Slovakia Investment Property

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Slovakia Investment Property Newsletter
May 2008 - Issue # 42
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Welcome to the new issue of your Slovakia newsletter.

Having focused on the residential property market over the
recent months, in this edition we take a detailed look at
the commercial property sector - in particular the boming
retail segment. Next issue will bring you an overview of
the office segment in Bratislava as well as the other regions.

As usual, if you've missed any of our previous newsletter
issues, they are available for you here:

www.slovakiainvestmentproperty.com/newsletters.php

In this issue you will find:

1. Excellent Year for Slovak Banks
2. Slovakia's Explosive Growth of Retail Trade
3. Tell Us What You Think!

===================== MUST READ NEWS ====================

1) Excellent Year for Slovak Banks

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After European Commission's approval of Slovakia's eurozone
entry the ministers of economy of EU member states also
expressed their support for the country's January 2009
euro adoption.

* * *

Slovakia's GDP growth in QI 2008 was 8.7%, 0.4% higher than
in the same period last year. The economy is expected to
grow by a strong 7.9% this year (according to the Slovak
Statistical Office).

* * *

Information from the Statistical Office from March 2008 shows
that the monthly wages grew fastest in the fields of property,
rentals, business activities and other services (by 12.6%),
followed by post (by 12.1%), transport (by 8.7%), industry (by
8.4%), telecommunication (by 6.4%), building industry (by 6%),
retail (by 5.4%), sale of vehicles and hotels and restaurants
(by 4.7%).

* * *

On 12 May the Slovak crown reached a new high of 31.770 SKK/EUR.

* * *

In spite of the troubles in international banking, Slovak banks
have seen an excellent year in 2007. The number of loans taken
out by Slovaks increased sharply last year and positive results
are expected in 2008 as well.

In 2007 bank loans increased by SKK 58 billion (1.9 billion euros)
to SKK 232 billion (7.7 billion euros). Adding loans from other
financial institutions, the total volume of loans reached SKK
285 billion (9.5 billion euros).

The loan to deposit ratio reached SKK 0.57 in 2007, up from
0.51 in 2006 (meaning that for each 1 koruna of savings a loan
of SKK 0.57 was taken out).

With the growing employment and higher incomes Slovaks are
gradually more willing to borrow money. The high demand for
homes and better quality of properties on offer have created
a stronger demand for mortgages.

* * *

By the end of 2008 Slovakia is to move from the group of countries
receiving support from the World Bank to the countries offering
support, according to Slovak Ministry of Finance.

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2) Slovakia's Explosive Growth of Retail Trade

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The dynamic economy and fast growing purchasing power of the
Slovak population have been behind the boom in shopping center
construction over the last few years. With increasing employment
and strongly growing middle class Slovaks are no longer satisfied
with shopping in cheap discount stores or markets. And, importantly,
the new malls are also becoming a popular place for people to
socialize and spend their free time rather than just shop.

Analysts expect an explosive growth in retail sales in Slovakia
in the coming years. Global property consultancy King Sturge
listed all 8 Slovak regions among the European hotspots for
retail growth, in particular Bratislava with the best economic
prospects and increase in purchasing power.

The slow beginnings...
----------------------

Due to the small size of the local market global supermarket
chains (followed by other retailers) came to Slovakia several
years later than to the neighbouring Central European countries.
It was only in mid to late 90's that the country has seen Tesco,
Billa or Carrefour super- and hypermarkets opening in Bratislava.
At that time Czech republic, Hungary and Poland have already
experienced a massive construction of modern shopping centres.

The beginning of the shopping centre era in Slovakia was marked
in the late 1990's by the visions of the Hungarian developer
TriGranit, whose Polus City Centre in Bratislava (opened in 2000)
was the country's first mall, and a local developer's (HB Reavis)
Aupark shopping centre, today considered the most popular and
successful in the capital.

Both of these early shopping projects were sold to international
investors (Austrian Immofinanz acquired Polus and Dutch Rodamco
50% of Aupark) - a model applied to most other existing shopping
centres not only in the capital but also in regional cities.

Just a few years ago there was a fight for modern well located
retail space - international brands were expanding into Slovakia
and the few new shopping centres were tenanted in no time. However,
the times when any retail space could be effortlessly filled by
big name tenants are over. The latest malls under construction
now will find it significantly harder to find solid tenants fast.

On the other hand, Slovakia doesn't yet have a high number of
quality retailers. Many high-end global brands are not yet
present and are at best observing the market. The Slovak market
may not yet be ready for brands of the calibre of a Louis Vuitton,
Prada, Versace etc, although limited articles of such brands can
already be purchased in a few luxury stores in central Bratislava.

There is still potential for new shopping centres as well -
Slovakia still has a lower number of retail space (in m2 per
inhabitants) than USA and most of Western Europe, in spite of
the recent boom.

The future expansion
---------------------

At the moment Slovakia has 34 larger shopping centres with a
total size of around 560,000 m2 of retail area. If all the
planned new projects are completed, the retail area will be
increased by another 800,000 m2 in the next few years. That
would bring the density of retail space in Slovakia to higher
levels than in the Czech republic and Hungary (but lower than
in Poland or Slovenia).

