BMI View: The commercial real estate sector in Bosnia-Herzegovina continues to be affected by low demand and high vacancy rates. Activity is expected to remain subdued in the short term, but over the long term there is significant potential in the market. We believe that interest from international occupiers and real estate developers will increase and lead to the development of the sector in the years ahead.
Following challenging economic conditions in 2014 caused by the severe regional flooding, the economic picture in Bosnia-Herzegovina has been improving this year and the country is forecast to see economic growth of 1.7% in 2015. Domestic demand and investment will positively contribute to economic growth. We expect continued economic expansion in 2016 with growth predicted to be 2.8%, before levelling off at the same rate over the remainder of the forecast period.
In the office sector, market fundamentals are likely to improve in line with economic performance. Occupier demand is expected to increase in response to higher GDP growth and improvements in the output of the tertiary services sector. But this improvement will be gradual. The market is predicted to remain stable over the next two years, before picking up from 2017 onwards.
In the retail market, the increase in private consumption should exert a positive influence on the retail real estate sector. Following a period of deflation, prices are expected to increase, but to remain relatively low. This will support the retail sector in the short term and should help to keep the retail real estate sector stable. In the medium term, rising consumption, higher wages and falling unemployment will filter through to higher retailer demand for space and should translate into rising rents, particularly since supply is set to diminish further as a result of a lack of development. The retail sector remains under-developed in the country and there is scope for expansion, particularly in terms of developing new shopping malls.
The industrial sector should be supported by the increase in domestic demand and consumption as these help to drive the manufacturing sector. Trade remains weak in the short term and that could be a drag on demand for warehouse space. This is however expected to be short-lived with higher volumes of trade over the period 2017-19 resulting in a greater need for distribution space.
With no development activity currently in the pipeline in the country, vacancy rates are likely to come under downward pressure in all three real estate sectors, helping the prospects for rental growth as demand picks up.
The greatest risk for businesses and investors relates to security, owing to the country's position in a conflict-prone environment. Simmering tensions with Serbia as well as with the Republika Srpska (a semi-autonomous entity within Bosnia) have the potential for escalation and that is likely to deter international investors from engaging in the real estate sector. Heavy regulations and bureaucracy is also hindering the free activity of businesses in many regards and is a constraint on international occupiers. Reform of business practices and the legal framework is needed before significant quantities of investment flows to the Bosnian economy.