Real estate prices will fall an additional five percent by the end of the year

Projections for the recovery of the real estate market are already being pushed to 2011 and 2012. For now, prices are falling for office spaces, apartments, and land, while shopping centers are struggling with occupancy.

Written by Antonija Knežević

C rental prices for office spaces will fall an additional five percent by the end of the year, and the same reduction will apply to rental prices in shopping centers. Brighter forecasts are not expected for the apartment and construction land markets either, and predictions for the recovery of the real estate market are now being pushed from 2011 to 2012. Namely, only with improvements in the overall economic situation, followed by an increase in purchasing power and better credit conditions, can positive changes in the real estate market be expected. According to data from the Croatian branch of the consulting firm Colliers International, the best condition is currently in the office space market. Although occupancy is also declining in this segment (the vacancy rate has increased by 30 percent in a year), it is still at a relatively low level of seven percent, and by the end of the year, it is expected to reach eight percent. Rental prices for office properties in the most desirable locations have fallen by 10 percent in the last year for the ‘A/B+’ class, currently ranging between 14.5 and 15 euros per square meter, while in less attractive locations outside the city zone, they have fallen to 10 to 13 euros per square meter. Thanks to the price drop in the first half of this year, demand for office spaces has slightly increased.

Everyone is on alert
– The highest demand for offices remains in the main business zones and in the center of Zagreb. The main groups of tenants are financial institutions, IT (information technology companies), private polyclinics, and law firms. There is noticeable interest from foreign companies that are just entering the Croatian market, but this importance is still not significant. Demand for leasing office properties still exists, but due to the economic crisis in which the market is, tenants are very cautious regarding contract terms, seeking shorter lease durations and lower prices. Additionally, they are increasingly turning to locations that can provide the lowest rent, which increases the vacancy rate of office spaces in central areas and secondary business zones. This, in turn, causes increased pressure to reduce prices in the mentioned locations, says Vedrana Likan, director of Colliers Croatia, who predicts that office space prices will continue to fall by five percent by the end of the year. A similar decline is expected in the shopping center segment, which has a vacancy rate twice as high as that of office spaces. It increased to 15 percent in the first quarter, continued to rise in the second quarter, reaching a high rate of 17 percent, and further growth is expected. This has, of course, affected rental prices, which have fallen by 10 to 15 percent compared to the same period last year. Today, the rental of retail space ranges between 13 and 60 euros per square meter. Spaces in ‘high street’ locations (in Zagreb Ilica, Frankopanska) are in a somewhat better position compared to shopping centers due to the limited supply of such premises, resulting in a vacancy rate of only eight percent in that segment.

Three new shopping centers
Due to the announcement of the opening of three new shopping centers by 2012 (Arena Center, Ikea, and Horvatinčić Center at Cvjetni Square) and accordingly increasing the gross leasable area by an additional 206 thousand square meters (from the existing 427 thousand), further changes will occur in the retail real estate market, forcing first and second-generation shopping centers to reposition and reconstruct if they wish to retain customers (and tenants). The slowest recovery is expected in the apartment market, which, along with the construction land segment, is the most affected by the economic crisis. A large number of unsold apartments (estimated at even 10 thousand in Zagreb) and a decline in demand have caused a significant drop in their prices.
– In July, the average price per square meter in the center of Zagreb was 2,184 euros, 165 euros higher last year, and in 2008, the square meter was more expensive by as much as 352 euros, indicating a drop of 16 percent. Compared to the first seven months of last year, apartment prices in Split have fallen by as much as 13 percent, in Pula by 10.4 percent, in Osijek by 9.1 percent, and in Zagreb by 6.5 percent, explained Ivana Beljan from the portal Crozilla.com, emphasizing that the real estate market is still subdued and that only lower prices or better bank credit conditions can lead to an exit from this state, which cannot be expected.
– Therefore, we advise advertisers to publish realistic and true prices when placing ads to take a step forward, says Ivana Beljan. When it comes to construction lands, in most counties, they are constantly losing value, but there are exceptions. – Construction lands in some areas are constantly losing value, for example, in Zagreb County, prices are significantly falling. It is assumed that the reason for this is the large number of unsold apartments in Zagreb and its surroundings. In Split, however, the situation is quite different – there, land prices have recorded an increase in recent months. The reason is that Split, due to its traffic and geographical position, is extremely interesting to buyers, but also due to the small number of available construction plots in that city, prices are still high, notes Ivana Beljan.

Construction has stopped
The poor state of the real estate market has also halted construction activity in the country. According to data from the Croatian Bureau of Statistics, in the first quarter of 2010, construction companies completed 49.6 percent fewer residential units than in the same period the previous year. The volume of construction work decreased by 19 percent in the first quarter of 2010 compared to the last quarter of 2009. When it comes to new constructions, the largest decline is in the residential real estate segment. A significant portion of investments has been halted in the office space area – in the first half of 2010, only 3,650 new square meters of ‘A’ class office space were introduced to the capital’s market, while in 2009, 12 thousand square meters of office buildings of that category were completed. There is also a noticeable decline in activity in the retail real estate segment, but investors are gradually turning to secondary and tertiary cities such as Varaždin, Zadar, Sisak, Rijeka, and Osijek, which investors still consider interesting.

A logical consequence of the events in the real estate market has been a small interest in investment purchases. Last year, there were almost no such transactions. This year’s sale of the center in Žitnjak by Agrokor to W. P. Carey, a transaction of 77 million euros, is considered by Colliers to be a return of foreign investments to Croatia. – The most interested investors are focused on ‘sale and lease back’ types of transactions, mostly for spaces owned by chains of consumer goods stores. Properties with questionable commercialization (distressed properties) are yet to arrive on the market, says Vedrana Likan, adding that the expected conclusion of negotiations in February 2011 and Croatia’s entry into the European Union will bring stability to the country, and consequently more investments. Due to the expected reduced risk of the state due to Croatia’s accession to the EU, increased interest from international and institutional investors in Croatia is anticipated.

However, until Croatia’s entry into the EU, it seems that roses will not bloom in the real estate market. A slight decline in prices is expected by the end of the year, and as long as prices continue to decline, recovery cannot be discussed. – We can expect a recovery of the real estate market when the overall situation in the country improves and the purchasing power of citizens increases. The imposition of new taxes may have filled the state treasury, but it has emptied the pockets of citizens. If the ‘black autumn’ mentioned by our politicians truly occurs, we can expect an even more unstable financial situation and further price declines in real estate, which will likely not mean much to citizens. In such a situation, the standard of citizens, and thus the sale of real estate, will further decline, concluded Ivana Beljan.