Institutional Investors conference – 14th September 2010, Conference center Brdo

Translation of an article that appeared in Slovenia’s financial daily newspaper on 24th October 2011

Office – where do we go from here?

Jacqueline Stuart (Author)

js@sloveniainvest.eu (Email)

The 293,000m2 of vacant office space in Ljubljana comprises approximately 235,000m2 of older space and 58,000m2 of new build. Companies going out of business, downsizing, and rental of previously vacant office space are all contributing to the large amount of available space. The total occupied space is estimated to be 660,000m2, so the vacancy rate, at 30%, is high.

Where will demand come from for all this office space?

Demand for office space comes from three sources; lease expiries, economic growth, and foreign direct investment.

It is difficult to estimate how much space will be taken up each year as a result of lease expiries for two reasons. First there is no record of the percentage of owner occupied space, however a recent survey indicates that approximately 50% is owner occupied, and 50% leased. Second, many companies have indefinite leases, so whilst they can move at any time subject to the appropriate notice being served, they have no incentive to move at a given time, as their lease has no expiry date. Nonetheless, we estimate that lease expiries will result in 26,000m2 of take-up each year.

It is hard for most people in Slovenia to imagine economic growth at present because of continuing poor business sentiment. However, Oxford Economic Forecasts estimate that within Ljubljana, there will be an increase of up to 5,642 employees in office based employment sectors over the next five years, and that will create demand for new space.

Slovenia has to date attracted limited Foreign Direct Investment, although a recovery in volumes was seen from 2006 to 2008 until the global economic downturn impacted on FDI activity, not only in Slovenia but globally.A steady upturn in interest is anticipated over the next few years, albeit still below peak levels seen in 2002, with an estimated US$1.2 billion anticipated to be invested in the country this year.Most FDI has come from wholesale and retailers, who accounted for over 40% of companies into Slovenia, whilst manufacturing companies showed consistent activity levels of around 15%. Because of the profile of FDI in Slovenia, it is unlikely to create significant demand for office space in the near future.

Cushman and Wakefield, a global property advisory, estimates that overall take-up will be around 40,000 m2 per annum in Ljubljana for the next five years, based on available information.

With little new demand for space, it is clear that take up will be primarily from Companies relocating from older, outdated office space. This is good news for the landlords of the new office buildings, but very bad news for those who own the older ones.

What will happen to rents?

There is around 60,000m2 of office space available for rent in new buildings, and with 40,000m2 of take up each year, the vacant space is likely to fill up within the next two years. Rents in such buildings have dropped and it is now possible to move into a brand new building for as little as 11€/m2, by taking a large space and signing a long lease. Some new buildings are still overpriced, but landlords will find it impossible to rent the space until they accept market levels. Average rents are unlikely to drop much more in new buildings but clearly competition will become much more fierce in older buildings. With 235,000m2 currently available and more to come we can anticipate a steep drop in rents.

Landlords in new buildings are becoming much more competitive, and have started offering a free rent period and a free fit-out, allowing occupiers to take advantage of cost neutral and cash neutral moves. Quarters 1 and 2 saw little office market activity in Ljubljana but there was a big increase in Quarter 3, and Quarter 4 shows no signs of slowing down. Many Companies have realized that this is an unprecedented time for negotiating a good deal for the next 5 years.

The average advertised price for office space (both previously occupied and new) in Ljubljana is shown below:

Source: nepremicnine.net

Achievable rents tend to be approximately 10% lower than advertised prices.

Up to 15% common space is generally charged in addition to rent, as are service charges, water, electricity and VAT.

What about the pipeline projects?

A cohesive central business district has never developed in Ljubljana unfortunately. Dunajskacan best be described as the CBD but it is a very long street, and home to many other buildings, not only office towers.

Some Companies that one would expect to find in prestigious offices in the City Center are located in inferior locations. This is certainly partly due to the poor availability of office space in 2004 when an influx of new companies arrived in Slovenia thanks to EU accession; and the poor supply of office projects coming to market between 2001 and 2008.

