Lack of Financing Expected to Push Vacancy Down Across CEE

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 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)). Kiev ( 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.

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.

Speaking about the Budapest office market Gábor Borbély Head of Research & Consultancy at CBRE Hungary, said: “average vacancy in Budapest is now 19.2% compared to 20.5% a year ago. The rate was flat until Q3 and dropped in one quarter on the back of record high net absorption registered in Q4. Net absorption however was far from across the submarkets. Occupied stock has grown in Central Pest to the greatest extent, hence vacancy rate fell by over 830bps in a year and stands at the lowest level in town -15.6%. All other central submarkets (CBD, Central Buda Váci Corridor) registered negative or zero absorption hence an increase in the vacancy rate. South Buda Non-Central Pest had also significant positive net absorption and this was reflected in decreasing vacancy. Other non-central submarkets essentially have seen no growth in occupied stock.”

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.”