Serbia’s fourth-largest city, Kragujevac, does not have a happy history. The scene of an infamous massacre in the Second World War, by the early 1980s it was harbouring lofty ambitions of becoming the Detroit of Europe. For a while, its prospects looked encouraging, with exports of the ultra-cheap Yugo car exceeding industry analysts’ forecasts. The disintegration of Yugoslavia brought that phase of industrial success to a shuddering halt, with annual production falling from 200,000 units at the start of the 1990s to 14,000 by 1999, when the Zastava plant was bombed by Nato forces.
Today, Kragujevac is enjoying something of a renaissance. In September, Fiat signed a joint-venture agreement worth close to €1 billion aimed at restoring output to 200,000 cars by 2010, creating 5,000 new local jobs in the process. The potential for an economic revival in the city has not been lost on real estate developers, with Israel’s Plaza Centers investing €60 million in a new shopping mall. Construction of the mall, which will house well over 100 shops, began in September, suggesting that there is plenty of dynamism in the market beyond the Serbian capital of Belgrade.
"Although Belgrade accounts for about 34% of Serbia’s GDP, in the last 12 months we have seen several important retail developments in a number of other regional centres," says Jovan Jovanovic, head of investment at Belgrade full-service real estate firm YU Kapital. "The Fiat deal has really put Kragujevac back on the economic map."
Jovanovic is bullish about the prospects for the broader retail sector of the Serbian real estate market, pointing to the example of a project such as Shopping City in the Belgrade municipality of Čukarica, a 100-hectare site that is being developed into the first retail park in Serbia. Others are equally excited about the potential for retail developments in Serbia, with MPC Properties, in which Merrill Lynch has a holding, due to open the flagship Usce shopping mall, with a gross lettable area of 43,500 square metres, in the first half of 2009.
At Shopping City, negotiations are progressing well with international retailers, who to date have been slow to explore the opportunities in the Serbian market, says Jovanovic. Germany’s Metro has had a presence in Serbia for a number of years, and Sweden’s Ikea is due to open its first factory in the country in 2009. However, the majority of multinational retailers remain conspicuous by their absence.
Local developers say there is no shortage of reasons why international retailers and other investors should be scrutinizing Serbia’s potential. In 2007, according to Colliers International’s latest bulletin, Serbia recorded GDP growth of 7.5%, the highest in the country’s history, with inward flows of foreign direct investment reaching €1.1 billion at the end of last year, underpinned largely by the privatization process. It is highly improbable that that rate of growth will be sustained, and a recent IMF report suggests that tough times are ahead for the economy as Serbia looks to deliver continued robust growth combined with low inflation and a manageable current account deficit. Nevertheless, the IMF expects real GDP to expand at between 6% and 7% in 2008/09.
Looking to the longer term, however, the prospect of EU membership appears to be the biggest draw for existing or prospective investors in the Serbian real estate market.
"The likelihood is that Serbia will be fast-tracked into EU accession," says Stuart Place, a director at Argyll Investment Services in Guernsey, which last year launched the Belgrade Pioneer Fund, one of the first vehicles dedicated exclusively to investment in the Serbian real estate market.
Place describes Serbia’s accession to the EU as being in everybody’s interest, not least because of the country’s importance as a transportation hub. In particular, some 800 kilometres of the 2,360 kilometre Corridor X between Salzburg and Thessaloniki runs through Serbia. As the EIB noted last year when it announced that it was providing €66 million of funding to support the rehabilitation of Serbian bridges and roads, "a well-developed transport infrastructure... particularly along the priority pan-European Corridor X, is of crucial importance for ensuring deeper integration with the European Union".
Improved prospects
Serbia’s prospects for EU accession were enhanced in July with the arrest of war criminal suspect Radovan Karadzic, which immediately prompted a positive comment from Standard & Poor’s. Although the agency did not go so far as to revise the negative outlook on its BB– rating, it advised that the detention of Karadzic signified "a notable reduction in political risk, particularly if it were followed up with the successful arrest of Ratko Mladic, the remaining high-profile war criminal still at large".
Continued robust economic indicators twinned with an acceleration of EU convergence will support expansion in a number of areas of the real estate market beyond retail. Rising demand in the office market, for example, has driven yields for high-quality premises from 12.5% in 2003 to an estimated 8.2% in 2008, according to data published by Greece’s Eurobank Properties, which notes that in Belgrade the vacancy rate for class-A stock has decreased to below 7%. A similar trend has unfolded in the logistics/industrial sector, where yields have fallen from 11.5% to 10% since 2003.
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"There is no economic logic in land prices being twice as high in Belgrade as they are in Sofia or Bucharest"
Siniŝa Braŝanac, Citibel Invest |
Another sector that is expected to expand over the coming years is tourism, which will filter through into rising demand for hotel facilities. Siniŝa Braŝanac, co-founder and managing director of Citibel Invest, points out that the Hyatt Regency is still the only five-star hotel in Belgrade. That means that there are only 302 top-quality hotel rooms in the city, an extraordinarily low total for a European city. That shortage, says Braŝanac, will be addressed in 2009, with the opening of a number of new five-star hotels.