There is a large project pipeline, but it is not clear how many developments will come to market in the short term due to the current oversupply of space and difficulties in obtainingbank finance. The city center can support one new quality office building, and it will be interesting to see which project gets to market first, there are three contenders; Immorent’s City Tower, Tri Granit’s Emonika, and the S1 project, currently in the hands of the liquidator.

Top priorities for Companies wanting to move

Slovenia entered recession after northern and western Europe, and the country is still lagging behind in recovery. Although production and exports have increased significantly, the construction sector and other business sectors are still in crisis. For reasons of sentiment, achieving an affordable rent is the number one priority for Companies and Organizations wishing to relocate. Rent has replaced location as the number one objective. The second priority is availability of parking. Occupiers want a limited number of secure parking spaces for Directors, and availability of free parking within walking distance for Employees. Pay per hour parking for visitors is also desirable.

Jacqueline Stuart is a Director of S-Invest d.o.o.

Translation of an article that appeared in FInance on 28th November 2011

How to reduce your office rent by 50% and improve your workspace?

Autor: Jacqueline Stuart

E-pošta: js@sloveniainvest.eu

Rents have dropped

Rents in quality office accommodation in Ljubljana have dropped by as much as 30% since the start of the global financial crisis due to a combination of new office space coming to market, downsizing and cost cutting. As I reported last month, many Companies find they can move to superior offices, for less rent, and often get a rent free period and free-fit out too.

How to save space

There is another way that Companies can save money on office space, and this is being embraced by some of the largest firms, all over the world.

By abandoning the traditional cellular office model, and adopting open plan, huge savings are being made. What is even more interesting is that by fostering new ways of thinking about how office space is used, architects and planners are creating spaces that employees love to work in, and are proud of.

A new research report from Colliers International, a global real estate consultancy, predicts that Europe will see a 20% drop in demand for office space over the next few decades.

Shifting demographics

The baby boomers dominate the current workforce, comprising almost 45%. This group has influenced the planning of office environments in recent years, resulting in a high proportion of cellular offices as opposed to open plan. However by 2020, the boomers will have less influence as half of them will have retired. Generations Y and Z will then dominate, and have a much greater say in decisions regarding the workplace.

The workplace has to work harder

Metod Vidic, Director of Ovita, is the local representative of global company Steelcase, which provides innovative office furniture and solutions for workspaces. He comments, ‘the workplace has never had to work so hard. It has to maximize the use of real estate, attract and engage workers, communicate company brand and culture, and foster collaboration and innovation’.

Collaboration is the fuel for innovation, and space saved by creating smaller individual workspaces can be used for spaces everyone will use: impromptu meeting areas, project rooms, and huddle rooms. These support learning, socializing and collaborating.

Unassigned workspaces

Many Companies are embracing unassigned workspaces; three examples of these are ‘hot-desking’, ‘hoteling’ and ‘benching’. Hot-desking means a worker takes the first free desk available, which might well change on a daily basis. Hoteling is similar, but workers have to reserve their desk in advance through a concierge system. Benching is like hot-desking, but the workspaces are not confined to desks, workers share a parallel work surface along a spine, with no space-defining panels and little or no dedicated storage and privacy. Each worker takes what space is necessary for the job in hand that day. Steelcase conducted research that shows space savings of 22-26% for benching compared to individual workstations. Real estate savings due to benching can be utilized for the benefit of all workers – for cafes, lounge areas, team rooms and other shared spaces.

Accenture’s Workplace 2

Accenture, a global consultancy, recently piloted their ‘Workplace 2.0’ strategy in a new Houston office. The results are impressive. Their office went from three floors on over 6,000m2 to 2,300m2 on one floor, whilst still housing more than 800 people. Like many Companies, Accenture found that many workstations were empty for long periods of time because workers were collaborating in team spaces, project rooms, or offsite. Accenture changed to benching for workers who need different spaces during their time at work. They move seamlessly from bench, to enclosed space, to café, to lounge area. Their work weaves between meetings, informal collaborations, quick asides, and focused personal work sessions. The Accenture workforce voted the new offices an outstanding success, in a study that measured Interaction with Clients and Customers, Networking and mentoring, Impromptu collaboration, and Collaboration with team members. The overall improvement was 26%.

