Checking out the Czechs

Country focus
While the Czech economy may have taken something of a battering from Covid-19, inflation and the energy crisis, the real estate sector seems undaunted and is eagerly expecting the economy to roar back into life once more

According to the Czech Real Estate Market Outlook 2023 report by Cushman & Wakefield, by Q4 2022 the Czech economy had bounced back after the pandemic. This was driven by rising investment, industrial production and exports. Household consumption, however, remained largely stagnant. Increased production and exports are expected to support the economy over the near term. The country’s economic growth for 2022 is estimated by Moody’s Analytics at 2.6 pct, while its forecast of 0 pct GDP growth for 2023 is now likely to be revised upwards. According to CBRE, the Czech Republic saw a sharp upswing in consumer prices in the summer of 2022, with the consumer price index rising to 15.1 pct for the year. These price rises have now begun to abate, but inflation is expected to remain far above its historical average for some time. In response to the increase in inflation, the Czech central bank has raised interest rates, which are not expected to fall significantly until 2024.

The Czech Republic entered 2023 with a moderate recession forecasted, but most experts now believe that inflation and interest rates have already peaked. According to the preliminary estimates of the Czech Statistical Office (CZSO), GDP grew by 2.5 pct y-o-y in 2022. The forecast is for the economy to contract this year, although a recovery is expected to get underway before the year’s end. The CZSO estimates that in Q4 2022 GDP fell by 0.3 pct q-o-q. This small contraction was largely softened by strong net trade figures but was also pushed down by consumer spending. Along with low consumer confidence, the Czech economy is currently suffering from high inflation, falling real incomes and tight monetary policy – and together these factors are combining to suppress growth. Despite all this, the CZSO actually recorded a significant improvement in consumer confidence (+7.4 pp m-o-m) in January 2023 as well as a slight increase in business confidence (+1.3 pp). Average inflation for 2022 came to 15.1 pct, the highest recorded level since 1993. The price of goods went up by almost 17 pct and services by more than 12 pct. In December 2022, the consumer price index increased by 15.8 pct y-o-y, which represents a 0.4 pp reduction on the previous month. According to the Ministry of Finance, average inflation should fall to 10.4 pct in 2023.

According to CBRE, the real estate investment volume for 2023 is expected to remain stable or to slightly decline by 5–10 pct y-o-y. Czech prime yields are currently rising in all sectors. At the end of 2022, they had shifted out by 25–75 bps since Q1 2022. Prime retail yields, having already gone up during Covid, experienced less movement than office and logistics. In Q4, logistics and prime high-street retail yields were around 4.75 pct, while prime office yields were at 4.8 pct, and prime shopping centre yields were at 6.25 pct. Core logistics and offices remain the most sought-after property types. In 2022, offices accounted for 36 pct of the total investment volume and industrial and logistics for 22 pct. However, CBRE has noted a lack of supply for quality office investment product in Prague as a consequence of the reduction in office development. The logistics investment market will remain solid. Strong occupational demand along with record low vacancy and good rental growth prospects will further fuel investor interest in the sector. CBRE also expects increased retail investment activity in 2023.

The latest MarketBeat report on the Czech office market by Cushman & Wakefield claims that investor activity remains limited. In 2022, the total investment volume in the traditional real estate sectors amounted to EUR 1.5 bln. This mainly comprised investment in Prague offices (36 pct) and retail (26 pct). The value of transacted assets came to 8.2 pct, down on the 2021 figure. Several retail portfolio transactions were closed towards the end of 2022, including the DRFG retail park portfolio acquired by Generali group and the Ahold hypermarket portfolio by ZRD Investments. Most buyers (57 pct) were of local origin.

“The Czech Republic remains an attractive investment destination for domestic and international investors due to its structurally lower supply, its low vacancy and its strong rental growth for industrial projects and office buildings in prime locations. However, given the limited willingness of owners to sell, we do not expect investment volumes to increase significantly in 2023,” explains Michal Soták, the partner who heads the capital markets team at Cushman & Wakefield.

