Introduction to Czech Market
The Economy
-
The Czech Republic has a population of 10,211,500. - The key economic indicators for 2004 demonstrated continued long term economic growth. Positive macroeconomic development was reflected in the continued interest from foreign investors arriving prior to and after the EU accession in May 2004.
- The economy has been relatively steady over the first half of 2005 and no significant changes are expected in the near future. GDP growth has increased from 3.6 % to 4.0 % and the latest forecast for 2005 is 4.0 %. Household consumption rose by 2.4 %, which was lower than previous years, this was caused by the slower growth of real wages.
- The inflation rate remained moderate at 2.8 % and was influenced mainly by world oil prices. Inflation is forecast to be relatively low throughout 2005 at approximately 2.5 %. The unemployment rate reached 9.5 % at the end of 2004 in accordance with the new methodology. It is expected to decrease slightly by the end of 2005 to 9.0 %.
The external trade balance and the budget deficit continue to be the weak points of the national economy. In 2004 the state budget deficit amounted to CZK 93.5 bn (Euro 3.1 bn). At the end of April the deficit reached CZK 22.5 bn (Euro 0.75 bn). The deficit is forecasted not to exceed Euro 3.7 bn in 2005.
- Long-term interest rates stood at about 4.7 % in 2004. Short-term interest rates were at 2.5 % at the end of 2004. In January 2005 the short-term interest rates further decreased to 2.25 %.
- For the first quarter of 2005 the average exchange rate Euro / CZK was at 30.1. Czech authorities aim to adopt the Euro in 2010–11 at the latest.
- In the near future it is expected that the Czech economy will further benefit from the EU accession. The volume of investment activity is expected to further increase, along with stable growth in private consumption and a slight decrease in government consumption.
Economic Indicators (2000–2005) |
||||||
| Year | 2000 |
2001 |
2002 |
2003 |
2004 |
2005* |
| GDP growth (%) | 3.9 |
2.6 |
1.5 |
3.7 |
4.0 |
4.0 |
| Inflation rate (%) | 3.9 |
4.7 |
1.8 |
0.1 |
2.8 |
2.5 |
| Unemployment rate (%) | 8.8 |
8.9 |
9.8 |
10.3 |
9.5 |
9.0 |
| Foreign Direct Investment/USD bn. | 5.0 |
5.5 |
8.4 |
2.6 |
4.0 |
3.8 |
| *Forecast | ||||||
| Source: Adjusted data of Ministry of Finance | ||||||
Development Sales
The EU accession in 2004 gave confidence to investors. The activities of existing investors were promoted and the entrance of new investors into the local property market was accelerated. However there were already many investors present; the EU accession has not radically boosted the market.
The quality of the investment environment for the sale of development projects is gradually improving. This is mainly thanks to the increasing transparency of the market and better availability of market data, which assists in predicting future demand in chosen locations. The availability of data helps to minimise developers’ risks and together with the increased competition this results in higher prices for properties with development potential.
The companies already active in the market, having past experience with the aspects and evolution of development within Prague are usually more conservative in their calculations of values. It is typical however that they are forced to present more competitive bids due to the more aggressive approach of new market entrants. The intensity of demand for properties in prime locations (which is increasingly becoming the vital factor for the successful sale of projects), is working for the benefit of the vendors to ensure good sale conditions.
The increasing transparency and competition is pushing some investors further south to countries such as Croatia and east to the Ukraine and Romania. With all of these nations showing similarity to the Prague market of the mid 90s, investment in these locations could be deemed to be currently more promising and thus more profitable for venture investors.
Data from completed transactions demonstrates a gradual increase in prices for both land and buildings with development potential, rather than sudden jumps, as may have been previously predicted. Price increases have resulted in falling yields for investment products and increased demand and prices for residential units. The biggest obstacle for the development of office space is the difficulty in finding good quality pre-lease tenants.
Demand from international investors is also increasing in regions outside of the capital, usually in the form of logistic / warehouse centres or retail projects. The interest in developing office or residential projects are limited to larger cities such as Brno, Plzeň or Hradec Králové. In the smaller regions local investors, who are capable of predicting the local demand from end users, are responsible for the majority of transactions.
Residential sales
Throughout 2004 the level of activity in the residential sector continued to grow. Levels of both completed supply and development project commencement were the highest since the early 1990’s. This level of activity is due mainly to the following factors.
- The continuing development of the mortgage market and the current interest rate level. The number of mortgage approvals increased by 30 % compared to 2003.
- The continuing development of new residential projects coming onto the market.
