Clare Nuttall in Belgrade -

Lack of funds has caused many of Serbia's planned construction works to stall, but domestic companies are persevering with projects to fulfill the growing need for all types of real estate, especially in the industrial cities that have escaped the worst of the crisis so far.

Serbia's fourth-largest city Kragujevac, formerly the centre of the Yugoslavian auto-making industry, has seen a remarkable revival. With Fiat's decision to start up production at the old Zastava car plant, the city hopes to attract auto-component manufacturers supplying other CEE-based carmakers. It also had the knock-on effects of bringing down unemployment, boosting spending power and creating demand for real estate from residential to retail to warehouse space.

Plaza Centers Group, a subsidiary of Israel's lbit Imaging, chose Kragujevac as the location for the first of four planned investments into Serbia, the €50m Kragujevac Plaza which opened in March. Other firms interested in Kragujevac include Yu Kapital, which describes the city as "the most favorable investment destination in central Serbia".

Goran Zivkovic, deputy managing director of CB Richard Ellis Belgrade, describes Kragujevac as alive again after the arrival of Fiat and other international investors. "Demand for residential and retail property has quickly followed the initial need for industrial and logistic space," he says. "The situation in Novi Sad, Nis and smaller towns with successful industries is similar."

Pre-accession bubbles

The growth of cities with a solid industrial base has raised hopes that Serbia's real estate market will escape the pre-EU bubble seen in Bulgaria and Romania, and grow in a more sustainable way. Vladimir Vuckovic, associate director, transactions and investments at Coreside Savills, recalls the rush to invest in Bulgaria. "Many of those buildings have been sitting empty for the last decade," he says. "I believe Serbia's path will be closer to that of the Czech Republic, as historically Serbia was a stronger economic power than either Romania or Bulgaria."

He notes a similar pattern of industrial development in the Czech Republic and Serbia. "Volkswagen bought Skoda in Czech, and Fiat bought Zastava in Serbia. I expect most real estate projects here will be driven by industrial growth and rising salaries. There is a good market anywhere with large companies and privatisation of former state enterprises."

For historical reasons Serbia lags a decade or so behind other Emerging European markets and has a high level of pent-up demand for real estate, as the country only started to open up to international investors with the democratic changes after 2000. For a short period, Vuckovic says, Serbia was the fastest growing real estate market in the world with "cranes everywhere" in New Belgrade, the capital's commercial centre. But the boom was limited to the post-democratic, pre-crisis window and came to an abrupt end in 2008, meaning Serbia did not have enough time to catch up with the rest of the region.

Now foreign investors are stalling, as they need time to raise finance and are not ready to commit to new markets, especially one that is facing a fresh economic crisis as a new, untested government tries to fix the country's deteriorating finances. "Most foreign investors are a bit inactive at the moment and hesitant to make new investments," Zivkovic tells bne. "Several foreign companies have purchased land in prime spots, but have not started construction. Since the crisis, most construction has been by local developers."

However, he notes that in an encouraging sign, since 2009 the situation has improved. "Throughout 2011, we saw a stabilisation of all segments of the market. Rents went down and are now bottoming out, while demand has remained fairly constant."

Retail trade

Even though Serbia is back in recession after GDP growth was 2.1% in 2011, retail remains the most resilient part of the real estate market, again because of unfulfilled demand. Belgrade, with a population of 1.7m, has just two modern malls, while Zagreb in Croatia, which is less than half the size, has seven.

Delta Holding, one of Serbia's largest domestic real estate investors, plans to start construction of a third mall in the capital, Delta Planet, in spring 2013. At 200,000 square metres, the €200m mall will be the largest in Serbia. According to the company's vice-president Jelena Krstovic, international high street brands started to enter the Serbian market four or five years ago. "This process paused when the crisis started but now they are very interested. In the last six months companies have been calling us to ask about new retail space in Belgrade," Krstović says.

However, she believes future growth is not limited to retail. "The future for the sector is also in office and residential property, and hotels," she says. "We have plans for all these segments, and we have selected our locations while we wait for the market to revive. There is more potential in Belgrade now than in Croatia or Serbia, both because of the catch-up factor and because Belgrade is a big city and the centre of the region."

Given that Serbia lacks all sorts of real estate - from modern malls to warehouse space, class-A and class-B offices to housing for its growing and increasingly prosperous population - the market has some serious catching up to do and scope for investment. The question is when significant volumes of investment will come back.