Vítězslav Doležal, the investment property director at CBRE, agrees: “The Czech Republic is one of the least risky emerging markets due to its conservative fiscal and monetary policies, low debt levels and an equally prudent and liquid banking sector, along with the growth potential benefits from its diversified industrial base, highly-skilled but cost-competitive labour force and competitive exports. Czech real estate investment still provides attractive yield returns in comparison to Western European markets. The appetite for its assets remains solid, with limited new development seen in all segments,” he explains.

Offices looking up

Simon Orr, the office director for advisory and transactional services at CBRE, is clearly optimistic about the prospects of the Czech office market. “During the first three quarters of 2022, we saw office leasing activity in Prague recover in comparison to the same period last year. The take-up in Prague was up 10 pct compared to the previous year and by 27 pct on the pre-pandemic year of 2019. Since Q4 2022, we have started to see a slow-down in leasing activity. Rising energy and service prices are having a major impact on financial and real estate planning, so companies will remain cautious throughout 2023. However, at the same time, we are seeing new premium office projects on the market succeed, showing that some companies are willing to pay above-market rents in the most sought-after locations,” he says.

Even though office-based employment is forecast to grow slightly in Prague in 2023, CBRE expects that the recessionary environment will constrain growth in the leasing market. The take-up of office space in Prague will be lower in 2023 than it was in 2022. For the biggest tenants, space reductions and consolidations are prevalent, so CBRE believes second-hand space will be subleased. However, at the same time new premium office developments are proving successful on the market, showing that some companies are willing to pay above-market rents in the most sought-after locations.

CBRE saw a recovery in office leasing over 2022, when the take-up (excluding renegotiations) came to 297,000 sqm (up by 43 pct y-o-y). The average size of new deals was stable at around 600 sqm in 2022. This demand was driven by IT companies, which accounted for almost 30 pct of the take-up. However, a slowdown in the tech sector is anticipated in 2023 and new leasing activity is already slowing down. The total leasing activity in 2022 was above 500,000 sqm with 43 pct of deals being renegotiations. At the end of 2022, the Prague office market comprised 3.8 mln sqm of modern office stock, 75,300 sqm of which was newly delivered to the market over 2022. This constitutes a 33 pct increase, but is still way below the ten-year average of 125,000 sqm per year. Around 48 pct of this space has already been leased. The vacancy rate was stable throughout 2022 and at the end of the year stood at 7.7 pct. There is currently 184,900 sqm under construction, out of which 129,000 sqm is scheduled to be delivered in 2023, with 43 pct of this space having already been preleased. Vacancy rates are expected to rise moderately over the coming year.

Radka Novak, the head of the office agency team at Cushman & Wakefield in Prague, is clearly waiting for the market to rebound. “Despite the hybrid working model becoming the norm, the office vacancy rate has yet to grow on the Prague market. I expect some impact from the high office fit-out costs, which may deter companies from relocating. Any new office construction will depend on pre-leases. Prime rents are currently about to peak,” she explains. According to Cushman & Wakefield’s latest Marketbeat report on the Czech office market, the only new office project completed in Q4 2022 was in Smíchov City in Prague. Although no new construction started in H2 2022, the development activity in the sector remains relatively healthy. More than 183,000 sqm of office space is currently under construction, with over 100,000 sqm potentially starting in 2023. In 2022, gross and net take-up for 2022 was up by 42 pct on the previous year. The gross demand came to 151,800 sqm in Q4 2022, which, combined with the lack of new supply, led to a decrease in vacancy by 0.1 pp over the quarter. At the end of 2022, around 293,600 sqm of offices was vacant. In absolute terms, the largest space availability was recorded in Prague 4 (60,900 sqm), Prague 5 (54,400 sqm) and Prague 1 (40,800 sqm). Prime office rents stabilised towards the end of 2022, with prime headline office rents remaining at EUR 27 per sqm per month. Over 2023, further rent rises are expected, but only at a moderate level.

Not too bad with retail

Retail is a sector that has borne much of the brunt from the disruption related to Covid-19, but Jan Janáček, the head of retail advisory and transactional services at CBRE, nonetheless remains sanguine. “Post-pandemic changes in shopping behaviour were reflected in a lower purchasing frequency and a higher value of the average shopping basket. Although footfall and – to an even greater extent – retail sales have been gradually recovering from the pandemic, the market is threatened by the downside risks of consumer price inflation and the increases in costs that will affect the market going forward into 2023. We are also seeing a visible spill-over of online sales back to brick-and-mortar stores. E-commerce sales are not reaching the same levels seen during the pandemic and the ratio of online sales to total sales has declined. But nevertheless, the Czech Republic has one of the highest e-commerce penetration rates in Europe at 17 pct,” he explains.

