Czech Real Estate Report Q2 2010

The Czech Republic’s economy continued to contract during the second half of 2009, shrinking 4.1% year-on-year (y-o-y). The Q309 figure showed a slight improvement on the recently revised 4.7% decline recorded in Q209 (previously the CSO had estimated a 5.5% y-o-y fall), though indicates that the Czech economy was experiencing a fairly severe downturn. However, with net exports and government consumption likely to continue contributing positively to real GDP growth, the pace of contraction eased in Q409, with full-year real GDP growth forecast to come in at -3.8% y-o-y. In 2010, we expect private and government consumption to stay in positive territory, and forecast 1.8% full year real GDP growth. It seems that the resilience shown in the residential real estate market was likely to have just been a delayed reaction and we have now seen declines in house prices. King Sturge says that 2009 saw prices decline up to 10% for older brick-built flats and new projects in less-attractive areas and as much as 15% for flats in old prefab blocks. Quality projects in attractive locations did not see any major price corrections and luxury homes in Prague's historical centre sold well at stable prices. Customers were generally wealthy foreigners.
Mortgage advances dropped during 2009. Loans worth about CZK73.85bn were advanced, down by 39% from CZK120.09bn in 2008, the Local Development Ministry said in January 2010. Local banks are predicting slight growth for 2010. There are a number of legislative changes that will make residential property ownership more attractive to foreign investors, but these are likely to have limited impact given the difficult economic environment.
Office space vacancy hit a record, causing falls in rents during the year. According to Colliers International, the vacancy totals 280,000 m² (10.6 %) for 2009. Prague's 12% vacancy rate in offices in the fourth quarter of 2009, was below Sofia's and Bucharest's 16% or Budapest's 22%. However, Prague is one of the main cities expected to recover first in Central and Eastern Europe. Prague is appealing to investors in part because it is popular with international companies, looking for office space. According to CBRE, there is little office space product in the pipeline; new development under way represents only 3% of Prague's current office supply, compared with Sofia's 44%, Budapest's 8% and Bucharest's 31%. Signs of recovery in the industrial space market have been recorded, but much of this may well be renegotiated in terms and occupancy. 2010 will see lease negotiations and extensions in industrial property play a significant role as they are leases signed at the height of the market.
On the basis of the Czech Republic’s Real Estate/Construction Business Environment Rating (RECBER), we continue to see the following issues as important:
􀂃 Delayed response in demand for real estate property. Although we see the downside as being less than for the other segments, the weakness of the Czech economy means the impact of legislative changes that boost the accessibility of residential real estate to foreigners is so far unclear;
􀂃 The absolute level of bank lending for property in the Czech Republic. It appears that either the willingness of the banks to lend – or customers to borrow – has been a constraint in the past; and,
􀂃 The oversupply of property that is likely to persist in the office, retail and industrial segments, despite a big decrease in development. Transactions are likely to be fairly few in number, prices will likely be under downwards pressure and yields may rise further.