Ben Aris in Belgrade -

In the midst of the crisis, there was a big party in Belgrade as the country opened its second modern department store at the end of March. The swanky 130,000-square-metre the Usce Shopping Center is the largest mall in the country, home to over 150 shops, restaurants and bars, and cost €150m to build. The question now is, when will the city build a third mall?

The crisis has brought the real estate sector in the Balkans to a standstill, but local developers and bankers argue it is little more than pause: the gap between supply and demand for modern buildings is so huge that the sector will quickly recover.

There is still growth in the Serbian real estate market, but isn't distributed evenly. Belgrade, with a population of 2m, is developing much faster than the rest of the country, and is attracting most investment, especially from foreign developers, says Sasa Trajkovic of EC Harris. But compared to its neighbours Serbia has weathered the recent financial storm relatively well and while the relentless rise of prices has been reversed, they haven't fallen far. "The prices have gone down, but not as significantly as in the UK or other markets of the region. What has really changed is the number of transactions: the market has more or less come to a standstill," says Peter Oberlechner, the partner in charge of real estate at Austrian law firm Wolf Theiss, which is also the biggest law firm in Southeast Europe.

Real estate prices in Serbia have fallen by 10-15% from their pre-crisis peak, but the real problem is that sellers don't want to sell at the depressed prices, whereas buyers don't want to buy as prices could fall further: transaction volumes have fallen by 30% to 35% of their pre-crisis levels as both sides of the bargain sit on their hands waiting to see how the crisis unfolds.

Land is the one area where prices have fallen faster, but Oberlechner says the size of the fall depends very much on the region or city. "Land was too expensive and as a results the only projects that were viable was residential or office. One of the results of the lower prices is suddenly logistic park projects have become viable and we are seeing investment begin here," says Oberlechner.

Professionals working in the market have no doubt that the market will recover, and probably quite soon. The huge deficit of quality housing means demand is still running well ahead of supply, even in this depressed market.

Shops and offices

Retail space has been the fastest growing segment in Serbia over the past couple of years, with shopping centres and hypermarkets spring in up in the major cities. The first big development was the 30,000-sqm Delta City mall, which opened in 2007 in New Belgrade, which was at the time the biggest shop in the country, but has since been overtaken by the Usce centre. Other important openings were the Mercator and Roda Centres last year in Kragujevac, Sremska Mitrovica and Sabac. The 28,000 sqm Plaza centre in Kragujevac is due to open at the end of this year, as are TQ City in Indjija and Park City in Novi Sad. In all, the total amount of retail floor space in modern facilities already doubled in 2008 to reach 170,000 sqm up from 65,000 sqm in 2007. Another 340,000 sqm was on the drawing board for 2009, says EC Harris.

"Estimates are that this trend of retail market growth is expected to continue as Serbia is undersupplied with retail space compared with its neighbours. In Zagreb, for instance, there is retail provision of 780 sqm per 1,000 inhabitants; in comparison, Belgrade has only 155 sqm," EC Harris said in a recent report. "But despite the increase in floor area, rental rates have recorded a slight increase and reached €100-200/sqm for prime high street shopping zones to €40-100/sqm in secondary zones."

The story is the same with office space. The Belgrade office market grew rapidly over the past five years and last year alone total space increased by 145,000 sqm to about 597,000 sqm. Of this, some 99,800 sqm was class A and 45,700 sqm was class B, according to EC Harris. Even at this pace, there is still only about a quarter of a metre of office space for each person in Belgrade, compared with one meter for each person in cities like Vienna.

This lack means that demand forms very fast in each part of the real estate sector. The result of the crisis has been a mass trading down to cheaper properties of all sorts. But as developers were concentrating on the most profitable end of the market, few objects at the cheaper end of the spectrum were ever developed. The result is there has been tremendous surge for class B offices as well as budget range hotels, and there are not enough to go round.

Oberlechner says that the Belgrade office market remains one of the hottest in the region; the crisis depressed demand in the real estate sector as a whole, however, the lack of space is so acute that even the low levels of demand remain above the levels of supply. The only problem that developers face is getting hold of the money to build these things.

Residential was also growing fast as prices rose to €4,000/sqm in the most desirable locations in New Belgrade and the Old Town, while the average selling price of apartments in Belgrade in 2008 was €1,600/sqm. "Serbia ranks very low in terms of the production of real estate. We had a 15-year-long crisis here which resulted in a very low stock of buildings. In Belgrade alone we need to build some 40,000-50,000 residential units a year when only 8,000 were being built. And even that has fallen to 5,000 units a year since the crisis started," says Slavko Caric, CEO of Erste Bank's subsidiary in Belgrade.

Send comments to The Editor