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As SURS, Slovenia's statistical office, reported in the end of October, the sharpest fall in prices was observed in the family house market where prices decreased by 17.1 percent in the first six months of this year compared to the 2007 average. The demand for housing, however, obviously outstripped the supply, as the prices in this segment of the residential real estate market continued to grow, albeit not at rates observed in previous years. Still, overall housing prices declined 2.6 percent, the first decline since SURS started tracking house prices in 2003.

Although the Slovenian real estate market is still healthy by European standards, prices have been growing ever more slowly. In 2007, housing prices went up by 4.8 percent on average every quarter; between 2004 and 2006, by 3.6 percent; but only by 0.7 percent in the first half of 2008. The change in trends is evident and, above all, unsettling for developers and other investors that have poured money in the market in recent years.

A housing glut...

The real estate market in Slovenia can be divided in three distinct geographical segments. In Ljubljana, Slovenia's capital and the centre of the most developed Slovenian region, house prices may be two to three times higher than in the rest of the country, except on the coast, where wealthier individuals have been buying their holiday homes. That does not mean, however, that prices grew faster in Ljubljana than elsewhere (see charts).

Developers have been piling onto the Ljubljana real estate market which has promised above-average returns. But as the fallout from the global financial crisis hits the real economy, people are becoming warier of taking out loans for house or apartment purchases. In any case, loans are hard to come by anyway, as banks cut back on their lending. Suddenly, there are too many housing units on offer and too few buyers.

...and buyers' strike

That spells trouble for developers. Vegrad, a developer and one of the biggest construction companies in the country, is a case in point. In recent years, the company's logo has become ubiquitous in Ljubljana. It has single-handedly thrown more than 1,000 residential units on the market since 2005. But over the summer the rumours surfaced that the company has problems selling the apartments in its flagship project, consisting of over 820 residential units. In autumn, the first workers were laid off.

Although Ljubljana's mayor, Zoran Janković, rushed to the rescue, taking more than 100 apartments off Vegrad's hands, this might not be nearly enough to forestall a significant drop in housing prices in the capital. Prospective buyers are waiting for prices to drop further, while some have entirely given up on purchasing their own home. Real-estate brokers say that the demand has dropped by nearly a half. Many of them expect a drop in the supply of new housing, as the number of issued building permits in the first six months of 2008 dropped by a third compared to the same period last year.

Too much of a good thing?

The commercial segment of the real-estate market, i.e. offices and retail space, is also slowing down. Only a few months ago, the bosses of big developers were relatively sanguine about the prospects of filling their office blocks and shopping malls with big names from business and the fashion industry. But with projections of economic growth revised downward by the quarter, doubts are spreading about the willingness of firms and consumers to keep spending, either on new offices or in new malls.

While in 2007 the prices of commercial real estate in Slovenia stagnated, in the first half of this year an increase in prices was observed, the Slovenian spatial planning authority reported in October. The retail segment grew faster than the office segment, but because data is not representative of broader trends, it is hard to draw meaningful conclusions.

Judging by anecdotal evidence, things are not as good as developers make them seem. Some experts have been warning that the supply of commercial real estate has long outstripped demand in Ljubljana. Looking at the projects coming on line in the next few years, it is clear why. Taking into account only the three biggest business centres under construction in Ljubljana, TriGranit's Emonika, IMOS's Tobačna City and GH Holding's Gemini, over 100,000 square meters will be added to the office space stock in the city.

Wrong place, wrong time

What all these projects have in common is that the decisions to go ahead with them were taken when the real-estate market, residential and commercial, was at its peak, with the broader economic picture looking brighter than ever before. But as the financial crisis has reached Europe, banks have become stingier with credit. Rumours abound that some developers have trouble accessing funding for their projects which may result in the latter being finished later than planned or even cancelled.

The developers' main customers, retailers and other companies are also being squeezed, from one side by sagging demand for their products and services, on the other by reluctant banks refusing to roll over their loans. No wonder that moving to new premises is not on the top of their agenda at the moment. It seems that the worst is yet to come.