The Czech market is still slow in comparison to previous years. Market fundamentals remain good, as does the demand for core and core+ assets, but the market is experiencing limited supply of the right investment product. Andy Thompson explains likely scenarios that could play out on the Czech market and tackles the market sentiment.
With the Czech Republic still very much in the grip of the pandemic, real estate investment volumes remain slow in comparison to previous years. There is evidence of continued demand for prime office, industrial and Private Rented Sector (PRS) in particular, yet options for investment are few.
This is also one of the main reasons why more and more of the typically active local investors are looking for new acquisitions abroad, particularly in Poland and Germany.
Investors all agree on their intention of expanding their portfolios in 2021, but due to the progress in managing the pandemic, we predict this activity will come in the second half of the year.
The residential sector, and especially PRS, is considered one of the rising investment asset classes in the Czech Republic.
Investors are currently exploring the possibilities and, while the market is in its infancy, the first major deals have already been transacted. As a result, developers are starting to focus more on this product, as opposed to individual unit sales.
The industrial sector is also enjoying much greater interest from investors. However, as the Czech market is composed mostly of long-term holders, land acquisition is also a path to follow, as Lidl proved with buying large development land for a local distribution center near Pilsen.
Andy Thompson, Head of Capital Markets for CR and SR commented: “In the Czech Republic, we see investor demand remaining firm for almost every sector. There is plenty of equity chasing far too few opportunities. We fully expect that investors who manage to secure investments now and find a home to get their equity working, are going to be considered the lucky buyers in the very near term.
“There is plenty of capital seeking a home in the Czech Republic – both international and local. This hasn’t changed during Covid times except that foreign investors can’t get here so easily.
“What is interesting is how the market appears to be splitting into two rather distinct camps. Both camps agree on the strength of the market in both residential (for sale and lease) and also in logistics.
“One (much smaller) camp is expecting rather bigger challenges and distress/distressed sales in retail (both city centre and shopping centres), hotels and, due to home-working except some impact also on the office market.
The (much larger) camp it seems to us, fully expects real estate to re-bound relatively quickly and therefore to see limited distressed sales.
These views reflect that
(1.) The Czech Republic’s strong historical economic performance (and expected performance including a re-bound in tourism),
(2.) The fact that debt levels on existing assets remain low and
(3.) A fundamental belief that customers will still want to shop and that businesses will still want their staff coming to the office (and staff will want to come to the office) - even if it’s clear that there will be some flexibility for remote working.
“One challenge right now for both investment and development activity is on the debt financing side. Banks across the globe have been hurt from Covid, so one would expect them to be more cautious in lending. In keeping with similar cycles, the banks therefore favour providing attractive debt terms on the more vanilla-type investments.
“This means that e.g. if an owner wanted to sell now, the more likely investors are cash buyers or buyers with a strong track record (unless the SPV is being sold with an attractive debt package in place).
“It also means that developers need to deliver substantial pre-leases before being able to draw down on development finance. Again, our view is that the developers that are pushing ahead are going to time the cycle and they will be the winners in the near future.”
Find out more in Colliers latest Capital Markets EMEA Snapshot with zoom on the Czech Republic on page 13.