- The new preference for ownership over renting. In the future however, we should expect that the continuing rising prices for private ownership will return more people to renting. Currently the rental market does not provide motivation for residential construction, with the exception being in prime locations.
| Overview of residential construction (number of units) | |||
Czech republic |
Prague |
||
| Total | 32,268 |
5,924 |
|
| Segments: Family houses | 13,302 |
884 |
|
| Flats | 10,722 |
4,156 |
|
| Extensions | 4,523 |
773 |
|
| Retirement houses | 1,638 |
||
| Within commercial buildings | 2,083 |
111 |
|
| Source: ČSÚ | |||
Throughout 2004, 32,268 residential properties were completed in the Czech Republic, which represents a 19.0 % (+ 5,141 units) yearly increase. The highest increase was in flats, 38.9 % (+ 3,002 units) and family houses 16.7 % (+ 1,905 units). We also saw a decrease in the conversion of commercial space to residential less 40.7 % (– 494 ).
Most of the activity is happening in Prague and the surrounding (Středočeský) region. The least amount of properties were constructed in Karlovarský and Ústecký region.
Overview of prices for flats to private ownership in Prague |
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|
Sale prices for new built or complete reconstruction CZK / m2 |
Rent (Euro /m2/ month) |
|
| Historic centre (Staré Město, Malá Strana) | 80–160,000 |
13–19 |
|
| Traditional VIP locations (Vinohrady, Praha 6, Centre) | 50–100,000 |
11–19 |
|
| Traditional locations (Vršovice, Podolí, Anděl, Pankrác, Karlín, Palmovka, Troja, Žižkov, Nusle) | 35–80,000 |
7–15 |
|
| Suburbs (Barrandov, Modřany, Braník, Kunratice, Chuchle, Stodůlky, Řeporyje, Velká Ohrada, Bohnice, Letňany, Prosek, Chodov) | 25–45,000 |
5–12 |
|
| Out of Praque locations (Large cities, Plzeň, Olomouc, Brno, Hradec Králové) | 17–40,000 |
3–15 |
|
| Recreational locations (Špindlerův Mlýn, Krkonoše, Orlík) | up to 50,000 |
||
| Source: Knight Frank | |||
Trends
Knight Frank has witnessed a further decrease in the price of old stock, mainly in “panelak“ buildings, flats located in non-attractive locations or within buildings in a bad physical condition. Generally however the prices for new stock are rising. The rise is rather slow, due to increasing supply, which provides the buyers opportunity to choose from a wider spectrum. The increased supply is slowing down the speed of sales at most projects. The increasing volume of sales should help to stabilise prices. Demand has increased for family houses in the Prague suburbs. The increase in this segment is the most significant throughout the residential sector. The level of mortgage interest remains low. The quality and selection of mortgage products is increasing and mortgages are far more accessible. Mortgage agents have an increasing role on the market, which can be witnessed by this increase in property transactions. Outside of the capital city local investors tend to be the principle developers. However increasing numbers of institutional and international developers are starting to adopt this approach. Currently the market is keenly anticipating an increase of VAT for residential construction, which is expected to increase from 5 % to 19 %. As and when this increase is realized (at the earliest in 2008), it will impact the market. The effect will be spread between increased prices and the decreasing profits of developers.
Office Market
Demand
2004 saw a drop in the take-up of office space following the hugely successful year had in 2003. In total companies leased approximately 125,000 m2 of office space during the twelve-month period, with an active Quarter 4 accounting for almost a third of all deals concluded.
The office market vacancy rate; an accurate indicator of demand levels, also increased from 12.4 % in 2003 to 15.1 % at the end of 2004. This can be attributed not only to the decrease in demand, but also to the increased level of speculative development that took place over the course of the year.
Supply
The total lettable modern office stock in Prague is currently estimated to be around 1,600,000 m2. This comprises approximately 980,000 m2 of newly built premises and 620,000 m2 of refurbished stock.
During 2004 approximately 147,000 m2 of new office space was brought onto the market. 75 % of this development was newly built space; with over 27,000 m2 attributable to the Lighthouse project in Holesovice, Prague 7. Knight Frank estimate that during 2005 a further 160,000 m2 of new office space will be completed.
The majority of new development is being carried out in the new business districts Prague 4 and Prague 5. Popular for the availability of space and their vicinity to local transport networks, both areas have seen a huge boom in development over the past couple of years.
Prague 4, with projects such as BB Centrum and The Park set the tone for these out of town business centres, attracting bluechip tenants such as Microsoft, GE Capital, DHL and Hewlett Packard amongst others. Both schemes are yet to be completed, with development set to continue over the next few years.
