25th February 2019

AmCham 2018/2019 Real Estate Update & Outlook

AmCham held its annual Czech real estate update "2018-2019 Commercial Real Estate Review and Outlook" on February 20, featuring Bert Hesselink, CTP, Kevin Turpin, JLL, Katarina Wojtusiak and Klara Bejblova, CBRE, Lenka Sindelarova, BNP Paribas Real Estate.

Czech Republic has had great ratings lately and investors do not feel nervous or insecure. There is plenty of money, there is cca 3 times more in the stock than demand to buy. In 2018, 50% of stock was bought by the Czech domestic capital. Czech capital became very strong and competitive. In 2019, the volumes are expected to stand at around a similar level as in 2018, constrained a bit by availability and expectations of sellers.
One of the major challenges for the Czech real estate market is Brexit which is expected to come at the end of March. The Czech Republic is an important trade partner of the UK, and if Brexit does not go well, it can have a negative impact on the country, particularly on the automotive industry. Czech Republic is heavily dependent on the automotive industry, and Brexit can have both direct and indirect impacts (parts, components etc.).

Czech Republic has the lowest unemployment rate in the EU, which is both positive and negative- positive for retail market – if everybody has a job, there will be disposable income to spend on products. However, for the investors, it could complicate business. It is difficult to find employees at the planned cost, so the overall cost of doing business in the country is rising. Low unemployment rate can also have a negative impact on the logistics market.

A lot of investors are looking into alternatives to grow their assets, one of the growing trends is construction of carparks. There is a lack of housing and student housing on the residential market, so there are still opportunities.

In the Czech Republic, there is a big gap between space leased and space on the market. Currently, the vacancy rate stands at 5.1% in Prague, which is historically the lowest figure. Prediction is that leasing activity is very strong, the vacancy rate will increase a bit, however, not above 6%, impacted mainly by the number of projects and leasing activity.

The most attractive areas in Prague are Pankrác-Budějovická, City Centre and Karlín, which is seen as a growing location.

Flexible offices, i.e. offices the companies can use for short-term rental, are one of the latest trends. The flexible offices have been attracting the companies lately, as they offer flexibility in size of the leased space. The rapid growth of the flexible sector can be attributed to fundamental shifts in technology and economy, which has changed how occupiers behave. Each of these in some way is contributing to a structural change in how businesses approach their real estate decisions, and this is why, in our view, the flexible office is here to stay.

The employers are focusing on office bonuses for employees in form of wellness, natural light, introducing healthy food and sporting space within the office, kindergartens. These benefits make life of their employees more pleasant.

Another trend on the rise is co-working space/shared offices. Co-working is popular due to the flexibility of office space. Another reasons are popularity among the self-employed and possiblity to work in community area. People prefer to work within a community, attend the events the co-working centres offer, using different services, amenities etc. Those who use co-working centres want to be inspired, they want to share.

Therefore, a lot of developers like to have some part of their space leased to co-working centres, as it gives synergies to other tenants who are leasing space in the building.

The rents have been growing significantly and the trend is expected to continue. Current prime rents stand at 21.5EUR/sqm in the city centre.

The third trend to be mentioned is the lack of projects the developers would like to buy, in attractive locations. And once the projects are available, the permitting process in the Czech Republic is hindering development.

Retail Market. The Czech Republic is one of the strongest markets in retail spending per capita, across Europe in 2018, with more than €4,000 per capita. Retail spending growth reached more than 4% in 2018. For the period of 2019-2023, we can expect the economy to slow down, based on the cycle, and retail spend growth to reach 2.25%, every single year from 2019 to 2023, but this could still be considered as a positive outlook.

We also record growth of shopping centre stock in the Czech Republic. However, since recession in 2008, construction has not been going back to the top, as the market has become saturated. There is a lack of locations. Most of locations are already gone. There are regional capitals with two and more shopping centres located quite close next to each other.

Prague has the highest purchasing power, Usti n. Labem the lowest. The developers in Prague are struggling with permit issue process and are waiting for the Metropolitan plan to come in 2020.

The Czech Republic ranked 2nd in the CEE region for activity of retailers. The prime locations are Palladium, Pařížská and Centrum Chodov. By sector, the most active retailers were in sectors: mid-range fashion representing 26% of the market, specialist clothing 21% and luxury and business 21%. Last year, food and beverages sector growth has been recorded for the first time with 15% share, which is historically the best figure. Beverages and leisure are the hot topics.

Outlook: slowdown in increase in Prime rents: +2% y/y HS & +4% y/y SC; enhancing the dominance of strong schemes within their catchment; pressure for improvement of the quality of existing premises on high street; correct retailer´s City strategy; demand for higher quality offer (incl. F&B + Leisure). 

E-commerce is a key driver for the logistics market.  The Czech Republic benefits from its great position in CEE. Automotive and production industries are the key drivers of industrial and logistics markets. They are still major source of demand and continue to be, however, we have recorded also rising demand from e-commerce and retail lately.

In online sales (goods and services), Czech e-commerce sales from last year reached €5.3bn, sales recorded a growth of 17% year-on-year. As for online sales per capita, Czech population buy on average €315 per head online, which represents the highest figure in CEE.

Western and Northern Europe record the highest online sales per capita. In 2017, on average, a British person purchased goods & services online for nearly €3,000. In most CEE countries, the number of people shopping online are well below the European average. Online sales are therefore expected to continue to increase significantly in the next 5 years.

According to the World Bank Logistics Performance Index which assesses 160 countries on six dimensions of trade, the Czech Republic performed the best among CEE with LPI rank 22, LPI score 3.68.

Major trends in logistics market: E-commerce remains a driver of demand, and new locations are emerging offering available sites and labour. Due to strong demand - rising rents; low vacancy; rising construction cost; labour issues. Automation & robotics: Increased efficiency, speed of delivery, less labour intensive; City logistics and the last mile: Increase in speed of delivery, traffic congestion issues, new technology used for last mile delivery (drones, self-driving vehicles etc.); Vertical storage: Lower footprint of the property, increased demands for property structure and load bearing.

Members of the American Chamber of Commerce in the Czech Republic