Location Eastern Europe:
The real estate market

The situations in which a manufacturing company looks for a new location are manifold: capacity bottlenecks, cost reduction, opening up local markets – to name just a few. Since the coronavirus pandemic, another point has to be added to this list: securing supply capability through local or continental production, known as near-shoring.

Eastern Europe is not only an obvious choice for these companies for geographical reasons: low labor costs, fast time-to-market, good education, a large workforce. But all that glitters is by no means gold.

That is why it is not enough to focus on the figures, data and facts. Admittedly, they are irreplaceable and the management of your company is ultimately primarily interested in figures. But the success of a new production site depends not least on many soft factors. It is therefore also worth learning from successful and failed relocation projects in recent years.

The second part of the article series “Finding a location in Eastern Europe” deals with the question of how to select the ideal property for a new location. In the previous first part of the series, you will also find information on labor costs and employee availability.

The search for the right property

The property is usually the largest item on the investment list. In addition, it is often the limiting time factor until the planned start of production. Every company is therefore faced at least once with the question of which property is the best choice. Does it have to be a new building or will an existing property (possibly with conversion or refurbishment) suffice? How specifically does the building need to be adapted to the processes and technologies? Build it yourself or rent it? Or something completely different?

The truth is that there is no such thing as the ideal property. The choice of property essentially depends on two factors:

1. The condition in which a company finds itself
2. The goal that the company is pursuing with the new location

This presupposes that the decision-making body and the people involved are sufficiently informed about these two circumstances or are aware of them. The condition of the company is even easier to grasp, as it can usually be described in terms of the financial situation. However, the company’s personnel and legal situation should also be taken into account.

It is more difficult to achieve clarity and agreement on the objectives to be pursued with the new location. An extended workbench with a low wage level, resources for local market entry or possible expansion into an engineering center: A jointly developed vision of the location is needed.

Existing property vs. new build

When looking for a location, it is often said that an existing property is usually cheaper and, above all, quickly available. This is true, but in most cases the right existing property is simply not available in attractive locations in Eastern Europe or the necessary adaptations require high investments. Moreover, in most cases, the macro-location of the site should not be determined solely by the availability of an existing property.

Vacancy rates for industrial properties

Let’s look at the key facts: the vacancy rates for industrial real estate. In Eastern Europe, these range from 1.9% in Bulgaria to 6.9% in Slovakia. By way of comparison, the overheated industrial real estate market in Munich has a vacancy rate of 2.1%.

It can be concluded from this that there is a low probability of finding a suitable existing property in the desired location in Bulgaria, Serbia, Hungary and the Czech Republic. At the same time, it can be stated for Bulgaria and Serbia that there are hardly any proactive development companies on the market that acquire properties at their own risk and develop them speculatively.

The situation looks better in countries such as Slovakia and Poland. Existing properties are more readily available. There are also a number of national and international development companies (e.g. MLP, Panattoni, Prologis, etc.) that have a large number of speculatively developed properties and commercial parks.

Availability of a property

Let’s come back to the question of how quickly a property is available. There are three different requirement profiles:

1. Very short-term: production start in 3-6 months
2. Short term: production start in 12-18 months
3. Medium-term: start of production in 2-3 years

Different properties come into question depending on the requirements profile:

1. Very short-term: Existing property without significant adaptation work or speculatively developed property in the second half of the construction phase
2. Short-term: Speculatively developed plot with planning permission
3. Medium-term: plots without a development plan

Experience shows that short-term location projects can also be realized with a new building if certain framework conditions are in place. My personal “record” from location decision to start of production in a new building is 8 months. However, this requires a real estate market that is attractive enough for development companies to realize speculative real estate projects at their own risk.

This is the case in the aforementioned countries with high vacancy rates, Slovakia and Poland. But even if the existing property is available, there are certainly attractive alternatives – especially when you consider that a new property is precisely tailored to the requirements profile of your production.

Standard building vs. build-to-suit

A hall built according to the real estate developer’s standard building specifications is cheaper than a building specially tailored to your needs. However, there are other differences that need to be taken into account.

A standard building corresponds to the developer’s standard building specification. This is usually a rental property and designed for use as a warehouse or for “light production” with floor loads of 500-700 kg/m². In the spatial design, the developer also ensures that as many usage profiles as possible are covered in order to enable unrestricted subsequent use. As a rule, this means that the buildings have large hall sections, many truck ramps and little office space.

A standard building is therefore particularly suitable for companies that want to create additional capacity at very short notice, do not use heavy production technologies (e.g. machine tools with foundations, heavy-duty overhead cranes) or prefer a short rental period of 5 years, for example. Nevertheless, modern production (especially assembly) can also be realized in a standard building.

An individually planned building (“build-to-suit”) can be tailored to all or almost all requirements, depending on whether it is self-built or rented. If you opt for an externally developed building whose site has already been speculatively developed and planned, implementation periods of 12-18 months can also be realized.

