DTZ Czech real estate market overview

According to the latest DTZ Property Times report vacancy rates in the office and industrial markets slightly increased due to lower demand for new space combined with occupiers downsizing and new supply being delivered to the markets (albeit limited). In the retail market there is a widening gap between performnig shopping centres with full occupancy and those centres which were facing problems prior to the economic downturn. Pressure office and industrial rental rates has persisted throughout Q3 2009 and DTZ expects further decreases in net effective rents towards the end of this year. On the bright side, a q-o-q increase was recorded on the investment market mainly thanks to local private investors.

Office take-up has been rescued from a historical low because of renegotiations (extension of contracts), which amounted to almost half of gross take-up. Net take-up (excl. renegotiations) reached only 24,900 m² in Q3 2009: a 45% decrease q-o-q and a 62% decrease y-o-y. Including renewals/extensions the drop of demand in Q3 2009 was „only“ 15% q-o-q and 33% y-o-y respectively. As a result, the total vacancy rate in Prague now stands at 10.6% (up from 10.13% in Q2). Prime headline rents are under a downward pressure, decreased by 5% q-o-q and 8.7% y-o-y and currently stand at EUR 20-21.

Due to the credit crunch, the vast majority of developers require significant pre-leases before start of construction. As a result, the majority of almost 1.4 million m² of scheduled office projects in Prague are being postponed to 2011 – 2013 and beyond depending on when pre-leases and financing will have been secured by developers.. This could very well result in a lack of prime offices in the Czech capital between 2010 and 2011.

"There are projects with total area of 281,800 sq m with secured building permit, of which the largest share will not be built speculatively and is waiting for pre-leases. An additional 295,800 sq m have secured planning permits," says Lenka Hartmanová, Consultant in DTZ. A further 681,800 sq m are in early planning stages, but could potentially be finalised by 2012 under the assumption that they secure pre-leases and necessary financing and succeed in obtaining permits.

The economic recession and lower consumer expenditures also affected the Czech retail market. Several retailers have announced their departure from the Czech Republic (Top Secret, Conbipel, Monton) while others have closed non performing shops such as OP Prostějov, Kanzelsberger, ElectroWorld Tábor and Bluestar Café.

New retailers with franchise expansion concepts are nevertheless looking at Czech Republic. Scandinavian fashion retailer KappAhl came back to the Czech Republic, and opened a new store in Brno. A marked increase in activity among gastro operators is noted, including Sunshine Kebab, Gloria Jean´s Coffee, Boost Juice, Asagao, Fratelli La Bufala, Revive Juice Bars, Café Nera, Pizza Mamma Mia.

In the industrial market, the overall vacancy rate increased to 18.2% (up from 16.9% in Q2), due to Q2 lower net-take up combined with occupiers downsizing and new supply being delivered to the market (albeit limited). As a result, there is now 636,000 sq m of vacant modern warehouse space in the Czech Republic. Gross take-up reached 113,500 m² in Q3 and although this is a 24% increase compared to Q2, net take-up reached just 70,500 m² (compared to 73,200 in Q2). New completions of speculatively developed warehouse space have come to an almost complete stop with the vast majority of space being completed after having been pre-leased.

After a quiet Q2 2009 investor activity increased in Q3 2009 as a result of progress on a number of long-awaited transactions. In the third quarter alone ca. €48 million was transacted in three deals. The total investment volume in the three quarters reached €100.49 million, which is an 89% decrease y-o-y. DTZ is aware of several transactions in the pipeline and along with improved investor sentiment, the revival of the investment market seems underway, albeit at lower volumes. The expected total volume of transactions is expected to reach around €300 million in 2009. Yield decompression has resulted in prime yields holding at around 7% for offices and retail and above 9% for industrial property.

Source: DTZ