Demand improved during Q2, while deliveries are limited and vacancy rates keep decreasing according to the Bucharest City Report for Q2 2022, published by real estate consulting company JLL.
“Despite of the economic uncertainties generated by increased inflation and higher energy costs, the real estate market in Romania experienced a positive evolution during the first 6 months of 2022 on all main market segments. Considering there are many challenges ahead, some adjustments are possible until the end of the year and growth rates in general are likely to be modest”
Investment volumes expected to reach €1 bln. by the end of the year
The property investment volume for Romania in Q2 2022 is estimated at approximately €257.4 million, a value almost 4 times higher than the one registered in Q1 2022 and 13% over Q2 2021. For the first 6 months of 2022, total investment volumes reached €326 million, almost the same as in H1 2021.
We expect investment volumes in 2022 to reach approximately €1 bln., although accurate predictions continue to be challenging to make in this period due to market uncertainties.
The largest investment deal closed in Q2 2022 was the sale of Expo Business Park office complex, developed by Portland Trust, to S Immo. JLL advised the seller in this transaction.
Prime yields in Q2 2022 were stable, at 6.75% for offices, 7.25% for retail, and 7.50% for industrial properties. Romania is well positioned from a pricing perspective, as the current yields are still well above those registered in the last peak (2007) and those currently quoted in the rest of the region. Prime yields are expected to remain relatively stable by the end of the year as the appetite for financing the real estate sector remains strong, especially for prime, income-generating assets.
Demand is improving on the Office market
Overall, H1 2022 marked a slight 10% increase in gross demand in Bucharest compared to H1 2021, to 134,600 m². However, net take-up increased to 82,300 m² during the period, 70% over H1 2021.
As expected, the vacancy rate contracted during Q2 2022, from 14.3% in the previous quarter to 12.75%, since the volume of new deliveries was low during the period. Although most companies opened their offices for their employees, the hybrid approach “work from home – work from office” is still common practice. The vacancy rate is likely to continue decreasing during the second half of 2022, due to limited options in developments to be delivered during this period.
Only one office building was delivered in Bucharest during Q2 2022, the second phase of the AFI Tech project, that adds 24,500 m² to the Center-West submarket. Until the end of 2022, approximately 41,300 m² are expected to be added to the market, bringing total deliveries for the year to 139,300 m². The largest project expected to be completed by the end of 2022 is the second phase of One Cotroceni Park, adding approx. 34,500 m² to the Center-West submarket, which already attracted most deliveries this year.
Q2 2022 marked an increase of the prime office rent in Bucharest, from €18.5 per m² per month, to €19.0 per m² per month, as a direct consequence of rising inflation, and construction costs, combined with a small volume of new deliveries.
Over 150,000 m² to be added the retail stock by the end of 2022
In May 2022, retail sales increased by 6.2% y-o-y after the state of alert and all pandemic restrictions were lifted on March 9th, which represent an encouraging evolution for the market.
During Q2 2022, only 16,800 m² were completed in two major retail schemes, both in regional cities. This is, however, 40% above the modest deliveries in Q2 2021.
Prime shopping centre rents increased during Q2 2022, but this is mainly due to indexation. Considering increase in inflation, rising energy prices and service charge costs, this will affect retailers’ ability and willingness to pay higher rents. Therefore, we estimate limited growth opportunity for prime rents in 2022, with retailer demand expected to strengthen in 2023.
Supply is expected to pick up during the second half of the year, adding over 150,000 m² to the modern stock. Overall, the volume of new deliveries in 2022 could reach 184,100 m², 73% over 2021, concentrated mainly in retail parks in medium and smaller cities.
Industrial stock expected to reach over 6.3 million m² this year
The Industrial market in Romania continued to perform very well during Q2 2022, gross demand reaching 188,400 m², 34% below the previous quarter, but 40% above Q2 2021.
For H1 2022, gross take up totaled 472,700 m², 19% above H1 2021. Net take up was 386,900 m², 37% more compared to H1 2021.
During Q2 2022, approx. 92,700 m² of industrial and logistics spaces were delivered in Romania. For the second half of 2022, developers plan to deliver another 424,000 m² of industrial and logistics spaces. This would bring total completions for 2022 to 672,100 m², 27% over deliveries in 2021. Thus, at the end of the year, the total stock could reach 6.36 million m².
Pressured by higher construction costs and inflation, rents for industrial spaces started to increase during Q2 2022, also encouraged by consistent demand and low vacancy rates. These increases are limited however by the strong market competition and large volumes of new deliveries expected for the second half of the year. In Q2, rents were situated between €3.85 and €4.25 / m²/ month in the Bucharest & Ilfov region, and between €3.25 and €4.25 / m²/ month in the other regions of Romania.
Due to strong demand in H1 2022, vacancy rates continued to slightly decrease at the national level, from 2.8% in Q1 2022, to 2.6% in Q2 2022. Considering the volume of new deliveries expected for H2 2022, we do not foresee further decreases in vacancy rates until the end of the year.
First signs of slowdown on the residential market
The level of new units transactions in Q2 2022 was situated somewhere at 8,350 units for Bucharest and 1,450 units for Ilfov, 3.8% increase as compared to the previous quarter.
Overall, the second quarter of the year marked a 16% increase as compared to Q2 2021 and a spectacular increase as compared to Q2 2020, with a double volume of registered transactions.
After a low, seasonal, evolution in April, the activity resumed in May, at a significant higher pace, as compared to May 2021, while in June the effects of the increased key interest rate impacted the transactions volume. We are prepared to see a slowdown in Q3 2022, this trend already being visible in June 2022.
The residential supply for Bucharest – Ilfov increased with approximately 6,250 new units in Q2 2022, out of which 3,460 new units in Bucharest and 2,790 new units in Ilfov County. By the end of the year, we estimate a total supply of 17,925 units for Bucharest and Ilfov.
Residential prices registered a 4% increase in Q2 2022 as compared to the previous quarter, levelling at an average of EUR 1,720 / sq m. The price increase is unexpected considering demand evolution and the overall economic and financing context. This increase comes mainly as a result of rising construction costs, but also can be a buffer for the expected widening of the negotiation margins.