More recently, Prague 5 has become attractive to both developers and tenants; with hugely successful schemes such as Anděl Park, Anděl City and Avenir Business Park all nearing completion. Leasing on these projects has been better than expected with high quality space being occupied by high class tenants. Developments in these out of town districts have been successful due to their readily available parking, ease of access for staff, competitive rents and high specifications.
Rents
Rental levels have dropped slightly over the past 18 months due to the increasing supply and vacancy levels throughout the city. With more available products, the landlords have been forced to reduce asking prices in order to attract tenants to their projects.
Top rents for ‘Class A’ office space within Prague 1; still the prime business location, are currently Euro 18 / m2/ month.
Due to the additional negotiating power afforded to tenants presently, effective rents (the actual amount paid) have reduced more significantly, as landlords now must offer incentives in the form of rent free periods and tenant fit out contributions of up to Euro 80 / m2.
“In total companies leased approximately 125,000 m2 of office space during the 12 month period.”
| Rental leves in different locations by project type | ||||||
Historical Centre / Prime Central Location |
CBD Central Business Districts |
Outskirts |
Secondary Locations |
|||
| Newly Built | 16.5–18.0 |
14.0–15.5 |
12.5–13.5 |
11.0–13.0 |
||
| Quality Refurbished | 13.0–14.0 |
13.0–15.0 |
11.0–13.0 |
9.0–12.0 |
||
| Refurbished | 10.0–12.0 |
9.0–10.0 |
8.0–9.0 |
8.0–7.0 |
||
| All rents quoted in Euro / m2 / month | ||||||
| Source: Knight Frank | ||||||
Prague Investment Market
2004 saw another record year for the investment market in the Czech Republic. Over 800 million Euros worth of deals were transacted, including the single largest deal in the country’s history. One very notable trend to emerge over the course of the year was the continued compression of investment yields, with deals done at below 8 % for the first time.
Investment interest continues to come to the Republic from a variety of sources.The more traditional Austrian and German open and closed end funds being joined in the marketplace by money from the USA, Ireland, Israel and Australia.
Notable deals concluded over the course of the past twelve months were; SachsenFonds’ purchase of part of the BB Centrum office park from Heitman. The four buildings (A,B,C & D) were bought for a record 125 million Euro at a yield of 8.1 %. Prague 5’s brand new retail and office scheme Galerie Butovice was sold pre-completion for over 100 million Euro, Australian investors Babcock and Brown obtaining the complex from ING. The lowest yields obtained were 7.5 %, with Invesco’s purchase of BB Centrum Alpha from PasserInvest. Hannover Leasing’s purchase of the Praha City Centre is rumoured to have achieved 8.1 %.
Yields have converged so quickly as more and more transactions occur within the market; there were 9 major deals in 2003, compared with 15+ in 2004. This, coupled with lower levels of additional stock and ever increasing investor interest, means that competition for limited product has never been higher. We estimate that the fall in yields will continue over the next year with a benchmark level attained in 2006 as the market matures further.
| Major Investment Transactions 2004 | |||||
| Month | Property | Price |
Yield |
Seller |
Buyer |
(mil. Euro) |
|||||
| Jan | Hilton HotelIbis Karlín Hotel | 145 |
n/a |
Deutsche Bank |
Quinn Group |
| Jan | Charles Square Centre | 70 |
8.5 % |
GE Capital Golub/Heitman |
Quinlan Private |
| Feb | Florence Office Centre | 32 |
8.2 % |
AIG/Lincoln |
Deka |
| Feb | Raiffeisen Centrum | 45 |
7.75 % |
Raiffeisen |
Deutsche Bank |
| July | Metropole Zličín Shopping Centre | 92 |
9.0 % |
Portland Trust |
CGI |
| August | Bredovský Dvůr | 32 |
8.4 % |
Skanska |
SachsenFonds |
| August | BB Centrum (A,B,C & D) | 125 |
8.1 % |
Heitman |
SachsenFonds |
| August | BB Centrum (Alpha Building) | 33 |
7.5 % |
PasserInvest |
Invesco |
| Nov | Rosmarin BC & Průhonice Showrooms | 28.7 |
10.0 % |
Illuminus |
Kilcullen/DB Opportunities |
| Dec | Westpoint Logistics Park | 30 |
9.25 % |
Europa Capital |
Immo East |
| Dec | Praha City Centre | 59 |
8.1 % |
EPD |
Hannover Leasing |
| Dec | Galerie Butovice Shopping Complex | 100+ |
8.25 % |
ING |
Babcock & Brown |
| Source: Knight Frank | |||||
Source: by Knight Frank
