BMI View: The outcome of October 2014's general election is likely to have done little to ease investors' fears surrounding the stability of the Bosnia-Herzegovina commercial real estate sector. The country currently ranks bottom of BMI's Central and Eastern Europe Risk/Reward Index, while economic growth has been largely stagnant over recent quarters. That said, we maintain that the real estate sector holds long-term potential for foreign investors.
The year 2014 has been difficult for the Bosnia-Herzegovina commercial real estate sector as a number of economic and political headwinds contrived to dent the country's already fragile reputation. First, severe flooding experienced during the middle of the year weighed heavily on output from the country's agricultural and industrial sectors. Added, to this, slowing growth in the country's main export markets including Germany, Italy, Croatia and Serbia, during the second half of the year placed further pressure on an already struggling Bosnian economy. Taking these factors into account, our Country Risk team estimate GDP growth to have been a slower-than-expected 0.2% in 2014, dashing expectations of an acceleration from 2013 levels.
Furthermore, it was hoped that the October 2014 general elections would bring some much-needed relief to the ongoing political tensions that have plagued the country over the past few years. As it stands, the country's political future hangs in the balance with a prolonged period of coalition forming between the main party winners in each ethnic community expected over the coming months. With little immediate upside to Bosnia's economic and political troubles, the country was ranked the worst country in Europe for doing business in the World Bank's 2015 'Doing Business' report. Meanwhile, Bosnia also remains the bottom ranked nation in BMI's Central and Eastern Europe (CEE) Real Estate Risk/Reward Index for 2015. Given the current state of play, it is little wonder that the country's commercial real estate sector has seen little growth over previous quarters with rental rates remaining below those seen throughout the majority of the CEE region. Following the improvement seen over H213, rates largely stagnated over 2014 and we expect this scenario to remain in place over much of 2015.
However, despite the current headwinds facing the sector BMI believes Bosnia-Herzegovina real estate holds considerable long-term growth potential. Bosnia is one of few European states to remain largely undeveloped in terms of modern commercial real estate facilities with the first high-end modern shopping centre opening in Sarajevo in March 2014. The real estate sector as a whole has been seeing increasing investment from the Middle East, however. Notably the Sarajevo City Centre shopping mall was built by a Bahraini and Saudi Arabian joint venture (JV). Added to this, we see economic growth rebounding in 2015 with growth of 1.6% year-on-year (y-o-y) and outperforming much of the CEE region over the next few years, all of which represents significant opportunity for foreign investors willing to overlook the country's current struggles.
Slovenian supermarket chain Tus has shut down its operations in the Republic of Srpska (RS) leaving its suppliers with a debt of around EUR10mn (USD12.83mn). Tus will reportedly sell all its assets in Bosnia to a local supermarket chain, Bingo, causing a loss of 600-700 jobs (IBNA).
The World Bank has ranked Bosnia & Herzegovina as the worst country in Europe for doing business according to its 2015 'Doing Business' report. The country is in 107th place overall out of 189 countries analysed in the report.
Key BMI Forecasts
Rental rates are forecast to remain unchanged for both the office and retail real estate sectors during 2015.
Industrial rental rates are forecast to report flat growth for the year, except for in Sarajevo, where they will see a slight increase from H214 levels.
Rental rate growth is forecast to accelerate across all three market segments in 2016 in both Sarajevo and Zenica.
Rental yields are forecast to remain stable at current levels over 2015-2016.