“The office market arrived at a bottleneck whereby planned supply was almost half of anticipated take up. However the market recovered as company expansions were limited and in general tenants opted for lease renegotiations rather than relocations. Now several developers such as HB Reavis, Karimpol, PPF Real Estate and Immorent have anticipated that there will be a scarcity of supply at some point and have started construction on a speculative basis. About 300,000 sqm of space will be delivered in the next two years,” commented Tewfik Sabonyui, Managing Director of JLL in the Czech Republic.

There are currently around 20 ongoing office projects due to complete in 2014-2015 according to consultants based in Prague. These are being undertaken by established international and regional developers and Czech-based companies such as Immorent, Immofinanz, Skanska, HB Reavis, Penta Investment, IVG, Karimpol, PPF Real Estate, Passerinvest, BPD Development and CPI. In general the quality of product is regarded as on a par with office buildings in for example Germany. Further, developers need to develop sustainable buildings that conform to EU legislation in order to gain a construction permit. In addition sustainable features in a project are now a necessity in order to let a building and provide an exit strategy.

Although the Prague office market is generally viewed in a favourable light, one potential black cloud on the horizon is the high average vacancy rate in the city, this has risen to 14 percent according to the Prague Research Forum (consisting of CBRE, Colliers, Cushman & Wakefield, DTZ and JLL). Although this figure should be qualified as there is considerable variation across the city with for example vacancy of 6 percent in Prague 4 and 31.5 percent in Prague 7. “Healthy take up is being tempered by a more than adequate level of supply,” commented Robert Neale, CEO of Portland Trust. The company has been active in Prague for several years, although it has no immediate development plans, in large part due to the substantial pipeline in the city.

Tewfik Sabonyui argues that there could be office oversupply in particular locations, but overall there is no market oversupply. However one problem for developers is the lengthening lease negotiation process that is now on average as long as a year. “This puts pressure on landlords and takes longer to get tenants into a building and banks can get nervous. This can force landlords into offering financial incentives and concessions,” he said.

Prague office stock stands at 2.90 million sqm with Class A properties representing 72 percent as of the end of the first quarter. Around 150,000 sqm is under construction and due to complete this year according to the Prague Research Forum. The Forum has undertaken the first stage of a “rationalisation” and “reclassification” of stock in order to provide more reliable figures. Headline rents in the city centre remain stable at €19-20 per sqm per month. RICS expect these rents to come under pressure.

The largest recent delivery is the 43,000 sqm Florentinum by Penta Investment. A 10,000 sqm prelease has been signed with Ernst &Young at the €200 million complex, which will include a retail centre. Located in Prague 1, the development has arguably changed the office landscape in Prague 1 as such large projects are rare in central Prague. Penta is currently developing the 27,000 sqm Aviatica in Prague 5.

With regard to further development in Prage 1, Immofinanz Group is undertaking two development projects with the €25 million refurbishment of the 6,800 sqm Jindřišská 16 in the old town of Prague and the 7,600 sqm Jungmannova. Also in Prague 1 the leading Czech developer, CPI is constructing the 16,000 sqm Quadrio 1, due for completion in autumn.

With regard to demand, Erste Group Immorent have secured a 11,000 sqm prelease with the software company Avast in the 29,000 sqm Enterprise Office Center in Prague 4. With the prelease concluded construction has commenced and the project is set to deliver in 2015. Immorent estimate demand at an annual 300,000 sqm. Skanska Property has secured a 8,600 sqm letting at its speculative 17,300 sqm Corso Court in Prague 8 in the Karlín district.

Prelease requirements from lenders for Prague office developments are put at 40-50 percent. “This figure can be difficult to realise in the Czech market because there are not too many big requirements that meet the expectations of banks. Tenants in general are not prepared to commit to a two to three year process in order to complete a move,” said Tewfik Sabonyui.

RICS have observed increased investment demand across the three major market sectors with particular interest in the office and industrial sectors. One challenge, however, is the limited supply of prime offices which puts investors in competition for the same product. Investment volume is on the up and JLL put 2013 volume at €1.39 billion. The Prague office sector recorded €690 in transaction volume for 2013.

Jiri Fousek, Head of Capital market at Cushman & Wakefield in the Czech Republic puts prime office yields at 6.25 percent compared to 7.5 percent for industrial. The Czech Republic and Poland, countries that border Germany, are benefiting from the shift and expansion of manufacturing premises from Western Europe according to Ferdinand Hlobil, Head of CEE Industrial at Cushman & Wakefield. For example Amazon is to locate a logistics complex in the Czech Republic.

Almost 300,000 sqm of new industrial space was built last year representing a 170 percent year-on-year increase. Vacancy in the sector stands at a low 6 percent according to Cushman & Wakefield. The biggest recent delivery was 22,000 sqm for DHL at Prologis Park Prague D1 West. There is a further 210,000 sqm under construction according to JLL and occupier demand is said to be increasing.  

With regard to development strategy, Eddy Maas, Partner at CTP argues that there is no necessity for speculative development, due to the short development time period of around seven months when a project can be constructed in accordance with the requirements of tenants. The company is now one of the top five industrial developers in Central Europe and is planning 200,000 sqm of space in the Czech Republic. Another industrial developer, Point Park Properties (P3) leased around 195,000 sqm of logistics space in the Czech Republic last year, making it the company’s most active leasing market. The company agreed a 46,000 sqm lease extension with the logistics firm Hopi at the PointPark Prague D1 logistics park.

Source: Gary J. Morrell
Publisher: Gary J. Morrell