OFFPLAN NEWS

(28.06.2007 )
Property Czech Republic Increasing quality of Czech Republic property

The increasing quality of the property for sale in Czech Republic environment is causing even small investors who may be used to investing through shares and the stock exchange to look toward real estate investments to diversify their investment portfolios.
The market already offers two basic forms for such investments. One is through real estate funds, which were enabled by amendments to the Collective Investments Act, effective June 2006. The other form is purchasing shares in real estate companies directly through the Prague Stock Exchange (PSE). Investing in real estate this way is popular mainly because responsibilities–normally related to property ownership–shift to fund managers and company specialists.

The diversity of offerings with these options is still not great. But we’re slowly witnessing an increasing number of investment opportunities.

Real estate funds

The primary accomplishment of the Collective Investments Act is the cancellation of the required Kč 2 million (€ 70, 409) minimum to invest in a real estate commodity.

Although we’ve seen the first funds created–the Reico fund for retail investors was established by bank Česká spořitelna (ČS)–we believe it could still take two to three years before investors will have a consolidated choice to deposit their savings through these funds. This delay is due to complicated legal conditions, for example the requirement to obtain a license from the Czech National Bank (ČNB).

Despite the red tape, the slower process benefits investors because it ensures funds are transparent and safe. The regulations, for example, include loan value limits with the stipulation that a portion of this be in liquid assets (20 percent, for example in Germany, 5 percent in the Czech Republic). Other complications resulting from vague explanations of related tax issues are being discussed within the Czech Ministry of Finance.

We know that other banks and private companies in the Czech Republic are in the process of creating infrastructure that will enable them to offer real estate funds to private retail investors. ČNB is currently in the process of discussing licensing applications with other companies.

The positive expectations are also the result of revitalized development throughout the Czech real estate market within all segments. Currently, there is a shortage of quality real estate in comparison with the demand, which is causing fast yield compression (from 8 percent in 2004 to the current figure of 5.8 percent).

Investment funds are prepared to take on more and more risk during the purchase process. We notice a growing number of forward sale transitions, i.e. investors assuming risks for the developer. It’s not unusual to come across transactions in which an investor is purchasing real estate that’s only half occupied by tenants.

Another consequence of yield compression is the growing number of investor-to-investor transactions. This provides an interesting array of products–usually within ready-made portfolios–in which to invest.

Because no significant economic and political changes are expected, we anticipate activity and development to remain stable. We expect rents will remain at current levels but this could change. Some experts expect a slight increase of the highest office rent (€ 19-19.5 per sqm per month). This applies especially to space in the city center where there’s a chronic shortage of quality projects.

The year 2006, brought new and interesting projects to the Czech industrial real estate market–a trend expected to continue in 2007 and 2008. The record increase has been influenced by EU accession, as operations based in Western Europe continue to relocate their major logistic and production facilities to the Czech Republic. The Czech industrial market is contributing by its position as a transition country for goods transport between Western Europe and countries that have recently entered the EU.

The industrial real estate segment also reported a drop in yields due to the limited number of industrial properties for sale. Yields run between 7.5 percent for first-class storage space to approximately 13-16 percent for logistic premises of the lowest quality.

Much like at the turn of the century, the retail market in the Czech Republic was unusually vibrant between 2004 and 2006. One of the most distinct signs of this was the sharp increase in sales areas due to hundreds of new stores. This applies to the large space of major commercial chains, modern shopping malls of various types, and specialized, independent stores.

While five or six years ago the retail yield was around 10 percent, and 7.5-9 percent three years ago, today the market is somewhere around 6-8 percent. Continued downward pressures on yield percentages can be expected in the near future.

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