Vodaphone in Holland

Vodaphone, a mobile telecom leader, applied a similar strategy for their new Dutch headquarters in Amsterdam. The Company was consolidating three different sites into one in the new premises. Vodaphone’s new workplace has a very open layout with no assigned workspaces, combined with a wide variety of meeting and project spaces. Every Vodaphone staffer, from leadership to the newest worker, operates from the same workspaces. Like Accenture’s office, Vodaphone’s workplace is colourful, welcoming and energetic. Vodaphone reports more informal communication, which adds to productivity.

Of course some private offices still exist in Accenture, Vodaphone and other Companies adopting unassigned workspace planning. In the past, organizations often allocated private offices based on hierarchy. Now many of those decisions are made on the basis of job function and worker needs. In some companies, employees are assigned private offices that are made available to others when that person is away. The private office worker isolates confidential materials in a file, and that office can become a meeting room or huddle space.

Making office space work in Ljubljana

It is quite clear how the future of office space will develop in Ljubljana. Many Companies will take advantage of lower rents and landlord’s incentives to move to new and better office space. Some of those will rethink the way they work, and introduce unassigned workstations, which will allow them to reduce the overall space they occupy, whilst improving the workplace experience by introducing more collaborative spaces such as coffee points, chill out areas and huddle spaces.

Our Company will be moving in the New Year from the World Trade Center to offices in the city center. We will adopt an unassigned benching system, with a cafeteria and chill out area, and a more private heads down zone for when uninterrupted concentration is required. Clients will meet with us in the cafeteria area, or the heads down zone, depending upon availability. We expect to reduce our space by 30%, accommodate 2 more workers, and improve interaction and collaboration. I look forward to reporting on how well we succeed in a future article.

Jacqueline Stuart is a Director of S-Invest d.o.o.

http://www.sloveniainvest.eu/company/www.sloveniainvest.eu/company/press/684

Translation of an article that appeared in FInance on 30th January 2012

An open letter to the new prime minister…

4 urgent steps required to resolve the real estate crisis

Autor: Jacqueline Stuart

E-pošta: js@sloveniainvest.eu

The construction industry is in a very different situation now from how it was before the global financial crisis set in. At the height of the market, construction and real estate contributed a large amount to Slovenia’s GDP. Now, the story is completely different, as development has diminished to virtually nothing.

It is very clear that for Slovenia to kick start economic growth again, the construction industry will have to be revitalized. Intervention from the government will be required; this is not something that the private sector can resolve alone.

It should be noted here that the real estate problems are so far not related to residential property, which forms a fairly transparent market.

The problem lies with commercial real estate assets. A combination of poor bank liquidity, inaccurate valuations, negative equity, poor developer and lender expertise, and no availability of equity due to corporate indebtedness is a toxic mix that has brought the development industry to a standstill.

Let’s look at each of these issues in turn, and what the government could do to address the problems.

1)Poor bank liquidity and negative equity

The banks are in a difficult situation. They are under constant pressure to improve their tier 1 capital ratio. In order to do that they have to dispose of distressed property assets and other assets. But how to do that when those assets are overvalued? A recent portfolio valuation by four international valuation companies of over 350 assets in Slovenia and ex-Yugoslavia showed that that commercial property assets were overvalued by local valuers by between 300 and 700 percent. If a bank sells an asset at a third of its book value, it records a loss, which further diminishes the tier 1 capital, and completely defeats the purpose of the disposal.

The situation with some Slovene banks is far worse than it appears because of the negative equity issue. We recently valued a commercial property asset at 2m€, it has 12m€ of debt outstanding, from 5 separate banks. The book value of the property is 7m€. Another asset was valued at 1.3m€, but has 4.7m€ of debt outstanding.

So what can the government do to help? Returning liquidity to the system is vital. The first step should be to carry out a widespread valuation exercise to establish exactly what the true picture is. An international valuation company that works to RICS standards, and can estimate the current market value should carry out the valuations. Until an accurate picture of the loan books emerges, it will be impossible for the banks or government to create a strategy that will work.

