Czech Marketbeat Q4/2022
AFTER SEVERAL QUARTERS OF SOLID GROWTH, A MILD RECESSION IS LIKELY IN Q1
Czechia’s economy recorded several quarters of solid growth, powered by increased investment expenditures. Industrial production and export sharply increased in recent months, counterbalancing the weakening of the rest of the economy, driven by high energy costs, and softening external demand. Nevertheless, Moody’s Analytics project that Czechia’s economy is likely to head into a mild recession in Q1 in line with the developments in the wider Eurozone. Although inflation passed its multi-decade peak and is likely to ease off soon, price increases are broad-based, leading to a drop in disposable income and a decline in consumer spending. Investment activity will be confined by interest rates expected to remain at elevated levels but with no further hikes expected.
The annual new supply of modern industrial space delivered to the market amounted to more than 1,080,000 sq m in 2022, representing a 117% increase compared to 2021. As of Q4 2022, the total industrial stock under construction was estimated at 1,237,000 sq m, 60% of which was already pre-leased. Gross take-up reached 2,209,700 sq m in 2022, representing a decrease of 10% y/y, which has largely been attributable to confined space availability on the market. During the past year, the occupier demand in the sector was mainly driven by logistics companies (34% of gross take-up), distributors, and producers (28% each). After a rapid rent increase in 2022, further rental growth is expected to slow down.
The annual supply in the Prague office market reached 75,300 sq m in 2022, representing an increase of 34% compared to 2021, albeit still below the 5-year average. Although no new construction started in H2 2022, the development activity in the sector remains relatively healthy, with over 183,000 sq m of offices currently under construction. In 2022, gross and net take-up increased by 42% each compared to the previous year. At the end of 2022, around 293,600 sq m of offices were vacant, accounting for a vacancy rate of 7.7%. Prime headline office rents remained at € 27.00/sq m/month. During the year, the rental level escalated mainly due to the ongoing construction of prime office schemes in the central areas of Prague, which are particularly popular among office occupiers in the city. The year 2023 may see further rental growth, but it is expected to be rather moderate.
About 52,700 sq m of the new retail area were delivered in the Czech market in 2022, about 55% less than the previous year. About 77,500 sq m were under construction at the end of 2022. However, more than half a million sq m are still in the pipeline in various stages of development, including long-awaited larger mixed-use schemes OC Dornych in Brno, Savarin in Prague and Ameside in Pilsen. Several high-street projects, such as Máj, 100 Yards, Fairmont Hotel, Pařížská 25 or Via Una, are currently being reconstructed. Once completed, they will be occupied by attractive retail concepts and improve the business environment of the entire location.
With significantly weaker investors’ activity in Q4, the total volume of investments in the traditional real estate sectors accounted for €1.5 billion in 2022, mainly in the Prague office (36%) and retail (26%) transactions. The value of transacted assets was 8.2% lower compared to 2021. Most buyers (57%) in the Czech commercial real estate transactions were of local origin.
Continued restrictions led to constrained hotel performance in H1 2021, which recorded an occupancy of 6% and ADR of €55. Nonetheless, performance has been picking up even with a partial lifting of restrictions, with RevPAR in June reaching 41% above the same month last year, generating optimism for a healthy post-COVID market recovery once restrictions are fully lifted. Accordingly, investor interest in hotels is returning and the gap in buyer-seller expectations is narrowing, however the number of hotel assets being put on the market in Prague remains limited, partially due to owners’ misconceptions that now is not the right time to sell.
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