Revving up for growth - The Slovak Republic's new investment hotspot

Bratislava has received a great deal of attention of late from investors - and with good reason. It's a city that's hot!

This is a city whose time has arrived. Unlike many other central and east European markets, this one is being driven by consumer demand. The economy is roaring ahead. According to government data, the economy grew by a record 7.5% in Q4 last year. For the whole year, growth was 6%. The general view is that growth is accelerating and will continue to do so for 2006. Some believe growth of 7% will be achieved in 2007.

This growth is fuelled by FDI and a population that is increasingly employed and increasingly ready to spend. Far more akin, then, to the scenario we would find in the US or the UK.

What does that mean for the property investor, though?

The significance is at a fundamental level. Here's how Property Secrets CEO Neil Lewis put it after visiting the Slovak capital: 'Walk around Bratislava and you cannot help realise, through everything you see and hear - from the property magazines, to the way people are smartly dressed and the smart cars they are driving, that this is a city that has already discovered the consumer market and is thoroughly enjoying itself in the process. 'The people of Bratislava are out there and having fun - that's the feeling the place gives you. And, as a consequence, people are obviously spending money. 'Essentially, the people in Bratislava make me think a lot of a bustling and chic Italian city - big on presentation and lifestyle - clothes, cars and restaurants. Great! 'This is what the central European emerging middle class phenomenon is all about.'

So, the question for investors is: does the fantastic Slovak opportunity go beyond the capital? We believe the answer is 'yes'. The great new opportunity in the country is going to be the small medieval walled town Trnava. Here's why.

This is a city in the West of the Slovak Republic of some 70,000 inhabitants, 45 kms away from Bratislava - 30 minutes by train - accessible by road, rail and navigable waterway. And it is about to be transformed by the same phenomenon that has hit Bratislava, and turned the Slovak Republic into Europe's Motown. This year, Peugeot Citroen will bring on line its brand new €1 billion car production plant in Trnava. This massive production site set over 190 hectares will be capable of producing 55 cars an hour - the plant's capacity hitting 60,000 cars this year, 240,000 in 2007 and 450,000 cars a year by 2010. Most cars - the latest Peugeot 207 will be manufactured there - will be exported, mainly to Austria, Slovenia and Italy. Most importantly for the people of Trnava is the fact that the two stage investment by Peugeot Citroen in the plant - €700 million in the initial phase and another €357 million in the second phase - will eventually employ some 5,100 people. Not surprisingly, this is going to lead to a proliferation of ancillary industries, feeding off the giant car plant's requirements - which means even more jobs. This is the kind of investment and production level that will have a noticeable effect on the nation's economy, let alone the town of Trnava!

This is the big picture - jobs flooding into a small city, that already has proved its ability to supply highly skilled workers to other big investors - notably Sony, Johns-Manville - the leading maker of glass fibre products, which recently announced $100m expansion plans at its Trnava plant - as well as a number of smaller concerns. The Peugeot Citroen investment, though, is on a scale that is capable of completely transforming the local economy, bringing a huge number of jobs and spending power into the twn and region. But it is not only the Peugeot Citroen factor alone that will, in the medium to long term, provide a turbo boost to the economy. It is the competition for skilled workers that the Peugeot investment will create that will prove decisive in raising employees living standards - and the aspirations that follow - including those to live in modern, well-designed affordable accommodation, whether renting or buying. The key is that the Peugeot Citroen plant will be directly competing for workers with VW, which has a massive production plant just outside Bratislava. And, until now, the big German auto manufacturer has been the lynchpin of the car manufacturing business in the Slovak Republic.

VW in the Slovak Republic produced more than 200,000 cars last year and expects that figure to rise to 220,000 in 2006. Currently Volkswagen in the Slovak Republic generates almost 20% of the country's exports and has 8,850 employees.

So, how does Jozef Uhrík, chairman of the Volkswagen board of directors and head of the Slovak Car Industry Association (ZAP SR), view the competition from Peugeot Citroen?

"Another car-making facility which is not far from our plant will mean that the workforce in this region will be able to choose between two big employers. This means that we will have to take a closer look at ways of increasing labour productivity and the optimisation of procedures. By the time PSA begins operations, we will already be at a stabilised stage. For us, the presence of PSA in the Slovak Republic will mean that we are faced with competition. In this respect, however, we at Volkswagen Slovak Republic have experienced a long period of 'training', not only within VW, but in the context of the global car industry."

In other words, these two car giants are going to be competing for skilled workers. So, the combination of two factors - huge investment by these car manufacturers that signals a 100% commitment to the market - and the inevitability of having to compete for skilled workers means salaries will be pushed up and therefore productivity will have to improve. But it's the rise in salaries, of course, that is of interest to preoperty investors. They translate into more Slovak spending power, which is great news. More spending power translates into more demand and therefore price inflation. Now, add this to the already significant mix of factors in Trnava and we have quite a recipe for property price growth.

The other factors?

The level of housing stock in the town is poor, and yet rents are relatively quite high, simply because they are being driven by the influx of people coming here to take up employment. There is a serious lack of supply to meet this new demand, which is set to grow exponentially as the new car plant gears up to full employment and production capacity. In particular, there is a lack of small flats and there is high demand for 2 and 3 roomed flats. The price for 1 sq m for flats on the secondary market is high, average SK 23.000 psm, and for small flats Sk 29.500 psm New build residential projects are few and are only just starting to come on stream, so there is little modern property - so much in demand by the locals - to choose from.

Bratislava has boomed and continues to do so. Trnava is on the verge of following suit, we believe. The next 12 month period is likely to see exceptional growth.

Key facts

  • Trnava has 70,000 inhabitants with an average age of 37.3 years [2005 census], out of which:
  • 98.5 % are Slovaks, 0.7 % are Czechs and 0.3 % are Hungarians.
  • Age: under working age: 9, 947, Working age: 46,742, retired: 11 603
  • Slovakia's economy is in good shape, showing strong growth and - that great bug-bear of CEE countries - the public deficit on the decline.
  • Fiscal reforms implemented in 2004 appear to be on target to bring the public spending deficit down, and the target of 2.9% of GDP appears to be achievable this year.
  • GDP growth in 2006 consensus forecast of 5.5% to 6%, with more optimistic forecasters suggesting 7% growth in 2007.
  • The Slovak Republic's target date for entry into the Eurozone is January 1, 2009.
  • Elections this coming September may cause the currency to fluctuate and there are some concerns about economic overheating, mostly driven by consumption levels and the demand for imports relating to further investment, as well as high oil prices, which affect all markets. After a base rate cut of 1% in 2005, the net effect of the changing market conditions may be a small rise in interest rates in 2006, perhaps a quarter point.
  • Finance remains an attractive element of investing in the Slovak Republic, with overseas investors generally finding it easy to take out a mortgage with good LTVs of 70%. Interest rates ranging between 4.8% to 6.05% over 30 years.
  • The potential for growth in a country's mortgage market is a useful measure of property price growth potential long term.
Source: Property Secrets (February 2006)