The second step is to make local valuers properly responsible for future valuations, to make sure this situation never arises again. In more mature markets, valuers are held responsible for any loss their Clients suffer as a result of an erroneous valuation. They are required to have sufficient professional indemnity insurance to cover any claims. In some cases, such a claim might be limited to 20 times the fee paid for the valuation, however in others there is unlimited liability. Accurate valuations form the cornerstone of any healthy lending system, and valuers in Slovenia have to stop asking, ‘What do you want the value to be’, when instructed to carry out a valuation. Banks will have to understand that the cost of valuations will rise if they are done correctly and insured with a proper level of professional indemnity cover.

The third step should be to allow the banks to write down the value of the loans on those assets that are in default and in negative equity. This could not be done all at once of course, as the banking system does not have the capacity to absorb the losses. They will have to be written down over a period of time, and the best approach the banks can take is to start actively managing their (defaulted) real estate loan books. There is a lot of value to be created through proper development / refurbishment / reletting / facility management etc. and programming a timely exit strategy. The government will have to inject equity into the banks to allow them to gradually write down the loans, but at least the current gridlock will be eased, the market will regain momentum, and much needed liquidity will start flowing through the banks, allowing them to make new loans and contribute to growth in the economy. Of course one could argue that the taxpayer should not be responsible for bank losses, but the point is that until liquidity returns to the system, Companies will continue to go out of business, the economy will not grow and unemployment figures will rise.

2)Poor developer and lender expertize

Slovenia has had a free real estate market for a little over 20 years. Much of that time was spent in a bubble, fuelled by cheap and easily available bank finance. In the good times, any developer who built anything was guaranteed a profit, thanks to double-digit price growth every year. Vegrad is the perfect example of a Company with no development expertise making foolish decisions and embarking on unsustainable projects, resulting in the bankruptcy of a once great company and many of their subcontractors, and losses of tens of millions of euros.

For these reasons, proper expertise in real estate development has not developed, and this urgently needs to be addressed

Two young Slovene developers have travelled overseas to study in specialist institutions that teach the skills required. Marko Rant from ABC Fin d.o.o. obtained a MSc in Real Estate Investment and Finance from Henley Business School in London, and Iztok Polanič from Intering Holding obtained an International Real Estate MBA in Germany. Marko Rant commented, ‘Applied real estate business and economics is an acutely deficient area of our university education system in Slovenia. There is little or no curriculum available to undergraduate and postgraduate students interested in the subject. Real estate business skills are often misinterpreted or confused with construction, engineering and architecture, which are all quite different professions.

My experience at the School of Real Estate & Planning at Henley Business School in Reading, UK, has been invaluable in terms of depth of academic research, applied skills and also peer contacts. The part time real estate masters programme which I attended is widely considered as best in the UK and offers 15 specialized modules covering real estate valuation, development, sustainability, investment, corporate real estate and others. I would highly recommend the programme to everyone interested in a following a career in real estate. Given the self-taught nature of the Slovenian real estate industry and the problems which it currently faces, I believe one of the key long-term policies in this area should be to increase the available education for young real estate professionals’.

Iztok Polanič said, ‘Good real estate knowledge is a must in today’s real estate business. Without it it’s like being at a crossroads and not knowing which way to go. A good education shows you the way, but how to get there is up to the project, individual and current market situation. The problem in Slovenia (I would say generally in the Balkan area), as I see it, is the fact that people have very little knowledge about real estate and how to value properties. This in the end leads to corruption, because investors value their properties in real estate projects above normal market values, this lowers their need for equity and they can then start the project without any or minimal equity. In organized markets, like UK or Germany, this can’t happen, because the banks employ people who have skills in real estate business and know which projects can be financed and can be in the long run successful. They also have MUCH better controlling and monitoring systems. Banks also monitor the track record of their developer Clients’.

The skills that real estate developers need are exactly the same as those required by lenders responsible for real estate lending. Intimate knowledge of past and current market conditions, an understanding of the drivers, potential growth, achievable prices, and the market appeal of a project are all essential, along with very good financial modelling skills.

Some banks in Slovenia have specialist real estate lending units that deal with development loans, but not all. Incredibly, one 40m€ project financed by a Slovene bank was dealt with by the local branch manager in a small town. Unsurprisingly, it got into difficulties and it will be a miracle if it ever shows one cent of profit. It is interesting to note that the banks that have developed specialist expertise, such as lending on retail projects, are now the ones with the fewest problems.