Such a building is therefore particularly suitable for companies with special construction requirements that can commit themselves for a longer period of time (min. 10 years).

Rent or invest

Up to this point, we have not explicitly dealt with the question of renting or investing, but we have already discussed both options in some detail. So let’s take a closer look at the advantages and disadvantages of each.

Advantages of renting

• No capital commitment, lower investment
• Complete transfer of responsibility for realization
• No long-term commitment to the location, i.e. suitable for temporary solutions

Disadvantages of renting

• Long-term capital value significantly worse, as after approx. 10 years the original investment sum has often been paid in full as rent
• Rental price is usually indexed, i.e. rental cost increases are to be expected over time
• At the end of the rental period, the landlord has a much better negotiating position (because your machines, systems and possibly employees have only been moved with difficulty and at great expense)
• Rental costs are not eligible for all subsidy programs
• Expansion not easily possible (areas must be optioned for a fee)
• Not all building adaptations can be realized
• Dependence on third parties, as resale of the property by the developer is possible

Advantages of investment

• No dependence on third parties for the use of the property
• In the long term, the investment is the economically more sustainable option, especially as no cost increases have to be factored in
• All individualizations are possible (limited by the buildability)
• The investments are eligible for most subsidy programs

Disadvantages of investment

• High acquisition costs
• Long-term commitment to a location
• Not available at short notice at all locations

Both models offer advantages and therefore have a raison d’être. The invested property is better suited to companies with long-term plans and sufficient capital. The rented property suits companies that either do not have the necessary capital or whose growth plans at the location are still uncertain.

Please note: If you favor a rental property that does not yet exist, pay particular attention to the reliability and solvency of the development company. This is especially true for smaller, local real estate developers.

Prices and availability

In the following, I would like to give you a concrete insight into the characteristics of selected real estate markets. The prices quoted refer to a standard warehouse building in a typical industrial design in very good condition and per square meter and month.

Czech Republic

The Czech real estate market is characterized by low vacancy rates and medium to high prices. This is due to the numerous logistics projects that have been realized in recent years in addition to a dense industrial structure. Rental prices range between EUR 4.10 and EUR 4.70 per square meter per month. There are numerous speculative developers and generally satisfactory availability. However, availability is limited in and around Prague and along the Czech-German border.

Slovakia

Slovakia has one of the highest vacancy rates in Eastern Europe. However, there are significant local differences. As a result, the range of prices is very wide (between EUR 3.45 and EUR 4.90). The west of the country is characterized by its proximity to Austria: many large logistics projects have been realized here in and around the capital Bratislava in recent years. Numerous real estate developers, some of them speculative, are active in Slovakia, meaning that availability can generally be described as satisfactory to good.

Poland

The Polish real estate market is the largest real estate market in Eastern Europe. Numerous speculative real estate developers are active here. In the metropolitan areas of Warsaw, Wroclaw, Katowice, Krakow and Poznan, there is a wide range of properties on offer, but also a lot of demand. The price is therefore largely determined by the micro-location. Vacancies do not remain on the market for long, there is a high turnover. Prices fluctuate between EUR 3.70 and EUR 4.20 per square meter per month. Prices are similar in the east, but availability is significantly lower. In the capital Warsaw, prices are around EUR 5.00.

Romania

The Romanian real estate market is characterized by numerous automotive suppliers and large medium-sized companies. For manufacturing companies with a logistical focus on the west, the areas west of the Carpathian Mountains are particularly interesting. As a result, new projects are mainly concentrated in this area. However, the high demand ensures that prices range between EUR 4.20 and EUR 4.70. Prices can sometimes be higher, especially in the large centers of Timisoara and Sibiu. With the exception of the capital Bucharest, there are hardly any real estate developers active elsewhere and availability is correspondingly limited.

Bulgaria

The Bulgarian real estate market is underdeveloped. There are hardly any speculative real estate developers. Supply is found almost exclusively in the capital Sofia and its surroundings. Prices range between EUR 4.50 and EUR 4.90. Availability can generally be described as low. Bulgaria is therefore not a country for short-term settlement.

Hungary

The country’s real estate market is heavily concentrated in the capital. Around 80% of all developed properties are located in the area around Budapest. Prices there are between EUR 4.50 and EUR 4.80. However, the vacancy rate is low. There is little availability in the rural regions of the country. Most vacancies were originally built as specific production buildings and have come onto the market as rental properties as part of sale-and-leaseback transactions. There are a few properties along the M1 highway and in the Miskolc-Debrecen area. In the recent past, BMW in Debrecen and Daimler in Kecskemét have been some major relocations or expansions in Hungary, which will also attract more suppliers and lead to increased demand.

Summary

Some of the real estate markets in Eastern Europe are highly developed. The buildings meet current industrial standards and are quite young. However, there are major regional differences. This must be taken into account when selecting a location, along with the choice of the right model (rental or investment, standard or individual, existing or new build).