At the moment the density in slovakia is 0.1 m2 of retail space
per inhabitant (less than half of what it is in Austria). It
could be increased to approx 0.27 m2/inhabitant over the next
5 years. (Comparative data for future retail space, after projects
in planning, is 0.22 m2/inhabitant in the Czech republic, 0.14 m2
in Hungary and 0.44 m2 in Slovenia.)

Not surprisingly the capital has seen most of the new malls
springing up in Slovakia in the last 5 years - the high purchasing
power in Bratislava has contributed to their success. More
recently several smaller malls have been built in the regional
capitals and centres of up to 20,000 m2 of retail space are
planned for smaller towns as well. Even the capital itself will
see a significant increase of retail space in the next 2-5 years
- a few superregional centres are planned for construction
(with up to 100,000 m2 of rentable area).

Bratislava the centre of Slovak retail
---------------------------------------

At the moment about 40% of modern Slovak retail space is concentrated
in Bratislava. After completion of the planned projects the retail
area in the capital is to double over the next 5 years.

Bratislava is becoming saturated and will soon reach the European
average of retail space per population. As a result of the competition,
retail (similarly to offices) in the capital now offers returns
that are only slightly above those in Western Europe. In spite
of that the demand of global property funds interested in purchasing
new malls in Slovakia and CEE is huge, offering developers a
safe exit strategy.

Bratislava doesn't have a traditional shopping street (high street)
and shopping activity is concentrated in the malls. High-end brands
are expected to be present in the planned shopping promenade in the
riverside multi-use development Eurovea. Smaller commercial projects
like Galeria Delta in Postova street in the heart of the city centre
also house luxury brands.

Below is a description of the capital's most significant shopping
centres - existing and planned.

Aupark - extended last year and now with a total of over 58,000
m2 of rentable space. It has overtaken Polus as the city's most
successful shopping centre thanks to better quality brands as well
as a good mix of entertainment space, wellness, dining, cinemas etc.

Polus City Center (40,000 m2 of rentable area)
Avion Shopping Park (extended in 2007 to 50,000 m2)
Soravia Shopping Palace (55,000 m2 of retail & entertainment area)
Danubia (30,000 m2)

The planned projects include:

Twin City - a multiuse development on the edge of the city centre
with a rentable area of 200,000 m2 of which nearly half will be
retail and entertainment. With a cost of SKK 17 billion (563 million
euros) it is the most significant development project in all of
Central Eastern Europe.

Eurovea - part of the luxury riverside development will be 60,000
m2 of retail space to house mid-range as well as high-end brands.

Main train terminal - at least 60,000 m2 of retail space is to
be created in the planned redevelopment of the city's train terminal
north of the city centre.

River Park - another high-end multi-use development on the Danube
river, to include significant retail area.

Centre Plaza in Kamenne namestie (the heart of the city centre) -
a project to transform the old Kyjev hotel and surroundings into a
high-end hotel as well as 40,000 m2 of rentable retail & entertainment
area; the current Tesco department store (one of the country's most
successful) will receive a luxury renovation.

Yosaria Plaza - a planned 34,000 m2 of retail space were to be
created by a total redevelopment of the old Prior department store
in Ruzinov district. Originally to be completed in late 2006, there's
been no building progress on the site for well over a year and its
construction is more than uncertain, due to reported finance problems.

The Mall - a 70,000 m2 retail and entertainment zone will be part
of the massive new residential project the Port on the northern
border of Bratislava. Retail areas of significant size are also
planned for the new residential zone in south Petrzalka, South City.

There are also numerous smaller shopping centres in the capital,
such as the newly extended and refurbished Hron with under 10,000 m2
of retail area (in Podunajske Biskupice), Saratov centre in Dubravka,
and many others. These are small centres of only local significance
for their home district and generally with a key tenant such as
food retailers Tesco, Jednota, Lidl, Billa, Kaufland, Metro or
Hypernova occupying a major portion of the space.

The shopping boom is spreading into the regions
------------------------------------------------

As the Bratislava market is getting increasingly saturated, developers
are starting to focus on the other 7 regions and smaller towns.

Experts now expect the shopping centres in towns with a population
of 25-30,000 and a catchment area over 80,000 to be the most
profitable in the coming years.

Aupark malls are planned for the towns of Zilina (24,000 m2 of
rentable area), Kosice (30,000 m2), Trencin (15,000 m2), Piestany
(17,700 m2) and Ruzomberok (10,000 m2). As in the capital, they are
to be positioned in well accessible locations near the city centres.

Max shopping centres have been built in Trnava (10,000 m2 of rentable
area), Trencin (15,450 m2), Poprad (12,000 m2), Nitra (17,000 m2)
and in late 2007 also in Dunajska Streda (9,000 m2) and Skalica
(8,000 m2). The developer is also building new Max centres in Zilina
(18,000 m2) and Presov (12,000 m2). A larger Euromax centre (with
20,000 m2 of rentable area) is Bratislava is to include a significant
portion of office space as well as a residential part.