The government should work with Ljubljana University without delay to introduce courses for real estate professionals, following the syllabus of similar educational institutions elsewhere. Sarajevo University has partnered with the University of Melbourne to introduce their successful Master of Property – Applied Finances course. This will be accredited by the RICS. This is an excellent way of skills sharing where knowledge from more mature markets can be imported. All real estate developers and lenders should be encouraged to attend short and long courses to improve their skills, through subsidized incentives.

This would benefit the economy in many ways. More projects would be realized thanks to the new skills and contacts, and once developers have obtained an understanding of the requirements of international professional real estate investors, FDI would increase as institutions start to invest in Slovene real estate assets. Projects would become more successful and profitable, contributing to economic growth.

In the meantime, both developers and banks are starting to realize the value of professional feasibility studies carried out by impartial Companies. This is becoming an important part of our business at S-Invest and we expect it to increase.

3)Lack of available equity

Project equity required by banks in Slovenia is at least 20%, but this is low compared to more mature markets. In the UK, 40% is the norm. Most Corporates in Slovenia are excessively indebted, and few can provide even 20%. In larger markets there are specialist lenders known as ‘mezzanine finance providers’ that can step in to fill any gap. During the boom times in Slovenia the banks fulfilled this role, but now of course it would be impossible to obtain this kind of loan from any Slovene bank. State owned SID Banka however is assisting some developers, by supporting realization of some projects that started before the crisis but stopped after commercial banks faced new market conditions. SID Banka is well aware of the problems in the real estate sector and is actively working to stimulate the construction sector.

The government should set up a 500m€ fund without delay, to take equity stakes in worthwhile projects. This would benefit the economy in two ways. Firstly it would get developments going that would otherwise never become reality, and provide work for architects, engineers, construction workers, real estate agents etc. Secondly it would provide a valuable return for the taxpayer, as this kind of equity investment is always well rewarded with returns of at least 20% p.a. It is of course essential to ensure that only the viable developments get this funding, and it would be necessary to hire professionals from overseas with similar experience to come to Slovenia to set up the fund and assess investment opportunities. The funds should be awarded on the merit of each project, unrelated to any political affiliation.

4)Cut the bureaucracy

No article on change would be complete without a comment on bureaucracy. The number of man-hours and resources wasted on truly pointless things in Slovenia is breathtaking. We recently moved office. In the UK, changing the official address of a company is very straightforward. It can be done in 5 minutes on the Companies House website. Here, nobody but me, the Director of the Company could deal with the issue, in person – at the Ajpes office. I arrived at Ajpes, to find they were closed for lunch. After a long wait, I managed to locate the right desk and sign the relevant forms. I was then told that the forms would be sent to the court so the judge could decide whether the change of address would be permitted. Several hours of my time were spent on pointless bureaucracy, and more hours of civil servants time. These people all have to be paid and it would clearly be better if worthwhile jobs could be found for them that would benefit Slovene society rather than create an administrative burden on taxpayers.The bureaucracy issue applies to building permission also, the process has to be streamlined and simplified, and it is not acceptable that it should take 2 years to obtain consent.

As we go to press, it is not yet clear who the next Prime Minister will be, so I would like to address this to Mr Janša, Mr Jankovič, Mr Virant and Mr Pahor. Whoever ends up in charge, or in any position of influence, please do what is required to end the gridlock, which is stalling economic growth, and implement these measures without delay.

Jacqueline Stuart is Director of S-Invest d.o.o.

Content is beeing prepared…

http://www.sloveniainvest.eu/company/press/743

Translation of an article that appeared in Finance on 22nd October 2012

Retail is changing

Autor: Jacqueline Stuart

E-pošta: js@sloveniainvest.eu

I visited Bucharest at the end of September to participate in the ICSC’s first retail conference for south-east Europe. It was truly inspirational to see the latest trends in shopping centre design, centre management and retail marketing.

