Translation of an article that appeared in Finance, Slovenia’s daily financial newspaper, on Tuesday 24th January 2017

Slovenia could make much better use of it’s industrial tradition and excellent location

Slovenia’s industrial real estate are quite different then in other mostly developed industrial countries; it all comes down to scale, as the Slovenian logistics and production facilities are much smaller.

Manufacturing companies in Slovenia are typically very small, with an average of only 11 workers per company. Logistics companies are also diminutive, with only 5 workers per company. Such small entities require very little space.The average size of newly built industrial properties in 2016 was just over 1,000m2, and the average size of those sold in Ljubljana less than 1,000m2. Most industrial property in Slovenia is outdated and unsuitable for modern production or logistics use. The average age of industrial properties sold in Ljubljana in 2016 was 42 years. Industrial development in Slovenia has been limited to small scale properties, primarily for use by owner occupiers.

Compare this to the warehouse facilities in the nearby Zagreb Business Park, over 100,000m2 of space serving companies like Kuhne + Nagel, that occupies 19,000m2. At S-Invest we often get enquiries for industrial facilities from international companies, we currently have requirements for 5,000m2, 6,000m2 and 12,000m2, that cannot be fulfilled from the poor selection of industrial property available. Most of S-Invest’s international Clients present in Slovenia are unhappy with the premises they rent – very few were custom designed.

Too much bureaucracy, less investments

It is clear that if Slovenia is to develop as a production or logistics zone, new developments will have to be built to accommodate the expansion. Land will have to be found near the industrial hubs of Koper, Ljubljana, Maribor or Novo Mesto. We need improved planning processes, the current length of time to obtain building permission is not acceptable to international developers and occupiers. In Germany it takes 6 months to get permission for an industrial project – in Slovenia 4 or 5 times longer. In fact local occupiers often prefer to acquire old, outdated properties at a low price, and refurbish them to their needs, than deal with the bureaucracy of building new.

Developers will have to deal with the extremes of very small industrial spaces required by local companies, and the huge spaces that global companies need. Any developer will have to design new logistics space cleverly, to be able to accommodate both kinds of company, through smart and flexible subdivision.

Why so little development?

During the credit boom in Slovenia, developers built every conceivable kind of project – except industrial. Hotels sprung up in the most unlikely places, fueled not only by cheap and plentiful bank finance, but also by EU funds for tourism development. Small and large residential developments were to be found all over the country, some successfully sold, others ill-conceived and struggling to find buyers. Many office projects came to market in Ljubljana following Slovenia’s accession to the EU. Most are now nearly fully occupied but it took many years to rent out the space in a market with 30% vacancy. Retail space too expanded, with the addition of Q-Landia, Supernova, Mercator and Tuš developments; and two extensions to the Citypark mall in Ljubljana.

It did not occur to developers to build industrial property, for a number of reasons. Most local industrial companies own their premises, and are not accustomed to renting. Whilst there is rental demand from foreign companies for industrial space, particularly logistics, it is sporadic. It takes at least two years to obtain building permission and construct industrial property, that is too long for most logistics companies to wait to occupy new premises. Furthermore the cost of industrial land in Slovenia ballooned out of all proportion, as building plots changed hands speculatively many times over during the credit bubble, some at up to 200€/m2. It is just not possible to build a profitable industrial development on such expensive land. Elsewhere in the region, industrial land sells for between 7 and 25€/m2.

Slovenia’s potential

Slovenia is in an advantageous geopolitical location, Pan European transport corridors 5 (Venice to Kiev) and 10 (Salzburg to Thessaloniki) intersect in Ljubljana, and Koper is home to the container port, the main gateway to CEE from the far east. Industry contributes 33% to Slovenian GDP, and is important for the economy, particularly the manufacture of pharmaceuticals and automotive parts. Slovenia’s most important export markets are Germany, Italy, Austria and Croatia.