In the months after May 2022, the high inflation rate and reduced purchasing power resulted in a year-on-year decrease in retail spending, according to the CZSO. Prior to that time, shopping centre footfall had recovered in March and April 2022 from 20 pct down on the 2019 figures to 5 pct below them and remained relatively stable around this level until the end of the year. But annual footfall levels still lag behind those of 2019 by almost 10 pct. Conversely, since February turnovers have exceeded 2019 levels, peaking in May and September. Oxford Economics expects retail spending to have decreased by 0.2 pct y-o-y in 2022, which corresponds to a 1 pct increase when compared to 2019. A similar drop by 0.3 pct y-o-y is forecast for 2023, which is slightly above the eurozone average of -1.3 pct y-o-y. While e-commerce underwent unprecedented growth during the Covid period, in 2022 total sales decreased by 12 pct (according to Heureka). Despite this correction, sales exceeded 2019 levels by more than 25 pct. The shopping centre stock grew negligibly, by 0.4 pct y-o-y, with one expansion and one new opening in the regions. The density in 2022 reached 234 sqm per thousand inhabitants. Around 6,300 sqm of retail is due to be delivered in Smíchov City in Prague in 2023. Currently, CBRE knows of five projects under development that are scheduled to open over the next three years, which when combined will add 75,000 sqm to the market. However, retail park development remained active over 2022 and this is expected to continue in 2023, mainly projects with smaller areas of up to 10,000 sqm.

According to Jan Kotrbáček, a partner who heads the CEE retail agency team at Cushman & Wakefield, we should not be expecting any significant drama from the retail market. “As the Czech market is not oversaturated, so there’s no risk of a dramatic increase in vacancy. Retailers will continue to optimise the number of their stores, their quality, and their distribution channels. In all retail segments, long-term relationships with tenants will be key, as property owners will focus on maintaining occupancy in their centres,” he believes. Cushman & Wakefield’s latest MarketBeat report on the Czech retail market reveals that 52,700 sqm of new retail space was delivered in 2022, about 55 pct less than in the previous year. All the space completed was within retail parks, including ten new developments and five extensions. Around 77,500 sqm was under construction at the end of 2022. However, more than 500,000 sqm is still at various stages of development, including such long-awaited larger mixed-use projects as OC Dornych in Brno, Savarin in Prague and Ameside in Plzeň. Several high-street developments, such as Máj, 100 Yards, Fairmont Hotel, Pařížská 25 and Via Una, are currently being reconstructed. Retail sales in nominal terms were higher than pre-pandemic levels. However, following the double-digit inflation and the energy crisis, retailers face higher service charges and lower margins due to the higher cost of goods. Rental levels remain stable and should continue to hold steady. In shopping centres the highest achieved rent is currently about EUR 142 per sqm per month, while in retail parks EUR 12 has been reached, and on Prague’s high streets rents are holding at EUR 225.

Sheds still smiling

To nobody’s surprise, industrial and logistics development has had another good year. Jan Hřivnacký, the head of industrial leasing at CBRE in Prague, is particularly ebullient: “In the first three quarters of 2022, 1.2 mln sqm of industrial and logistics space was leased – more than the take-up of any previous first three-quarter period. With such high demand and a record low overall vacancy rate at below 1 pct in Q3 2022, prime rental levels are still subject to upward pressure. In Q3 2022, prime rents went up by 25 pct y-o-y. However, we expect rents to stabilise through 2023. We are also seeing strong demand from heat pump and solar panel producers, as their sector is booming due to the current market conditions. The overall market activity is expected to stay strong in 2023, but not as high as the record levels of 2021 and 2022,” he predicts.