It crystalized in my mind how far retail in Slovenia has to go. There has been so little competition for so long that developers and owners of malls simply do not have to work to get shoppers through the door. Marketing campaigns are basic and typically consist of a newspaper with special offers. Centre events are often lacklustre affairs such as photographic displays. This will of course change.

INCREASED COMPETITION COMING SOON TO LJUBLJANA

There are many pipeline schemes in Ljubljana. The current retail space will increase by approximately 150,000m2 when all the new schemes eventually come on line.Emonika plans to open its doors in Spring 2015. Interspar Šiška is hoping for building permission soon. Supernova Rudnik will extend by 25,000m2 as soon as sufficient pre-lets are in place. And Stožice will be rescued, and bring some additional retail space to market but perhaps not the 55,000m2 originally planned. Existing Ljubljana retail developments will not only face competition from new schemes, but also from internet shopping. Goldman Sachs predicts that worldwide e-commerce sales will reach $963 billion by 2013, growing at an annual rate of 19.4%. This presents a real threat to the owners of retail space and shopping centres will have to become places to do things whilst online retailers will be where you go to buy things. Shopping centres will increasingly become places for ‘retailtainment’.

The retail environment will heat up considerably when the new space in Ljubljana becomes available. The number one priority for developers of shopping malls is to design and build something that is attractive enough to get shoppers in. For the retailers, the number of shoppers in the mall is key. This is known as ‘footfall’. The number of transactions in the centre depends largely on the number of shoppers. The owners of malls receive not only fixed rent from retailers, but also turnover rent – a small share of their sales. Footfall is therefore directly connected to the value of the property. The second most important factor is tenant mix, but that is a subject for a separate article.

GOOD DESIGN IS ESSENTIAL

Leisure elements in shopping centres are becoming increasingly important, as malls become places to meet and interact with friends, rather than pure shopping destinations. Europeans are demanding more leisure time and more from their leisure time. Most shopping centre developers embraced this concept a while ago and there are now many malls in Europe with multiplex cinemas. However a multiplex cinema is now not enough to guarantee numbers as so many malls have them, and the boundaries are constantly being pushed. Now children’s adventure playgrounds and climbing walls are considered essential for new developments. Some are even introducing petting farms for kids. One amazing retail centre is the Dubai Mall, developed by Emaar Properties. It has half a million square metres of retail space, 10 times the size of Citypark in BTC. The centrepiece of the mall is an aquarium and underwater zoo with more than 33,000 living creatures including sharks and rays housed in an overhead 270 degree acrylic walkthrough tunnel. The Dubai mall attracted 54 million visitors in 2011.

Nice, comfortable coffee shops and food outlets in good locations are increasingly important, as malls become places to meet and interact with friends and family. It is no longer simply about a shopping experience. Food courts are increasingly popular with a number of different takeaway units around a central shared seating area. These work well for both consumers and developers, the shoppers have multiple choices, such as salad bars, pasta outlets, sandwich bars, burgers and ethnic food. Because these food outlets share a common seating area, the developers achieve a higher rent per m2.

SOUNDS AND SCENTS

Some retail developers are going even further and bringing sound specialists in to create soothing retail environments. Retailers in Glasgow airport saw between 3 and 10% increase in sales after a calming birdsong soundtrack was introduced to public areas. Specialist scent consultants can provide scent air triggers outside a store to lure the customer in, and aromas inside the store that match the customer profile. Ambient scenting has been shown to make people stay longer in fragranced areas, and the longer they stay the more likely they are to purchase.

BOXPARK

One amazing new development is Boxpark in London’s fashionable Shoreditch. Shipping containers have been stripped and refitted to create unique, low cost, low risk ‘Box Shops’. These are occupied by a unique mix of international and UK fashion designers and lifestyle brands, galleries and Cafes. This is the world’s first ‘Pop-up mall’ – as its basic building blocks are moveable. Creator Roger Wade says, ‘I was always fascinated by shipping containers – the idea of Boxpark was a fusion of many personal ideas over time. I wanted to create something on a grand scale by using shipping containers and offer retailers short leases, versatility and cost-effective retailing that made sense – the antithesis of the out of town shopping mall. And at the same time a place where the kids could just hang out and have fun’.

