Copyright: David Lawson - Property Week 2001
The fact that the fund will be headquartered in the city shows how attractive Prague is becoming. Last year the Czech Republic was the main target for foreign investment in central and eastern Europe, according to Knight Frank, which sees value continuing to increase as the country pulls out of the deadening recession of the late Nineties. The slowdown in Germany, a dominant trading partner, is causing some worries but Jones Lang LaSalle points to the cushion of growth in seven successive quarters and the prospect that future looks more attractive than the EU as a whole.
ING is a long-term player which persevered through the hard times, creating landmarks including the 3000 sq metre ‘Dancing Building’ and the 20,600 sq metre ‘Golden Angel’ shopping and office complex. But hard economics lies behind the spectacular facades. The Dutch-based group is working hard to create investments for its new fund and hopes others will join the party, says Peter Davies who has moved out from London as part of a reorganisation of ING’s central European structure. And there lies the weakness which has held others back. Institutional-standard buildings are rare in this part of the world, says Noel Manns, a director of European Capital Partners. ‘You have to build your own. And with so much of the value tied up in over-optimistic land values, that can make it difficult to generate better returns than in lower-risk counties like Germany,’ he says.
But, like other fund managers, he sees light at the end of the tunnel as rents bottom out. ‘Western Europe still takes priority but I can see us going into the Czech Republic sometime,’ says Simon Marrison of LaSalle Investment Management, who is also constructing a European fund. Robert Neale must view such prevarication with amusement. The former Healey & Baker partner jumped in with both feet just before the recession hit in 1998 and still managed to set in train development with a potential completed value of around DM300m. Portland Trust, set up with partner Mark Vydra, won vital backing from Roger Orf’s Pelham Partners, which was cherry-picking promising Europe schemes for US fund Apollo.
That bet is now paying off. Zlicin Shopping Centre, west of Prague, is four months into construction and 80% let, says Neale. It includes a 26,000 sq metre Moebel Walther furniture store, 44,000 sq metres of other retail space, a multiplex cinema and 2,000 car spaces. The area is the largest agglomeration of retail space in the Czech republic with a total of circa 180,000 sq metres of retail floor space.
Also at Zlicin, several large groups are talking to Portland about taking space on a 30,000 sq metre office park. This is being designed to western standards, with 3000 sq metre floorplates to cater for the kind of tenants which cannot find this kind of building in the historic centre of Prague. Rents are expected to reflect this, reaching DM25/sq metre. ‘That is as good as downtown levels,’ says Neale.
A 150,000 sq metre technology and distribution park is also on the cards at Karlovarská, near Prague airport although, like most Czech schemes, it will not get off the ground until at least a third pre-let. Planning permissions also have to be negotiated, and ‘everything takes a long time out here’, says Neale. Both of which are advantages in his eyes. Despite blips of oversupply, nothing gets completely out of proportion the way it does in some western markets, he says. But he agrees that this leaves a shortage of suitable institutional material. ‘There is more interest than action among investors,’ he says. That growing pressure is beginning to show through, however.
Most activity in the past has been outside central Prague and the only office deal in the first half of the year was the sale of the 1650 sq metre Pankrac building for around DM5m to a group of private Austrian investors, according to Ben Bannatyne of Jones Lang LaSalle in Prague. But he forecasts a record number of completions over the next six months, pushing prime yields down closer to 9%. German and Austrian institutions have dominated the market but could be joined by open-ended funds and private investor groups. Marrison favours retail warehousing while Manns notes the yield shift in offices. JLL says this is underpinned by a change in market balance. Prague office supply will reach only 78,000 sq metres this year while takeup is anticipated to reach 145,000 sq metres and a third of the 220,000 sq metres under way is prelet. Prime rents should remain stable at around DM41/sq metre.
Retail
Prague is in the middle of a shopping boom which could create the leading retail market in central Europe, according to Healey & Baker. In the next year or so some 180,000 sq metres will come out of the ground as developers race to accommodate international retailers and with quality space in shopping centres and central Prague. Hypermarkets have been the driving force in the evolution of a modern retail sector, which has fed back into the recovering economy by helping keep inflation down. Around 18 stores have opened across the Republic in the last couple of years, operated by international names like Tesco, Carrefour and Globus. These are not the stand-alone sheds seen in some other countries, however, as many are enclosed in malls with up to 30 stores. Development of more out-of-town malls is expected to continue for the next couple of years.
Meanwhile, the number of international names looking for space has doubled and operators like Zara and Promod are queing to take advantage of a transformation in central Prague as spending and tourism soars. Rents have hardened to between DM25 and DM250/sq metre in the high streets and DM15/sq metre to DM100/sq metre ou of town. H& B forecasts further competition following the opening of Mango’s flagship store and a surge in prelets as new space comes on stream in the main shopping centres. Despite the surge of development, Knight Frank says there is little risk of oversupply
Industrial
The Czech Republic is a natural target for warehousing. Not only is it at the strategic heart of Europe, it can also offer much cheaper land, building and labour costs than most other European countries. Yet the sector is still remarkably immature, even around Prague, which dominates the market. ‘The stock of modern warehouses is as little as one tenth of what you would expect comparing the population with other west European regions,’ says Paul Betts, partner in charge at King Sturge’s Prague office. Even taking account of the lower spending levels of a still-emerging economy, the city has only half the stock expected on a GDP per head basis.
That does not mean any lack of development. He forecasts supply of 120,000 sq metres this year, an increase of more than 20% in the total stock of over 525m sq metres in the Prague region. But much of this is occupier-driven and generally pre-committed. The only speculative space is hidden in schemes that are mainly pre-let. Take-up is also eating away any new buildings coming out of the ground. This ran as high as 150,000 sq metres last year and, while this is unlikely to be matched in 2001, remains strong with more than 56,000 sq metres absorbed in the first half of the year.
Even that understates the strength of owner-occupiers flooding into the region. Czech GDP growth has recovered after three hard years of recession and foreign investment is running high again, adding to pent-up local demand left over from the recession years of the late-Nineties. Demand is coming from logistics providers like Maersk, which took 11,500 sq metres on Tulipan Park in the prime area along the Prague-Bratislava D1 route to the west, where much of the new stock is located.
Other buoyant sectors include consumer goods, electronics and technology. First International Computers took 22,700 sq metres on Rudna Logistikpark, also west of the city, showing some demand also exists for assembly space. Foreign-backed manufacturing is a powerful force for growth, already producing more than 65% of the country’s exports. Further growth is spilling over into local demand for support services. This has left a minimal vacancy rate of around 73,500 sq metres, but Betts points out that two-thirds of this is outstanding in one 1999 scheme, Airport Logistic Park, built by Raiffeisen Proinvest. Rents have yet to react to this imbalance but remained stable at DM11/sq metre to DM20/sq metre over the last year. The wide variation depends on quality and location, which are prime factors for most occupiers
Net yields of less than 11% are feasible on this basis. ‘The warehouse market continues to be a target for investors but the major barrier is the lack of product which makes the market difficult to benchmark in terms of current yield levels,’ says Betts.