Yes, the pandemic is a global problem and, of course, has affected the Czech market. The impacts in the Czech Republic are various, for example some American corporate companies have not opened their offices since March 2020, others are considering a reduction of office space by 15-40% (According to our research from November 2020 among 100 companies, which in total companies reduce the area of their offices by 30%). Forced remote work (home office) has shown companies that it works and they want to use it, of course. This, of course, generates secondary vacancy (subleases).
Companies deal mainly with savings and subleases
What are the most common forms of savings on the part of companies?
If the contract allows it with regard to its length (2-3 years until its end), then the solution is led by a reduction in the rental area, when most often our clients want to reduce by 30%. In the case of longer-term contracts, subleases are then used (usually for larger office capacities), or the least frequent solution in the form of leaving the entire premises/transferring the lease to another tenant.
Subleases may sound like a good solution, but aren't the market oversaturated by them?
Extremely. Currently, there are over 100,000 m2 on offer, with subleases being on offer to such an extent for the last time after the crisis in 2008. Before the pandemic, no one was dealing with subleases and only the expansion of offices for future growth was being addressed. Clients most often wanted to move to the new one. Currently, for the first time in many years, the share of renegotiations than moving is within the framework of concluded lease agreements.
Who has been hit hardest by the real estate pandemic?
Retail - stone shops are most affected - due to anti-pandemic measures, where tenants try to get out of contracts by referring to, for example, force majeure or simply closing them off permanently. Offices are less affected than retail and it very much depends on which segment the company operates in (the travel agency is closing, e-shop or online business is doing well). Warehouses, on the other hand, proved to be the winner of the whole crisis. Demand for warehouses is driven very significantly by the shift of citizens' purchases from brick-and-mortar stores to the Internet. Paradoxically, there is also an increase in rents in warehouses (warehouses in large cities - Prague, Brno, Plzeň).
Disruption of income from real estate investments?
The old investment rule advised that 30% should be "put" into real estate. Can't a pandemic distort real estate investment income by reducing rents?
Definitely yes and this is already happening. Building owners and investors are still trying to communicate externally that the market is low and the nominal rent is stable. The nominal rent is simply the so-called basic price per m2 (mostly in euros). Currently, however, the difference between nominal and effective rents has increased significantly. An effective lease is one that is actually paid after deducting rent-free (forgiven rents, rent rebates, etc.) or the provision of financing for renovation or equipment by the owner of the building. Therefore, looking at effective rent, we see a significant shift in prices. Thanks to greater incentives for tenants, prices are most often 10-15% better today than before the pandemic. Of course, it depends on the specific building and the dispersion of discounts goes above and below the most common average, despite the fact that the nominal rental price remains the same. If the covid restrictions and pressures persisted for some time, it would certainly push stable rents further down.
As for the loss of rent, this is, of course, a big problem, not only for investors but of course also for financing banks. Strong companies generally pay, however, a pandemic has worsened payment morale in some. For smaller, such as the already mentioned retail, such cases occur, and this is unpleasant for all parties.
What will be the impact on real estate investors?
In general, investment activity in the market has cooled greatly. Owners' expectations are still pre-crisis and investors' expectations are crisis, so the variance in the expected yield (rate of return) is large. And because of that, investment has faltered.
The impact of a reduction in stable rents, together with yield - the rate of return, would, of course, result in a fall in the value of the real estate. According to the slump, financing banks could demand an increase in equity. Which might not be feasible for some investors (for various reasons). And then they would be forced to sell or look for another partner.
When we talk about offices, the current vacancy due to subleases is not officially reflected in market statistics so far. But over time, this becomes unoccupied. At this point, however, it is premature to say to what extent the hybrid model (at home + at work) will affect the rental market in the long run. Maybe companies are very happy to return to the state before the pandemic, some are already doing so.
Source:// Prochazka & Partners