The year started with the most ambitious plans ever and ended with the biggest decline ever and with anticipation of a further decrease – that is what the property market, a sector of the Czech economy that has been hardest hit by the financial crisis, looked like in 2008.
“A shortage of financial resources is one of the main reasons behind the stagnation and decline on the property market in the country,” said Angus Wade, head of the Czech unit of real estate consulting company King Sturge.
A lack of money has had the biggest impact on the purchases of commercial buildings. Real estate investment decreased by almost two-thirds in the Czech Republic, from EUR 2.69 billion in 2007 to EUR 1.06 billion last year.
In 2007, the biggest deal was the EUR 530 million sale of Prague’s Palladium shopping centre. In 2008, less than half of the sum sufficed to secure the position on the list – seven office buildings in the project the Park in Prague’s Chodov cost the German fund Degi EUR 235 million. The second biggest transaction was the EUR 125 million sale of three shopping centres in Ostrava and Olomouc to the company Pradera.
Another sign of the decline is the fact that a shortage of money forced one out of three Czech real estate funds, Realita, to wind up in August.
“We can compare the current situation in the Czech Republic to the situation that Great Britain experienced in the early 1990s, when the local market almost stopped. I think the first signs of a recovery in the Czech Republic will occur in about half a year, and an overall improvement should come in 2010,” Wade said.
Market waiting for “vulture” funds
In the first half of 2008, several developers presented their biggest development projects. One of them is Nové Bubny that Orco Property Group wants to build for EUR 3 billion in 10 to 15 years. The company has invested CZK 1.1 billion in plots of land for the project that is scheduled to begin in 2010. Unlike its previous statements, the company has now admitted that it might cooperate with other developers in some stages of the project.
Another developer, Sekyra Group, is not against cooperation either. Within ten years, the company wants to build a new neighbourhood at Prague’s Rohanský island for CZK 15 billion.
Multi Development, which is building Ostrava’s new neighbourhood called Karolina for some CZK 15 billion, has already decided to share its project. On 6 October, the developer Passerinvest launched the construction of offices there.
The only self-sufficient developer building a big project is Finep, which has launched a CZK 6 billion construction of the first stage of a housing and office project Západní město on the outskirts of Prague. Finep received the necessary loans without any major problems because Siemens had ordered one of the office buildings, called Diamant.
“Some projects are being delayed, and others remain on paper only owing to a shortage of money. This year, we will probably see forced sell-offs that will reduce property prices,” investment consultant Dušan Šťastník said. The price decline will last for almost a year until prices are low enough to attract “vultures”, he added.
“These are opportunistic funds whose strategy is to buy as cheaply as possible even at a high risk, then increase the value of the property and sell it with a return exceeding 20%. It is companies like Europa Capital, Apolo Real Estate and Carlyle Real Estate. In the instant they start to buy in the Czech Republic, it will mean that the market has hit bottom and will only grow then,” Šťastník said.
Lower sale of flats
The lack of money has also hit the market for flats. Flat prices in the country mostly grew until September, but started to decrease in most towns during the last quarter of 2008.
Between September and December, the average price of a flat in the Czech Republic dropped by 7%, from CZK 2.26 million to CZK 2.1 million. The figure is an average supply price of 42,000 new and old flats of all sizes on the portal Euronet Media. The price decline has come in reaction to lower demand. Members of the Czech chamber of real estate agencies ČKRK sold 4,038 flats in the first three quarters of 2008, a year-on-year decline of 38%. Real estate companies Lexxus and Ekospol have registered a 20% decline in demand for new flats.
Some developers have postponed their housing projects owing to the low demand. This concerns for example Orco Property Group’s activities in Kutná Hora.
“We can assume that developers will halt or postpone some projects in order to prevent a price fall,” said Filip Endal, an analyst with Deloitte.
“Flats prices in prefab buildings will decrease, but the demand will persist for good-quality projects in good localities,” Ekospol director Evžen Korec said.
However, good-quality projects are not selling now either. A year after the completion certificate was issued, Prague’s Galerie Myšák, held by the fund CPDP, still offers six of its 32 flats for sale including a luxury maisonette worth CZK 90 million. Moreover, almost 50% of the office space is still unoccupied.
Office space should decrease
The Czech market for office space exceeded 2.5 million square metres in 2008. A record 340,000 square metres of new office space received a completion certificate. But not all developers found leasees beforehand, so the portion of the unoccupied area increased from 7% at the end of June to more than 9% at present.
This means there is roughly 230,000 square metres of vacant office space in the Czech Republic – an area corresponding roughly to six times the City Tower building at Prague’s Pankrác, the tallest office building in the country.
The projects completed in 2008 include the City Tower with an area of 40,000 square metres from the developer ECM, Kavčí Hory Office Park with 36,550 square metres built by Hochtief Development, and the Radio Free Europe building in Prague’s Hagibor with an area of 23,000 square metres that was constructed by Orco Property Group.
Orco and ECM are the only developers listed on the Prague Stock Exchange. Investors who bought shares in these companies at the start of the year recorded the biggest losses ever in 2008. Shares in both developers fell markedly during the year, with Orco losing a record 92%.
Their outlooks are not promising either. Next Finance analyst Ivona Hrušová said she expected ECM shares to rise to only CZK 280 and Orco to increase to some CZK 180 this year.
“We predict a smaller volume of transactions and rising demand for smaller offices for this year,” Ondřej Novotný, an analyst with the real estate consulting company King Sturge, told HN. Rents in top-quality offices in town centres will grow slightly because the office space will decrease as many developers have postponed the launch of new projects for financial reasons, he added.
“Construction and demand will be falling until the middle of 2011. At that time, the supply of vacant office space will be at its lowest. At the turn of 2009 and 2010, loans should become more accessible and developers will start building again. But that will take a year and a half, so there will not be enough office space in the Czech Republic until the end of 2011,” Novotný said.
Warehouse construction slows down
The financial crisis first hit the market for logistics buildings surpassing an area of three million square metres at the end of 2008. Instead of the planned 800,000, only 640,000 square metres were built last year.
“In year-on-year terms it is a decline of about 30%,” said Ferdinand Hlobil of the real estate consulting company Cushman & Wakefield.
The market expanded by as much as dozens of percent a year from the middle of the 1990s, so a slowdown had to come, he added. “The first half of 2009 will likely be weaker too, and the market for industrial property will be set in motion again only in the second half of the year,” Hlobil said.
CTP remains the biggest developer in this sector with almost a 50% market share. The first company to publicly announce the end of its expansion in the Czech Republic was the US firm ProLogis.
Retail parks will be smaller
The area of shopping centres rose by 300,000 square metres to more than two million square metres last year. Despite the crisis, expansion in this sector continued. New projects included mainly large shopping centres like Arkády Pankrác, Nisa Liberec, AFI Palác Pardubice and others.
“Competition has become tougher, so customer numbers have decreased in some projects. But local shopping centres in small towns have a future,” Novotný said.
Translated with permission by the Prague Daily Monitor.