Central and Eastern Europe (CEE) is starting to make a name for itself as the region to watch for the latest technological innovation.
Cities like Bratislava, Budapest and Warsaw have seen an influx of start-up funding, infrastructure investment and interest from Silicon Valley stalwarts, which is helping to boost their profile on the global tech scene.
According to Invest Europe, private equity and venture capital investment into companies in CEE reached €1.6 billion in 2016 – the highest since 2009 – with investment capital most focused on Poland and the Czech Republic.
The area is still overshadowed by the more established technology hubs of London and Berlin, yet it is home to some of the sector’s most successful start-ups.
The popular video calling app Skype and money transfer service TransferWise were both substantially developed in Estonia. Hungary’s Prezi, an online presentation app, and cyber-security brands Avast from the Czech Republic and ESET from Slovakia are used by millions worldwide.
Kevin Turpin, Head of Research & Consultancy CEE at JLL, says: “Countries in Central Europe have been good at supporting start-up tech companies for several years. Now we’re also seeing large corporations taking an interest. Central Europe has very strong tech-focused universities and the cost of labor is also a huge plus.
“The region has strong market fundamentals – office take-up is high and vacancy rates are low – making it an appealing option for real estate investors who can’t find opportunities in Western Europe.”
Governments and investors lend a helping hand
A key driver of tech start-up growth has been the launch of funding initiatives by governments in the region.
Peter Würsching, Head of Leasing for JLL in Hungary, says one of the biggest problems for innovative companies in the past was the lack of government-provided start-up capital. This started to change in 2016 when the Hungarian government launched the public agency Hiventures. With HUF50 billion (€160 million) worth of EU and Hungarian Development Bank funds, it became one of the biggest investor companies in East-Central Europe.
The following year saw the launch of a start-up campus in Budapest to give financial support to young entrepreneurs.
“Much of the city’s success as a start-up hub has been credited to Peter B. Záboji and his European Entrepreneurship Foundation (EEF), which for the last nine years has been running accelerator programmes and investor events that have resonated with a new generation of Hungarian entrepreneurs,” says Würsching.
Similar initiatives have been launched elsewhere in Central Europe. Governments have introduced special economic zones that give investors tax breaks and other benefits.
Estonia, which has one of the world’s best free Wi-Fi networks, introduced an e-residency programme to attract foreign entrepreneurs, while the Tallinn University of Technology has opened offices in Silicon Valley. Poland has announced plans to turn its universities into start-up incubators that will power future businesses.
Start-ups are also being supported by local and external investors. Warsaw is home to a Google Campus that aims to act as a catalyst for further innovation in the region, and start-up community Mosaic has been established in Budapest to support the local tech scene.
Enter the new working style
The rise of start-ups is having a significant impact on Central Europe’s office markets, with new styles of working coming on to the scene.
“The number of co-working spaces is on the rise, particularly in Poland,” says Turpin. “Co-working gives start-ups the flexibility to reduce and increase staff and office space according to how well business is going, which is much more difficult when a company is tied into a five-year lease.”
However, Rudolf Nemec, Senior Investment Analyst for JLL in Slovakia, says once companies transform from the start-up stage to more established market players, they do not necessarily seek sharing office facilities: many prefer to have their own or leased offices.
“ESET, a global IT security company founded in Slovakia, just acquired a large piece of land in Bratislava, where it is planning to develop entire micro-city serving as their HQ and innovation hub,” he says
Staying ahead in the battle for talent
A big challenge for the region competing with more established European tech hubs in the battle for talent. The region has a large pool of skilled engineers and developers, with Polish, Czech and Hungarian developers ranking fifth in 10 out of 15 domains in the HackerRank programming challenges.
The problem is that much of this talent is being poached by western IT companies.
“People who have specialist software skills are highly sought-after and they can be lured by the higher salaries offered by large corporations. Wage inflation and the battle for talent is already a challenge for start-ups in the Czech Republic, which has the lowest unemployment rate in Europe,” says Turpin.
According to the Hungarian Central Statistical Office, 370,000 Hungarians – mostly young, highly educated and single – could leave the country within the next couple of years.
Slovakia, meanwhile, is introducing initiatives to fight corruption, digitize public services and set up better schools. It hopes these will encourage Slovaks abroad to return home.
Another issue is that start-ups are often viewed cautiously by real estate investors. Nemec says start-ups are seen as risky tenants with low covenants, whereas established local IT companies are of a more “blue chip” quality. Nemec believes this will change as awareness of the region’s growth potential increases.
“Bratislava is building its Danube Valley reputation, with a booming future-oriented business sector resulting in highly-skilled well-paid jobs, increasing office leasing activity, accelerating retail consumption and improving standard of living,” he says.
Indeed, across the region, the success of the tech hubs will continue to drive change in the office markets as well as in workplace design.
“A quarter of office space demand is coming from tech companies and I would be surprised if that changes any time soon,” Turpin concludes. “Tech companies are investing in their offices to ensure they keep their employees as connected as possible, which means we could see greater demand for innovative workspaces with rest areas, games rooms and running tracks on the roof. It is an exciting time for the region.”
Source: JLL- Article by Emily Perryman