Less speculative building may lead to office scarcity in CEE

Global property advisor DTZ has warned that the sharp decrease in speculative development in Central and Eastern Europe may lead to the lack of new modern office space. With bank financing becoming increasingly difficult to obtain, the amount of speculative development has plunged in recent months, raising concerns that demand will outpace supply in the medium term.

'As an occupier looking for large office spaces - over 5,000 m² - in the Czech Republic you will have limited possibilities to find a suitable accommodations in two years' time,' says Bert Hesselink, head of Office and Industrial Agency for the Czech Republic at DTZ.

Poland is also seeing a slowdown in the amount of speculative development being brought to the market as a result of the uncertainty surroundings bank funding and the increase in lending costs, adds Alan Colquhoun, managing director for Poland & CE at DTZ. 'There has not been so much evidence yet of developers halting projects but it is beginning to happen,' he points out. 'There is a strong likelihood that some projects planned for 2009 will not go through or will be delayed.'

But the extent to which development pipelines in CEE will be affected by tighter credit markets will become clearer in February next year, he says, when banks will draw up their 2009 accounts. 'If debt financing will loose up, it would be like water spilling over the top of a dam,' he comments.

Developers in CEE are also becoming more and more concerned about banks' lending commitments, according to the property advisor. 'Banks are seeking to change terms on loans or even pulling back from previously-agreed deals. And it is rumoured that there is at least one case of a developer suing a bank to enforce a previously signed loan agreement', Colquhoun says.

Some CEE countries have seen tremendous growth in recent years as 'unprecedented levels of cheap money' was poured into the market on hopes surrounding EU accession. This 'foolish' level of growth was justified by the belief that economies within the EU needed to converge in the long term, Colquhoun says. 'In a way, this created a huge property bubble,' he adds.

As a result, yields in Poland and Hungary compressed approaching 5% before the onset of the credit crisis. The situation has changed significantly since then, as investors reassess risk in the less mature markets of Europe. Colquhoun: 'We are aware of a shopping centre in southern Poland now being offered at around 9% as opposed to 7% during the summer, but it will take a while longer to determine exactly where the yields are headed.'

The property advisor is also expecting a significant increase of office sub-lease space in CEE as international companies in particular are shedding jobs or seeking to relocate albeit not to the extent as in Western Europe. 'Increasing amount of sub-let space is being offered to the market for example by construction and development companies, an example of which is Prologis, which is thought to be seeking to sub-lease part of its space in Zlote Tarasy.'