Slovenia benefits from a well-educated, multilingual workforce. The country turns out qualified engineers who contribute to R&D, that companies complain are hard to find in the UK and other more mature markets. Unskilled workers are not cheap in Slovenia, and can be employed for much less in Croatia and further south. However, in the logistics world, location is everything – truck drivers are permitted to drive a maximum 9 hours per day, and every kilometre counts. Corridor 5 going east leads to many more affluent and populous markets than Corridor 10 going south, and this gives Slovenia a location advantage over Croatia and other countries in the Yugosphere.

Industrial hubs

Slovenia’s industrial hubs comprise Ljubljana, Koper, Novo mesto and Maribor.

Ljubljana is home to pharmaceutical, petrochemical and food industries. Ljubljana airport handled 18,852 tons of cargo in 2015. The Airport was acquired by Fraport, the owners of Frankfurt airport, in 2014. The new owners are planning on expanding the cargo terminal and are expecting cargo throughput to grow 2.9% on average in the next years.

Koper is the logistics capital of Slovenia, thanks to the port, which handled over 22 tons of cargo in 2016. The port handled 607,000 cars; 800,000 tons of soy; and 791 TEU of containers in 2015. The company achieved revenue of 18.3m€ in 2015, which is a 13% increase on 2014. In 2015 it employed 1,040 people. In 2014 Koper port represented 0.59% of all EU28 ports cargo traffic. Net income in Q2 2016 amounted to 11.7m€ and represented a 28% increase on Q2 2015. It has 12 specialised terminals: container and ro-ro, car, general cargo, fruit, timber, minerals, cereals and fodder, alumina, european energy, liquid cargoes, livestock and passenger terminals.

The port has long term expansion plans designed to ensure throughput of 1.4m TEUs per year, within 10 years. The upgrade to the railway line would play a big part in helping the port achieve its aims.

Maribor is home to heavy industry including chemicals, engineering, electrical and aluminum, truck and bus manufacture, railway equipment, food processing, and textiles. Magna is one of the largest manufacturers of auto parts in the world. The Company is planning to build a factory in Hoče, near Maribor. They require 1 million m2 of land for an investment worth 400m€. The Minister of Economy and Development is personally engaged in negotiations with landowners, to secure the land required. This is very important for Maribor’s economy, and will create 400 jobs initially, and 3,000 jobs longer term.

Novo mesto is recognised for its successful pharmaceuticals, automotive, construction, textile and other industries, being home to well known companies such as Krka, Revoz, Adria Mobil and TPV.

Notable industrial transactions

Viator & Vektor sold their Industrial facilities for 18.5m€ in 2015. They sold 114,000m2 of land and administration buildings in Rudnik in Ljubljana to the Croatian company, Benussi.

Akrapovič moved part of their production to Črnomelj when they bought 19,000m2 of industrial space from engineering company Danfoss in 2012.

Kolektor Etra, energy transformers producer, recently acquired a 20,000m2 land plot for 2m€, where they will expand their industrial facilities and employ 150 new workers.

International manufacturer of electrical components Raycap recently acquired 15,000m2 of land in the industrial zone of Komenda near Ljubljana’s airport, to build a new facility.

DUTB is currently selling 118 industrial properties located all over the country.

Amazon has been granted patent for warehouse in the sky

Industrial property falls into two categories; production and logistics. A factory used to look much like a warehouse, in fact in days gone by many production facilities also served to store inventory. We live in different times now however, and globalisation has had more of an impact on industrial real estate than any other asset class. Modern logistics properties are 11 or even 13m high, with no pillars to impede the freeflow of forklifts, that pick goods off high rise racks. Some companies like Amazon, have giant yellow tricycles riding round their vast fulfilment centres collecting items out of plastic tubs whizzing by on a conveyor belt. Amazon is considering delivery drones, that would collect goods from a giant warehouse floating in the sky at 15,000 metres. Does this sound far fetched? The Company has already been granted a patent.

Factories have also changed, with an emphasis on work flow and environments. Cramped, dimly lit interiors play no role in the production facilities of today’s global companies. On a visit to the Lambourghini factory in northern Italy last year, I was struck by the immaculately clean, attractive interior, with clever lighting that focused on production areas whilst providing diffused light elsewhere.

Jacqueline Stuart is a Director of Slovenia Invest.