According to CBRE, the demand from logistics and production companies remains strong, although we are now seeing a slowdown in the demand from e-commerce and parcel delivery companies. The market is expected to stay healthy in 2023, but will not hit the record levels of 2021 and 2022. Over the whole of 2022, 1.47 mln sqm of industrial and logistics space was leased – the second-highest take-up since records began. This was mainly due to the extremely high take-up over the first three quarters, which came to over 1.2 mln sqm. In Q4 2022, the quarterly take-up amounted to 230,000 sqm, in line with the figures prior to the pandemic. The total industrial stock now totals around 10.79 mln sqm. In 2022, more than 1.1 mln sqm was completed – the highest amount ever delivered. More than 96 pct of this newly delivered space is occupied. By the end of Q1 2023, the total warehouse stock should surpass 11 mln sqm.

CBRE registered almost 220 new leases for industrial and logistics space in 2022, 38 of which were for more than 10,000 sqm and eleven for over 20,000 sqm. The total leasing activity in 2022 came to 2.2 mln sqm, surpassing the previous record set in 2021 by 10 pct. The overall vacancy rate currently stands at just 1.2 pct, representing another decrease on the very low vacancy level of 1.3 pct recorded as at the end of 2021. Currently, there is 1.2 mln sqm under construction, almost 1 mln sqm of which is scheduled for completion in 2023. An additional 230,000 sqm is at the planning stage, with a number of completions scheduled for 2023. CBRE recorded an increase in speculative construction in Q4 2022 of around 39 pct. The high level of new supply and the speculative construction rate of almost 40 pct combined with demand that is healthy but not massive could lead to a slight increase in the vacancy rate to 2 or 3 pct. In Q4 2022, prime rents averaged EUR 7.90 per sqm per month, up by 32 pct y-o-y. In 2023, rental growth is expected to slow down. But it needs to be noted that the current main drivers of rental growth remain the lack of available space, increasing construction and material costs and rising inflation. Jiří Kristek, the head of the industrial and retail warehousing team at Cushman & Wakefield, predicts that the market will continue to grow despite the fluctuating demand. “We are still seeing a very high level of industrial development, which is being maintained due to the record low vacancy and constantly rising rents. However, rising interest rates might impact future development. While e-commerce demand will continue to ease, the Czech market will remain favourable for foreign distribution and production companies and so re-shoring and near-shoring will also mean new demand for warehouses,” he believes.

Cushman & Wakefield’s latest MarketBeat report on the Czech warehousing market states that around 149,300 sqm of modern industrial space was delivered in Q4 2022, while the new supply for the whole year came to more than 1.080 mln sqm – a 117 pct increase on 2021. In 2023, developers intend to complete the construction of another 1 mln sqm. At the end of last year, the total industrial stock under construction was estimated at 1.237 mln sqm, 60 pct of which had already been pre-leased. Gross take-up reached 2,209,700 sqm in 2022, representing a decrease of 10 pct y-o-y, which was largely attributable to the lack of available space. In Q4 2022, the industrial vacancy rate for the country increased by 9 bps over the quarter, but was still very low at 1 pct, while in Prague the figure was a mere 0.6 pct, mostly made up of ancillary offices within industrial developments. Over the last year, occupier demand in the sector was mainly driven by logistics companies (34 pct of the gross take-up), distributors and producers (28 pct each). In Q4 2022, the net demand came to 231,300 sqm, with pre-leases accounting for 71 pct of this figure and new leases and expansions for 24 pct and 5 pct, respectively. After the rapid increases seen in 2022, rental growth is expected to slow down. Prime rents increased by 34 pct over 2022, with the prime monthly headline rent for a 10,000 sqm warehouse unit averaging at EUR 7.50 per sqm in Prague, EUR 6.25 per sqm in Brno and EUR 5.75 per sqm in Plzeň.

Silvie Marešová a senior associate in the industrial agency at Colliers in Prague, remains upbeat. “The industrial sector will still be a healthy and growing segment despite the ongoing macroeconomic situation and energy price issues. The Czech Republic is geographically well-placed to serve European supply chains, so manufacturers and suppliers to neighbouring countries will remain strong. The recent rental increases have stabilised and I don’t expect them to grow further. Due to the turbulence of the last few years, it has been difficult to draw up strategic plans. For some companies, this has resulted in too much stock due to lower sales or more unused space in warehouses due to reduced orders. I expect, therefore, that there will be a degree of rent correction and more space will become available, mainly as subleases,” she forecasts.