„2016 was a record year for the commercial real estate markets in the Czech Republic and in Slovakia. Demand for commercial real estate has intensified in both markets. Transactions in the Czech Republic reached an all-time high during the fourth quarter”, says Reinhard Madlencnik, Head of Real Estate at UniCredit Bank Austria, commenting a study produced by the bank. “And the strong demand continued in the first quarter of this year”, he added.
The record investment levels in the Czech Republic and in Slovakia were remarkable: According to CBRE, in 2016 the volume of transactions on the Czech commercial real estate market jumped by about EUR 1bn to around EUR 3.7bn. Slovakia’s commercial property market is significantly smaller than the Czech Republic’s, but nevertheless the volume of transactions nearly doubled year on year in 2016, to approximately EUR 850m. This represented record investment levels in both markets.
“The strongest demand last year in the Czech Republic came from foreign investors, from Asia in particular, but also from Germany. About 30 percent of the total was attributable to local investors”, says Karla Schestauber, real estate analyst at UniCredit Bank Austria, editor and main author of the study. The final quarter last year was especially strong. Transactions reached an all-time high of over EUR 2 bn. The strong demand continued in the first quarter of 2017. A transaction volume of around EUR 1.4 bn was achieved.
Last year retail properties accounted for roughly half of all transactions on the Slovakian real estate market, supported by a solid private consumption.
Prime yields have continued to fall, but yields are still relatively attractive
Prime yields have continued to fall in both markets. “Prime property yields in both countries are still higher than those for example in Austria”, says Madlencnik. However, scope for further yield compression has deteriorated. The development of the two countries’ markets will mainly be shaped by interest rate developments and in turn by the relative attractiveness of properties”, says Madlencnik and adds: In-depth risk-return analysis is more important than ever at this stage of the real estate cycle.”
In the Czech Republic prime yields reached all-time lows at the end of 2016 / beginning of 2017. Prime office yields stood at 4.9 percent, shopping center yields at around 5 percent and those for industrial and logistics properties at about 6.5 percent. In Slovakia, demand for retail properties accounted for the lion’s share of investment. There was a relatively large fall in prime shopping center yields, to 5.75 percent. Prime office yields were around 6.75 percent, and those for logistics and industrial real estate reached about 7.50 percent. Rents in all three segments were quite stable in both countries, although there were slight increases in Prague’s premium office segment and in top shopping center rents in both capitals.
Solid economic growth bolstering property market
Economic growth in both the Czech Republic and Slovakia is significantly higher than that of the Eurozone. Domestic demand – in particular private consumption – and exports will be the main growth drivers in the Czech Republic. Real GDP in the Czech Republic rose by approximately 2.3 percent in 2016, and the economy is expected to pick up more speed in 2017 and 2018, with growth of 2.6 percent and 2.5 percent respectively.
Slovakia’s economy is growing even more quickly: real growth was a good 3 percent last year, and is forecast to rise still further, to 3.4 percent in 2017 and 3.7 percent in 2018. This year, a steady increase in private consumption and rising investment will be the main factors behind stronger growth, while real net exports are expected to make a significant contribution in 2018. Household spending will also contribute to growth in domestic demand, supported by tight labor market conditions. The Slovak economy, as a small, open one, stands to benefit from the expected recovery in global trade.
Office space: Strong increase in new take-up in Prague and Bratislava
The office markets in the Czech Republic and Slovakia are mainly focused on the respective capital cities, Prague and Bratislava, although there are also notable regional office markets in the Czech cities of Brno and Ostrava.
“The density of office space per capita in Prague and Bratislava is low compared with major West European cities. However, both are at the upper end of the scale in comparison with other capitals in Eastern Europe”, says Schestauber.
New letting rose significantly in Prague 2016, while the level of new construction activity was very low. Similarly high rates of new take-up are also on the cards this year. Sustained economic growth is having a positive impact on demand for new office space. However, new construction is also expected to increase this year.
Bratislava also saw record-breaking new letting rates in the office segment in 2016, although new construction was higher than in Prague. The project pipeline in the Slovakian capital is well stocked, and a year-on-year increase in new construction, to more than 100,000 m², is a distinct possibility.
Apart from a few small corrections, top rents in Prague and Bratislava were largely stable in 2016. Rents in both cities fell – in some cases significantly – during the global economic and financial crisis. “This trend has not only stopped, but reversed slightly, with an uptick in rents seen in Prague’s premium office segment”, says Schestauber. In both the Czech and Slovakian markets, as in others in Central and Eastern Europe, there are already signs of a shortage of suitable properties.
Automotive and e-commerce sectors continue to drive the logistics property market
Both the Czech Republic and Slovakia are sought-after locations for logistics facilities in the CEE region. This is mainly due to automotive clusters, which play an important role in both countries, while online retailer Amazon also operates a large, new distribution center near Prague from which goods are delivered to customers across Europe.
In Slovakia, the majority of industrial and logistics locations are in the greater Bratislava area. In the Czech Republic, such space is concentrated in the area around Prague, as well as in a number of logistics hubs elsewhere in the country, including in the regions surrounding Brno and Pilsen. Locations with good transport links close to the German-Czech border also have potential assuming further growth of the e-commerce sector.
“The automotive and e-commerce sectors will continue to drive the industrial and logistics property market in the Czech Republic and Slovakia in 2017. Vacancy rates at logistics facilities have fallen. This should remain unchanged until the end of 2017 due to steady demand”, says Schestauber.
Retail markets profiting from growing demand and low vacancy rates
Slovakia‘s shopping center market is closely centered on the capital, which accounts for 42 percent of the total. The market for shopping centers in Bratislava and a number of secondary regions is saturated. Competition is high and the threat posed by online retailers is growing.
The Czech retail property market is well developed and largely saturated. Strong economic data, increasing retail revenues and real wages and buoyant consumer confidence are driving interest in retail properties among investors and tenants alike.
Supported by a strong international tourism sector, the Czech capital is an exceptionally popular retail location. “The city has a good reputation among local and international retailers and is often cited as the place to be among CEE / SEE capitals, except Moscow”, says Schestauber. In recent years, numerous individual buildings have been renovated on these shopping streets, resulting in an overall increase in the location’s attractiveness for retailers and shoppers. Adjoining streets have also benefited from this development and are in turn helping to extend central Prague’s high-street segment.
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