Slovenian investments have no such history as British or German ones, here the market is more volatile – this is both a risk and an opportunity.

– How to organize the processes you mentioned?
– The Slovenian or Croatian markets are not well studied, so investors usually do not work themselves, but are looking for a partner in these countries. There are not so many offers, but they are there. At the partner – searching for the object, tenant, assistance in opening a company in Slovenia, conclusion of contracts.
It is important that the general principles that allow you to find a truly successful commercial object will be the same as in other countries. More importantly, the Slovenian market is now more dynamic, and this is “upward dynamics”. Therefore, they pay attention to it.

Source: Prian.ru