Class A Office Rents in Sofia Among Cheapest in EU

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Class A Office Rents in Sofia Among Cheapest in EU

The office property market remained positive for occupiers during the first quarter of 2011. Only a few large leasing deals were closed in the first three months and all of them were company relocations, analysis by Forton International Group shows.

New Class A office buildings are now being completed and this is increasing competition among landlords. Two property transactions were announced at the beginning of 2011 and several more are expected to happen by the end of the year.

Supply

Office stock grew by 40,000 sqm reaching a total of 1,354,000sqm. The overwhelming share of this new supply was contributed by the Serdika Officescomplex, located above theSerdika Center shopping mall. The retail part of the complex was opened in Q1 2010 while the office part gained its use permit at the end of 2010 and is now available for occupiers.SerdikaOffices is one of themore significant new office schemes on the market, not only due to its scale and location, but also because of its functional design. The complex provides prime office space on a main city boulevard at the edge of Sofia's CBD. Based on its floor area and technical parameters,Serdika Offices joins the group of Class A office developments which were started at the peak of the market and were delivered after the crisis hit Bulgaria. These new schemes set new office space standards in Bulgaria and as a result are the main drivers of the majority of business relocations in the capital city.

The active pipeline remains stable with approximately 560,000 sqm under construction in Sofia. Approximately 135,000 sqm of new officesare scheduled to be delivered by the end of 2011. However some of the projects may be put on holduntil 2012 in order to secure enough occupancy for operation. We expect competition between landlords to be intense with the delivery of five new Class A office schemes with a total area of 96,000 sqm. Three of these developments will be the first office buildings in operation certified as green sustainable buildings. Practice across more developed European markets shows growing concern for building's carbon footprint, especially by large corporate occupiers. Furthermore, sustainable buildings achieve savings on running costs and utility bills, which is attractive for large occupiers.

Despite the evident oversupply of new officespace and the high share of vacancies on the market, construction works on three new office developments commenced this quarter, adding approximately 20,000 sqm to the pipeline.

Demand

Occupier activity is improving although from a low base, driven by the current low office rents and attractiveness of new prime office schemes entering the market. The most notable office leasing deals in Q1 2011 amount to 7,700 sqm, while the total take-up in modern office schemes is close to 10,000 sqm. However the majority of leasing deals arerelocationsand this coupled with the high supply of newly completed office buildings has led to a further rise in vacancy.

Three new tenants recently entered Polygraphia Office Center raising the occupancy above 50%. New tenants were also secured in Litex Tower and Megapark.

The vacancy rate continued its upward trend rising to 31% at the end of this quarter. Supply significantly outpaces demand for office space which will eventually lead to a further increase in vacancy in the next three quarters.

Rents

Prime office rents fell by 2% compared to the previous quarter and by 7.7% on an annual basis. Office rents in Sofia are much more competitive compared to other EU capitals.According to recent research from Cushman & Wakefield Sofia was ranked 65 out of 68 countries in terms of prime rent levels. These results, together with the notably decelerated rental fall in this quarter, has set a stable rent level outlook for 2011. However we do not expect rents to increase in 2011, because the main drivers for such a recovery are not visible in the short term. Future increase in prime rents should be expected if demand catches up with supply and the economy achieves sustainable growth.

Occupiers Focus

The positive aspect of low rent levels is the opportunity for occupiers to secure prime office space at favorable prices. The 2011survey of A.T. Kearnay Global Services Location Index ranks Bulgaria at 17th place out of 50 countries in terms of attractiveness for outsourcing business. Bulgaria scores high on financial attractiveness due to favorable office rents and labor costs. However the country has dropped by 4 places since 2010 giving way to the Baltic states of Lithuania, Latvia and Estonia attributable to their better score in business environment. This has been the most significant concern of foreign investors coming to the country.

The potential increase in demand may come from outsourcing business, which remains strong within a global perspective. However the factors influencing outsourcing industries are not limited to the property market alone.

Investment Market

Several office property deals were announced at the beginning of this year. The former Benchmark REIT negotiated a sale of 80% of its office development onRakovski Blvd, in Sofia's CBD. The potential new owner is the local country office of the European Commission. The building has a total built-up area of 4,662 sqm.

ERG Capital REIT negotiated a sale of a group of retail properties which also includes an office building in the suburbs of Sofia on TsarigradskoShosse. The building has total built-up area of 2,400 sqm. The anchor tenant is the local branch of Praktiker.

Prime yields remained unchanged in Sofia at approximately 10.00%. However ininvestment market which lacks true office investment deals priced on income the accurate yield level is proving difficult to pin down and may vary depending on the property and covenant strength. A number of deals are rumored to be in the pipeline and are expected to close by the end of the year.

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