The real estate market in Slovenia during corona time
Author: Matevz Mencak, Head of Real Estate Funds at Generali Investments LLC Slovenia
The real estate market was quite active in 2019, although real estate transactions were somewhat subdued in 2019 compared to 2018. According to the Land Surveying Administration of the Republic of Slovenia (Geodetska uprava Republike Slovenije), the number of transactions stagnated, but the prices in bigger cities still kept rising. This growth was partly reflected in investment real estate. At the time I am writing this paper, exact figures showing the growth in prices of investment real estate are not yet available, but based on my experience and predictions, I assume there is a growth trend. This is reflected in particular in the capitalisation rate in commercial real estate valuation, which dropped on average by 0.25 and up to 0.5 percentage points.
Taken as a whole, the growth of both Slovenian GDP and salaries in the public and private sectors is also reflected in real estate market activity. Generally, real estate has proved to be a relatively good and safe alternative investment, with real estate prices recording stable growth in the period from 2014 to the end of 2019, resulting in rising optimism in the real estate market. Even more, the Slovenian real estate market saw a lack of supply of both residential and commercial & office buildings in 2019. It was impossible to rent high-quality offices in Ljubljana with a surface area exceeding 1,500 m2. In its December report, the Bank of Slovenia assesses that prices are close to their fundamental levels, with no overvaluation, and are likely to continue rising at lower rates in the future.
However, the events witnessed in March 2020 led to change. Due to the risks connected with the SARS-CoV-2 outbreak, the vast majority of governments-imposed quarantines, interrupting the normal course of life. It has become clear by now that euro area countries will slip into recession, and we can only speculate how much GDP is to fall in Slovenia. Although numbers vary, the Bank of Slovenia assesses that the GDP decline could range between 6% and 16%, consequently causing problems in the entire economy and indirectly in the real estate markets. According to assessments, the industries suffering the most include tourism and trade. Those sectors stopped working overnight, remaining with no income until the lifting of the national Decree on the provisional prohibition of offering and selling goods and services to consumers. Exceptions are the activities which, according to the government decree , must continue operating for the sake of normal supply to the population.
It was fascinating to watch investors’ sentiment on the one hand and that of tenants on the other. For Slovenia, I dare say that the sentiment could be divided into two periods – the apocalyptic period, which started on 13 March with shops closing and lasted up to the second week in April, and the reasonable period beginning in the second half of April. In the initial period, we heard people talk somewhat along these lines: “We are unable to make any payment because business has come to a halt. We cannot even pay for operating costs. We also request a write-off of all liabilities for April and May, and a credit note for March. And in the months after May, we will only pay costs. We expect a discount on the rent, subject to discussion.” As an investor, narrative of this kind makes you worry about how to service the debt and honour other liabilities, such as property tax, electricity, water, etc. However, as with any other investment, it turns out today that what you need is a lot of patience; you need to talk to your tenants and keep an eye on the events connected with the economic shut-down. Now that we are in the “reasonable period” with the rhetoric calming down, we are getting messages such as: “Clearly, we must pay for the costs, and no, we do not expect you to reimburse our rent for March, and yes, we are open for negotiations with respect to April and subsequent months.” I allow for the possibility that the reason for the change in rhetoric has been the interpretation of Article 34 of the Act on Additional Liquidity to the Economy to Mitigate the effects of the COVID-19 Epidemic, which sets out: “In accordance with the applicable legislation, any waiver of rent payment in a specific period due to disease spreading or in a period of epidemic declaration is not admissible. If tenants are incapable of payment, the only immediate possibility is that they suspend rent payment and the manager refrains from collecting the rent due through execution.” However, I also think that tenants have realised it is not the end of the world yet, and that we will have to (try to) go back to normal sooner or later.
Forecasting any events for the next year is a very unfortunate job, especially as no one knows how quickly consumers’ and people’s habits in general will go back to pre-crisis practices. Several things are clear by now, namely:
- The trade and tourism real-estate sectors have been hit hardest;
- The winners are those who placed their bets on online-logistics real estate or data centres, or whose tenants are from the pharmaceutical industry;
- Close links between owners and tenants will be established. Communication, listening and understanding will be of key importance;
- Investors should get ready for a decrease in real estate values, albeit the declines will be much lower than with other “traditional asset classes”. Importantly, trusting the right portfolio manager will turn out to be a key factor,
- Retail and other shops of up to 400 m2 may re-open as of 4 May in Slovenia, and others (tourism, restaurants) are soon to follow,
- Banks in particular are in much better shape than in 2009, and bank arrangements are possible to reach, hence it is not expected that many properties will be subject to a so-called stress-sale.
This article should not be misinterpreted, though. GDP declines will be severe. The IMF is predicting the following GDP falls in the top five countries according to Slovenia’s exports of goods in 2019 (in descending order):
2020 Projected Real GDP (% Change)
Source: imf.org, stat.si (own calculation)
Personally, I feel that although all sorts of institutes, funds, national banks and other stakeholders are very keen on making all sorts of forecasts, no one really knows what will happen. An example is the IMF projection versus that of the Bank of Slovenia, with the difference in decline prediction of up to 100%; or a comparison between the IMF and the IFO, the renowned German economic research institute, which forecasts the German economy to contract by more than 16%.
Being an optimist by nature, I believe the future will not be as black as initially predicted. Of course, caution and reason are necessary – but is this not the principle we should abide by at all times?
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