CENTRE MANAGEMENT AND MARKETING

Sam Kirk, Director of leading specialist firm BCI Design, comments, ‘The future retail experience must be events driven with cultural and sporting programmes that are executed by the best centre management teams. From catwalk fashions shows promoting local talent, farmers markets selling the best locally sourced fresh products, retro furniture and antiques markets, musical events to classic car rallies’.

Westfield shopping centre in London has embraced this idea with regular theme events. They will celebrate a travel event from 26^th to 28^th October sponsored by Virgin travel, showcasing travel media, travel agents, tourist destinations, airlines, and holiday fashion retailers. The event will be enhanced with the presence of Olympic snowsport athletes, photography classes, and advice from a bootcamp specialist on getting fit for a winter sports holiday.

SOCIAL MEDIA AND MARKETING

Social media is becoming increasingly important in shopping centre marketing. Westfield shopping centre has an amazing 225,000 likes on their facebook page. Mall of America’s facebook page has over 400,000 likes. The owners of malls are finding this a cost effective way of getting their messages across to people who are genuinely interested in their offer. However the key to really effective retail marketing is flexibility. Francesco Terra of global developer Sonae Sierra reports that they are now using their marketing budget in Greece to provide petrol vouchers to people who visit the mall. Consumers are so cost conscious during these times of austerity that numbers were dropping because of the expense of getting to the mall.

Competition is the Mother of innovation and we can expect big changes in Ljubljana’s retail scene in future with the arrival of new schemes.

Jacqueline Stuart is a Director of S-Invest.

Translation of an article that appeared in Finance, 17th December 2012

Little change expected next year

Author: Jacqueline Stuart

E: js@sloveniainvest.eu

The real estate market saw little improvement this year. The reasons are more than clear. An unhealthy economic environment, credit crunch and sceptical buyers do not add up to growth or create optimism.

We cannot predict anything optimistic for the coming year. Office, residential and industrial will not see any great change. Perhaps only the owners of some hotels can be optimistic and could see interest from the emerging markets including India and China, but price will be key.

Let’s examine each asset class in turn:

More than quarter of office space in Ljubljana is vacant

There is 27% of vacant office space in Ljubljana, and this is increasing. Negligible foreign direct investment, and a stagnant economy do not create a healthy environment for growth.For every company that approaches us needing additional office space, five more want to downsize.

There is a great deal of movement in the office market at present. Most companies are aware that rents have dropped, and that they can move to superior office premises with better parking opportunities for a lower rent than they are currently paying. Many landlords pay for the fit out for new tenants, and most also offer a rent free period as an incentive. So, there has never been a better time to move office! We can expect even more movement in 2013.

Of the 250,000m2 of space currently available, 190,000m2 is in older buildings, and around 60,000m2 is in new Class A office buildings. This is a huge amount of space in a city the size of Ljubljana, with an estimated take up of only a 40,000m2 per year. It is clear that the newer quality space will fill up at the expense of the older space. We can expect prices in newer buildings to drop slightly, and prices in older buildings to drop significantly. An interesting fact for any Company intending to move is that advertised rents in new buildings can often be discounted considerably. The landlords are unwilling to advertise lower rents as they do not want to upset current tenants who signed leases two or more years ago when rents were higher. However they are aware that the buildings have to be filled up and this will only be possible with lower rents.

Smaller offices are rented out quickly

Most of the planned office projects in Ljubljana will probably never become reality. Although there is a surplus of office around the ring road, there is still a shortage in the centre and there is sufficient demand for one new quality building. However it is unlikely that the achievable rents could support the cost of construction – even in these hard times when the few builders left are desperate for work. It is even less likely that bank finance could be obtained.

One interesting trend is the insatiable demand for tiny office spaces. We were marketing one 300m2 office space on the ring road for a year and a half without success. We convinced the landlord to lower the price slightly and offer the space as 11 individual office suites of between 9m2 and 34m2. 8 were rented out within one month, and 2 more will be occupied before the end of the year. This should probably come as no surprise. Of the 40,379 Companies registered in Ljubljana, 45% have no employees, and a further 30% have between 1 and 19 employees.

Office elsewhere in Slovenia is stagnant. There are no notable projects planned, and nothing that would indicate significant increased demand.

