Against a background of cooling but more sustainable economic growth and continuing momentum in property prices as central European markets remain one step behind western markets on the cyclical curve, Czech real estate enjoyed another strong start to the year, with investment levels on track to meet last year’s total of around €2.5 billion.

According to Q1 data for 2019, total investment in Czech real estate was €1.05 billion, with office investment claiming the lion’s share of that at €451.1 million, followed by hotels at €293.5 million, retail at €211.7 million and industrial at €93.4 million.

Predictably, Prague received the vast majority of that investment at €934.1 million, with the remaining €115.6 million spread over the rest of the country. The majority of deals (€574.7 million) were worth less than €100 million in volume, while €475.0 million were in the range of €100 million-€499 million. None was above that.

Low vacancy rates

Prime yields in the Czech Republic across all asset classes have reached their lowest levels as the market has matured over the last couple of years to become closer to that of more developed countries.

In the office segment, there were a few deals of prime CBD assets done at yields of 4.15-4.25 per cent during the first quarter, giving the prospect that those levels could fall below 4.00 per cent in 2019. Secondary yields (outside CBD, class-A assets) were between 5.00 per cent and 6.00 per cent, with a slight further compression expected this year. The very low vacancy rates amid high demand mean prime monthly rents have increased to around €25 per square metre.

The situation on the industrial market is similar, where low vacancy combined with high demand are causing rents to rise. Prime (but rare) assets are now nearing yields of 4.50 per cent and regional assets are at approximately 5.25 per cent. Investors are now turning to regional markets if any product can be found and lot sizes are attractive enough. E-commerce and data centres are the fundamental drivers of the sector. Savills placed the Czech Republic in the top ten of European countries where to invest in this segment.

In retail, yields on the high street are around 4 per cent, with a stable outlook expected for 2019. Prime shopping centre product is scarce, though yields would likely test sub-5 per cent for core Prague assets. Secondary (regional assets or smaller shopping centres outside of the CBD) yields are at between 6.50 per cent and 7.50 per cent.

However, compared to Western European markets, yields in the Czech Republic are still higher, making it more attractive for those seeking better returns without the need to take on a disproportionate amount of additional risk. The Czech market can deliver this favourable risk-reward trade-off, having established itself as a developed rather than emerging market, based on economic fundamentals – stable growth in a low-inflation environment being the most significant, along with the stable value of the Czech koruna against the euro in comparison to other Eastern European currencies.

No tailing off

Despite the cycle reaching saturation point, we expect investment demand to remain high for the rest of 2019, coming in at around last year’s €2.62 billion.

However, we believe the market stock will struggle to match this demand primarily because of two factors.

With the success of the record-breaking years of 2016 and 2017, large portions of the core investment market are currently within holding periods with the owners, meaning there is a lack of premium stock available to be purchased. Low supply of available product is the main reason behind the investment volume drop-off compared to the previous years.

As a result of the positive investor sentiment, combined with the somewhat shallow supply, we would expect a further sharpening of asset prices and yields across all property sectors. Even so, the yield differential between the Czech market and Western European countries is likely to remain at its current level. This naturally increases the attractiveness of the Czech market for investors who can no longer satisfy their return requirements by placing capital in the western markets.

Taking all that into account, we don’t expect the overall investment volume to show any significant tailing off this year.

FURTHER INFORMATION

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