The most affected part of the real estate market are apartment deals. Large transactions with business real estate are also relevant. The situation in the office business is not easy either.
This follows from the new summary report on the state of the real estate market, Trend Report 2023. Experts from real estate and consulting firms, financial institutions and the Czech National Bank participated in the study published by the Association for the Development of the Real Estate Market.
In addition to the reverberations of the coronavirus measures, the real estate market is also affected by the consequences of the war in Ukraine, the energy crisis and high inflation.
“The situation on the real estate market is affected by factors that are beyond the market’s control. The growth of interest rates plays a vital role as a tool to tame inflation,” said Pavel Kliment, vice-chairman of the ARTN supervisory board and partner of the KPMG consulting company.
Sore flats
The mix of these influences most significantly affected the housing market. Due to rising interest rates, the volume of newly granted mortgages fell by 57 percent to 162 billion crowns last year. This created an unstable situation in the market.
“The CNB expects that the mortgage market will recover only very slowly during 2023 and the total volume of new loans will increase only slightly year-on-year. The growth trend should then continue in the following years, however, the total volumes of mortgage loans should remain well below the record levels of 2021,” CNB Deputy Governor Jan Frait and CNB specialist in macroeconomic risks Miroslav Plašil wrote in the Trend Report.
The result is the central bank’s expectation regarding the further development of apartment prices. The average year-on-year decline in prices across all types of residential real estate should be around five percent. According to central bankers, the market could return to slightly positive values in 2024.
“Nevertheless, there is a high degree of uncertainty associated with the development of prices, in particular, their more significant drop is not excluded. In its autumn report, the CNB estimated that the probability of a price reduction of more than ten percent over the next two years in the second quarter of 2022 has increased significantly and is roughly one-third,” experts from the Czech National Bank added in the Trend Report.
Despite weaker market activity, professionals dependent on the prosperity of the housing business remain optimistic.
“The situation on the housing market cannot be called a crisis. Since the cooling is not caused by demographic reasons or a deep economic crisis, it can be assumed that its current state will be rather a short-term issue,” wrote the head of the Trigema developer group Marcel Soural and the director of the Central Europe Holding company Jiří Pácal in the Trend Report’s chapter on apartments.
A challenging year in the offices
The situation is not easy on the office market either. Last year, their volume in Prague increased by 30 percent year-on-year, but according to the Trend Report, the absolute value of the increase is very low compared to the long-term average.
“Compared to the previous year, there is a lot of caution on the part of the developers. In 2022, the construction of only 57,000 square meters of office space was started, and that was already in the first half of the year, and no new projects were started in the second,” Ondřej Vlk, a specialist in commercial real estate from the Knight Frank consulting company, stated in the Trend Report.
As for office rentals, last year was good at first glance. Year-on-year, 44 percent more offices were rented in the capital. However, 44 percent of the total leases were just newly negotiated contracts with existing tenants. Moving companies to new premises was not behind them. The share of so-called renegotiations was the highest in the last eight years.
Despite the weaker market performance, office rents are rising, mainly due to rising energy costs, office operating costs are also increasing.
“We expect 2023 to be challenging for the Prague office market, especially in the first half of the year. The recently announced layoffs in global technology firms, which are also significant tenants in the local market, will increase the pressure to reduce leased space, which we are already witnessing due to low occupancy caused by the hybrid way of working,” added Vlk from Knight Frank.
Retail after covid
The retail space business has yet to recover from closures during the coronavirus pandemic and is already dealing with a drop in consumer demand. Although sales in shopping centers increased last year, the number of visitors to the centers did not return to the pre-Covid level.
According to the Trend Report, the coming period will be affected by the worse condition of the economy and the lower purchasing power of part of the population in retail.
“The most threatened segment of the market is small non-food stores outside shopping centers, on the other hand, experts see the future of retail parks more positively. They are also helped by the frequent presence of discount tenants, which is a welcome element for many customers in a period of uncertain economic conditions,” stated retail expert Tomáš Drtina from research agency Incomind.
The difficult situation on the market also leads to the fact that some brands literally closed shop and ended their business.
“As a result of covid restrictions and shifts in shopping habits, in recent years a number of retailers have found themselves in a situation where they are considering and calculating whether it is economically sustainable for them to keep all existing stores. It was manifested, among other things, in the departure of some well-known brands from the Czech market,” added Drtina from Incomind.
This concerned, for example, the sporting goods retailer Hervis. The editors of SZ Byznys also recently reported on the collapse of the chain of stores with Eiffel Optic glasses.
On the other hand, new brands are still coming to the Czech Republic. According to consultants from Cushman & Wakefield, 38 new brands entered the domestic market last year.
Healthy warehouses?
According to the reported indicators described in the Trend Report, the industrial real estate market including warehouses and production halls is the healthiest part of the real estate business. There are practically no vacant spaces, especially in the vicinity of Prague and Brno – at the same time, construction is at a record high. Last year, developers completed 1.1 million square meters of halls. Wenceslas Square in Prague could fit more than 24 times in them.
However, question marks also appear over the further development of the industrial real estate market. The business with halls growing mainly around highways is largely dependent on the prosperity of the automotive industry and online stores.
“In the second half of last year, demand began to weaken, reaching the level of 2020. E-commerce, which mainly drove demand upwards, saw a decline in sales in 2022 for the first time in history. The number of e-shops also decreased for the first time on the Czech market, and the same trend is expected in 2023, mainly due to high operating costs and rising inflation. This fact will also have an impact on future demand,” Markéta Vrbasová, head of Knight Frank’s industrial department, wrote in the Trend Report.
Czech capital rules
At first glance, investment transactions with office and shopping centers and halls were successful last year. The volume of business increased to more than two billion euros.
However, as Ondřej Vlk from Knight Frank pointed out in the Trend Report, last year’s investment market results have one “but”. The transfer of the retail real estate portfolio from billionaire Radovan Vítek’s CPI group to the Austrian Immofinanz group was reflected in the statistics. However, this is just another company controlled by Vítek.
“While in a year-on-year comparison of the gross volume of investments, the figures would show an eight percent increase, after adjusting for the aforementioned real estate transfers, it is, on the contrary, a four percent decrease. And if there is still a noticeable decrease somewhere, it is the total number of transactions, which decreased by about a third,” said Vlk from Knight Frank.
However, despite the situation, Zdenka Klapalová, president of the Association for the Development of the Real Estate Market and managing director of Knight Frank, remains optimistic.
“I am positive about this year’s outlook, because even if it doesn’t look like it at first glance, transactions are taking place. Domestic capital in particular is very active. We should not underestimate its power, there is enough liquidity in the market. Private investors from among successful Czech entrepreneurs and businessmen show interest in investing in real estate,” she noted in the Trend Report.
The numbers also confirm the predominance of Czech investors. Domestic buyers of business real estate accounted for 51 percent of the total investment volume. Domestic investors even accounted for 70 percent of the number of transactions.
