The first quarter of 2016 in the Czech Republic was characterized by a lack of logistics and industrial space, demand for office space and high volume of investment into real estate. Colliers International released its latest report summarizing trends on the investment, office and industrial markets.
Volume of real estate investment increased by 85% from last quarter
Colliers observes a strong demand on the investment market. The transaction volume of investment into real estate reached 490 million euro during Q1 2016, excluding transactions with a confidential sales price. Compared to the previous quarter, it represents a significant increase of 85%.
Retail is dominating investment volumes, which accounts for 40%. This was supported by the largest transaction of the quarter, an acquisition of a retail portfolio by Palmer Capital (now Arcona Capital) from Atrium Europe Real Estate. Also in the retail sector was the largest single asset deal of the quarter, which was the acquisition of Bondy Centrum Mlada Boleslav by CPI Group for 40 million euro.
After retail investment, office investment remained strong with a 29% market share, followed by industrial with a 16% share.
Yields experienced a mild compression compared to 2015’s year-end. However, some investors are willing to acquire properties with sub 5% yields in the centre of Prague if they can benefit from long term lease contracts.
“We are expecting that the total investment volume in 2016 will be further influenced by large transactions such as the sale of The Park in Prague 4 and the Olympia Shopping Centre in Brno,” said Andrew Thompson, Head of Capital Markets Czech Republic & Slovakia, Colliers International. “Recent yield compression is most likely to be further supported with the proposed sale of the Florentinum building in the heart of the city which may also achieve a sub 5% yield.”
New tenants show interest in offices
During Q1 2016 no new office space was completed. The total office stock in Prague remained unchanged at 3.22 million sqm. This led to a decrease in the vacancy rate to 13.9%, which is 2.6% lower compared to the same period last year.
The largest amount of vacant offices was in the largest submarket, Prague 4. The vacancy rate for this district reached 13.7% and it offers 120,700 sqm of office space to lease. The second highest amount of available office space was in Prague 1 with 74,960 sqm, which represented a district vacancy of 15.9%, followed by Prague 7 with 55,760 sqm of vacant space or 28.8%. The lowest vacancy rate was achieved in Prague 5 with 9.1%.
For 2016, market activity in terms of new office completions will be significantly limited with 40,000 sqm in seven new properties. The largest completion of 2016 will be Futurama Business Park Phase III in Prague 8 consisting of 9,147 sqm.
An additional 124,000 sqm of office space is currently under construction and planned for completion in 2017. A further 23,600 sqm exists in “locked up” properties with valid permits, while at least an additional 60,000 sqm of new office projects have valid permits and may be completed in 2017, but some developers continue to wait with new developments.
Total gross take-up in Q1 2016 reached 92,209 sqm demonstrated by a y-o-y 30% increase in gross take-up and on a q-o-q comparison represented by a 43% decrease; however, one must note that the previous quarter was historically the busiest on record. Net take-up in Q1 reached 45,737 sqm, which is a significant increase both on a q-o-q (up 55%) and y-o-y comparison (up 146%).
The largest transaction of the Q1 2016 was the expansion of Ceska sporitelna at the Trianon in Prague 4 (5,600 sqm). Other significant transactions included renegotiation of Publicis at Jankovcova 23 in Prague 7 (3,500 sqm) and the renegotiation of L’Oreal at Palac Krizik in Prague 5 (3,419 sqm).
The highest letting activity was recorded in Prague 4 with 21,624 sqm (23.5% of total take-up), followed by Prague 1 with 18,686 sqm (20.3%) and thereafter Prague 5 with 16,395 sqm (17.8%).
The downward pressure that prime rents experienced in recent years has slowly disappeared which is mainly due to recent strong occupier demand levels. Prime office headline rents remained more or less stable in Q1 and ranged between €18.50 and €19.50/square metre/month. The city-wide average rent remained unchanged at €13.20/square metre/month.
“Demand for office space in Prague is high. We see increased interest of new tenants which may tempt some developers to commence speculative construction. Also positive are new inner city and city centre large scale projects, such as Penta’s redevelopment of Masaryk railway station, which are helping to improve parts of CBD that were previously under-developed as an office location,” said Iva Caňková, Head of Office Agency Colliers International.
Lack of industrial and logistics space
Although 84,277 sqm were completed, the vacancy rate of industrial and logistics space continued to decrease during Q1 2016. At the end of the quarter, it reached 4.2%, which translated into absolute terms represented 240,900 sqm. From delivered space only one building was built speculatively.
The largest property completed in Q1 was the 27,700 sqm warehouse extension for Globus in Prologis Park Prague – Jirny and the second largest was the 10,500 sqm production plant for Megatech Industries Hlinsko in CTPark Modrice.
In total, industrial warehouse stock in the Czech Republic reached 5.78 million sqm at the end of Q1. Prague remains the largest warehousing region in the country with 2.3 million sqm of warehouse space, followed by the Jihomoravský and Plzeňský regions. The amount of available space in Prague reached only 71,600 sqm. The vacant space thus represented a vacancy rate of only 3.1%.
By quarter’s end, around 271,200 sqm of new warehouse space was under construction. 55.9% of the space under construction was pre-let. The largest portion of the space under construction was in Prague (43.7%), followed by the Plzen region, which had some 46,300 sqm under construction and the Karlovy Vary region with its first commercial warehouses of 2016. Construction of two warehouses was also under way in Q1 comprising of 28,600 sqm for two tenants in Panattoni Park Cheb.
Demand for industrial space was stable with a gross take-up in Q1 2016 of 313,600 sqm. Net take-up accounted for almost 211,000 sqm of this figure. Prague dominated leasing volume (42.1%), followed by Karlovarsky region, where the largest agent-led deal ever recorded in the Czech Republic was concluded in Panattoni Park Cheb (73,000 sqm).
Headline rents in the regions for a five-year lease term ranged between €3.70-€3.90/sqm/month in Prague; €3.70-€4.00/sqm /month in Pilsen; €3.75-€3.95/sqm/month in Ostrava and €3.95-€4.25/sqm/month in Brno.
“Based on the logistics market development in Q1 2016, developers will soon commence construction on new spaces. Speculative developments are also highly probable as vacancy rates are currently very low,” said Petr Zaoral, Head of Industrial Agency, Colliers International. “However, a discouraging factor for investors could be that some locations are facing a problem with a shortage of available labour. This trend is becoming more acute due to decreasing unemployment rates.”