If you or your clients are considering doing business in Southeast Europe (SEE), there are several countries that should not be overlooked. In the last year, Serbia and Bulgaria were more active in terms of construction activity in comparison with their neighbours in the region. Overall, the most active sector among investors in the SEE region was the office, followed by the accelerating industrial and stabilizing retail sectors. The first half of 2023 continues to be influenced by ongoing external and internal challenges. However, new opportunities have risen—the industrial sector, aside from manufacturing, has been increasingly driven by retail, with a surging e-commerce trend impacting both industrial and retail business models.
In the last two years, we have noted a rising interest for industrial properties, which has been on an upswing since the start of the pandemic. This was marked with several regional developers entering the market and continuously seeking opportunities in the vicinity of capitals and several major cities. Following higher activity over the previous years, combined with the lack of new supply, investors looked after prime assets within the non-core markets, which also offer attractive return rates. Investors’ appetites remain solid, further supported by an increasing number of new developments in emerging markets such as Serbia, Croatia, and Bulgaria.
Investment volumes realized in 2022 in Bulgaria experienced an upswing, pointing to the recovery of all sectors. The level of transactions presents a record high in the four-year cycle and the highest share in the overall SEE market volumes. The industrial/logistics sector drove the volumes throughout the past two years, with nearly a 30% share, with the largest transaction being the Transcapital Logistics Center acquired by CTP, a Czech-based logistics and industrial developer, for around €60 million euros [$65.5 million USD], reflecting a cap rate of 6.5%. Additionally, multiple opportunities were also realized in the retail sector. As was the case in the previous year, investors were once again mostly focused on retail parks in secondary cities, which have experienced an upsurge after the pandemic. This will inevitably lead to an increase in demand for more evenly dispersed logistics hubs in the country.
Sustainability is becoming increasingly applied among developers and investors as business is rapidly changing to prevent climate change.
Finally, a notable driver of the market has been environmental, social, and governance (ESG), continuing to lead investors, occupiers, and developers in the direction of environmental and social transparency. In the SEE region, sustainability is becoming increasingly applied among developers and investors as business is rapidly changing to prevent climate change. We have already noted that certified assets tend to achieve higher rents than non-certified assets. Nevertheless, the demand for certified assets is increasing year by year, as well as tenants’ awareness.
Logistic assets will remain attractive to investors with continual rental growth expected due to supply/demand imbalance. The ongoing external challenges did not lower the activity within the industrial sector across the region. Over the previous 12 months, Bulgaria was one of the most active markets in the SEE region in terms of new completions. E-commerce, which is becoming an important growth driver for logistic companies looking for opportunities to serve growing consumer demand from online channels, continues to surge. Going into 2023, vacancy rates will remain critically low, and although build to suit development grows, there is an increasing demand for speculative development, especially if developed according to latest ESG standards and with location/access focus in mind.
The Bulgarian logistics market remained one of the most active markets throughout the SEE region in 2022, with a number of new schemes being delivered across the country. To date, Sofia remains the most active region, still luring many international and local developers. CTP continued to expand its presence in 2022 by acquiring multiple locations and developing several industrial parks in the Sofia area, followed by acquisitions by Bulgarian Property Developments, part of Tavistock Group and one of the largest local investors in industrial properties. Demand has been constantly improving, boosted by e-commerce, which continued to gain pace and impact the logistics sector, as several online B2B wholesale market platforms emerged, such as Optidist by the 3PL operator bERS. This new segment in the logistics market will lead to a rapid growth in demand for ambient and cold-chain premises throughout the country.
The pipeline is looking strong with multiple projects under construction and the announcement of future schemes, mainly around the capital and a few larger cities. The last quarter of 2022 was marked by a significant drop of the vacancy rate in Sofia, with the share of unoccupied production and logistics space falling below 1% of the total supply. On the one hand, the active demand from retail and logistics companies led to exhaustion of available space. The last quarter was marked by acceleration of the occupiers’ activity and take-up. Total volume of leased space and completed owner-occupied premises in Sofia amounted to roughly 104,000 square metres [1,119, 500 square feet], an unprecedent quarterly result. Still, many occupiers count on build-to-suit projects that are planned and implemented to meet their specific requirements.
Overall, the year was similar to 2021 in terms of take-up activity, with 224,971 square metres [2,421,587 square feet] of occupied area. Similarly, at the end of 2022, construction pipeline amounted to 319,898 square metres [3,443,382 square feet]. More than 60% of this supply is for owner occupation. Active development locations are the government-owned industrial zone to the west and the Sofia ring road area to the east. Projects within the city’s ring road are in great demand for e-commerce operations. The fall of 2022 registered continuing rent increase, with prime logistics space in Sofia rented at 4.75 euro/square metre per month [€57/sq m per annum or US$ 5.80/ sq ft per annum] for premises over 10,000 square metres [107,640 square feet]. The rent for small to mid-size schemes increased by nearly 10% to 5 euro/square metre per month in Q4 (€60/sq m per annum or US$ 6.10/sq ft per annum) over the previous quarter. The price growth is pushed by rising construction prices and operating expenses and is expected to continue. Prime yields also posted slight increase, reaching 7.5% which is 25 bps more than in the previous quarter.
After the market slowdown (stemming from the pandemic), the supply figures bounced back in 2022 in several SEE markets, and more notably, Bulgaria. Overall, industrial and logistics assets will remain attractive to investors with a continued rental growth expected. Throughout 2022 across the region, rental levels increased multiple times in some markets, noting the decade peak. This will further spill into 2023; while we are probably witnessing the end of the sudden compression of yields which started just after the global pandemic was over, this might make industrial/logistics properties quite an attractive segment in the next few years.