Apart from Max Trnava also has the new Arcadia centre (with less
than 5,000 m2 of retail area) and in planning is a shopping and
entertainment centre by Irish developer Parker Green - to be the
largest in the city, offering 45,000 m2 of rentable area.

In Zilina the Duben and Max shopping centres will receive strong
competition from several planned projects (including Aupark).

The recently completed Europa Shopping Center in Banska Bystrica
is offering over 31,000 m2 of rentable area. Europa Shopping & Relax
Center in Zvolen will offer over 21,000 m2 of rentable space when
completed in late 2009. The developer is also planning Europa centres
for Liptovsky Mikulas and Levice, as well as several other towns.

Laugaricio centre in Trencin is to offer 67,000 m2 of retail area
when completed.

After a long period of limited development eastern Slovakia's
metropolis Kosice is also appearing on the new retail map. Apart
from the existing Optima shopping centre (32,400 m2 + extension by
16,300 m2 of rentable area) and Cassovia centre the city will also
welcome a new Aupark in 2010.

The most surprising development has been seen in Nitra, a city
of less than 100,000 people, where 5 shopping centres are fighting
for customers. Four of them were completed recently (Max, Centro
with almost 30,000 m2 of rentable area, Galeria Mlyny with 25,500 m2
of retail space and CityPark with 27,000 m2), the fifth and oldest
is the Tesco department store in the city centre. Furthermore there
are talks of 2-3 new retail centres to be created in this town.
Nitra will shortly have a staggering retail density of 1 m2/inhabitant
which is likely to result is strongly diminishing profitability.

While the regional capitals have, unsurprisingly, attracted most
of the development, smaller towns are also starting to participate
in the shopping rush.

Martin has received the Tulip Center. Aquario shopping centre with
7,500 m2 of retail area opened in Nove Zamky in late 2007 and another
one in Sturovo is to be completed by the end of 2008. Poprad and
Presov will also see smaller malls built in the next 1-2 years.

Small centres (generally of 5-10,000 m2) have also opened in towns
such as Michalovce, Liptovsky Mikulas, Lucenec. Further ones are
planned for Levice, Spisska Nova Ves, Sturovo, Prievidza, etc.

Many towns already have a Tesco hypermarket with an adjacent
small shopping gallery. Tesco, the largest retailer in Slovakia,
is also building super- and hypermarkets (of up to 3,000 m2) in
smaller towns of 10,000-20,000 inhabitants.

Strong competition
-------------------

Developers have typically preferred to build malls outside the
central areas due to high costs of land in city centres and limited
space presenting a difficulty in creating sufficient parking spaces,
as well as the frequent traffic problems, etc. Today, as higher
purchasing power justifies the arrival of luxury brands (that
tend to prefer renting centrally located spaces), developers
are increasingly interested in creating retail temples in city
centres. (Bratislava examples are the new Eurovea, Twin City,
Centre Plaza, Galeria Delta, the redevelopment of the old Dunaj
SC with approx 10,000 m2, etc.)

As consumers expect more than just shopping, increasingly important
for the success of Slovak malls is the entertainment segment -
cinemas, fitness centres, child playgrounds, variety of restaurants.

Despite the fast growing prosperity and willingness to spend,
it's far from certain that all of the new shopping malls will
be profitable. As the competition increases and the public becomes
more demanding, it's likely that only the better centres will
prove to have been a lucrative investment. Shoppings situated in
less suitable areas, with worse accessibilty, lower quality and
less favourable mix of tenants will likely see a high fluctuation
of tenants and falling rents and revenues.

Rents and returns
------------------

For the last 8 years the trend has been of the developers selling
their malls before completion (often even before the construction
start) to global investment companies and property funds. However,
not all malls are always successful and with increasing competition
they will likely have to specialize more as well as offer better
quality retailers to an increasingly demanding market.

And while the demand from investors continues huge, falling yields
as well as the current financing difficulties due to the global
credit crunch will result in greater caution of investors who are
likely to be more selective in the future (for example demanding
higher ratio of pre-tenanted space, better quality locations, etc).

At the moment average rents in Bratislava malls are around
15-25 euro/m2/month. In the most popular centres such as Aupark
rents can reach 50 euros/m2/month for smaller spaces. And rental
levels in the prestigious Eurovea project (late 2009) are
estimated to be approx 20% higher still.

So, while experts don't expect the Slovak retail boom to be
over any time soon, quality and location will be increasingly
more and more important for developers' and investors' success
amidst growing competition.

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3) Tell Us What You Think!

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We would love to hear what you think of this issue of our
newsletter. We hope you find the information useful and
wish you best success in your investment activities.
And of course, if you have any suggestions for upcoming
issues that you'd like to share with us, please send them!

Just e-mail us at: contact@slovakiainvestmentproperty.com

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We are looking forward to seeing you next month. In the
meantime, if you have any questions or would like to
request further information, please contact us at
info@slovakiainvestmentproperty.com or at
+44 (0)207 152 4014.

Best of success,

Petra Gajdosikova
Managing Director
Slovakia Investment Property
www.slovakiainvestmentproperty.com

Slovakia Investment Property is a trading name of
Alpha Real Estate Investments Limited