Retail

There is little retail space available anywhere in Slovenia with the exception of two newly completed schemes in Maribor and Nova Gorica. Velenje is the only town with significant vacant space, due to overdevelopment and increased unemployment due to Company bankruptcies. There are no new retail developments planned outside Ljubljana at present. Ljubljana has four pipeline schemes but the completion date is uncertain for all. Emonika will bring 55,000m2 of retail space to market. TriGranit, the developers, have been successfully preleasing space for some time, and they are currently at the stage of acquiring building permission. Stožice, with a 55,000m2 retail element, has been built to a shell finish but due to the bankruptcy of the developer, and difficulties in renting out all the space, it cannot be completed for the moment. Spar European Shopping Centres is planning an additional 32,000m2 development in the densely populated area of Šiška, to complement their existing successful Citypark mall. They report that they are expecting a building permit in the near future, however this project has been in planning for over 10 years already. Finally Austrian developer M2 Gruppe plans a 20,000m2 extension to their successful Supernova mall in Rudnik, but this is currently on hold until demand for retail space increases.

Because of the lack of quality retail space in Ljubljana and elsewhere in Slovenia, there is still little vacant space, even although most retailers have experienced a decrease in turnover. As a result there has been no significant change in rents. There are no major new retailers in Slovenia, and only a handful interested in entering the market. Landlords of malls report some tenants in arrears, and we can expect some changes in 2013.

Two large retail investment opportunities were recently offered to market. The Q-Landia portfolio comprises large scale malls and other retail schemes of approximately 200.000 m² GLA. The Owners report that they declined some offers earlier this year and will wait for better market conditions before actively marketing the properties again. Mercator offered two portfolios of real estate worth approximately 250m€ as a sale and leaseback, however this was withdrawn from the market pending a possible sale of the Company. This was the first time that retail investment opportunities in Slovenia have come to market since the Supernova portfolio was sold to Pramerica in three tranches, finalized in 2008. It is not the best time for such deals for a number of reasons including difficulties in obtaining debt, the current economic climate in Slovenia and investors’ focus on core CEE markets such as Poland and Czech Republic.

Industrial

Industrial is the one asset class that was not overdeveloped in Slovenia during the real estate bubble. As a result, supply and demand is more or less in balance. Although some industries are declining or relocating, others are growing. A case in point is the 29,000m2 industrial site in Črnomelj that was sold earlier this year by Danfoss to Akrapovič. Danfoss shifted production to Slovakia, and Akrapovič will use the facility to increase their output over the next years. There are other similar examples, we sold a 2,000m2 production unit in Koper that belonged to a global chemical manufacturer to a local laundry company that provides services to hotels in Slovenia and Italy. Whilst the industrial market is illiquid, there is always some movement, and 2013 is unlikely to be very different. Around 70% of industrial property in Slovenia is owner occupied, and this is unlikely to change soon.

Residential

The residential market is stable, nationally and in the capital. Prices have dropped nationally from a peak of 1,860€/m2 in 2008, to 1,649€/m2 now. Recorded transactions are up slightly at 3,105 to the end of the third quarter, compared with 3,217 in 2011.

In Ljubljana prices have dropped from a peak of 2,740€/m2 in 2008, to 2,321€/m2 now. Recorded transactions are down at 868 to the end of the third quarter, compared with 1,224 in 2011,however the fourth quarter is typically the strongest so it is possible that 2012 might end with a similar number of transactions as the previous year.

There is no reason to believe that things will change radically in 2013.

Hospitality

It is likely that more hotels in Slovenia will be repossessed by banks next year. Others will be put up for sale by the current owners as part of a debt restructuring process. This will present interesting opportunities for foreign investors. However, at this difficult moment in time few hotel developers are expanding their businesses and the buyers will be opportunistic, looking for an exceptionally good deal. Price will be key. We are currently marketing two hotels in Bled, and there has been a good response to a global marketing campaign. Interestingly most enquiries have come from people who are not existing hotel investors, from emerging markets including India and China. The sale of such assets will depend upon bank finance being available, something that is uncertain at present.

Jacqueline Stuart is a Director of S-Invest d.o.o.