Q2/2023: DESPITE A PERIOD OF ECONOMIC SLOWDOWN, THE OUTLOOK REMAINS POSITIVE
Czechia’s economy has mildly contracted for three consecutive quarters since H2 2022, while Q1 2023 marked the first year-on-year GDP decrease since early 2021, mainly due to a significant decline in private consumption and a reduction in inventories. However, Moody’s Analytics anticipates that the decline in household consumption may have bottomed out in Q1 2023, with indications of improving disposable income as inflation decreases. The labour market remains relatively resilient with a well-educated and growing talent pool. Despite the central bank keeping policy rates in restrictive territory, Moody’s analytics project a softening of rates in early 2024 and reaching neutral levels by the end of 2025.
The vacancy rate decreased to 7.3% amidst no new supply in Q2, renegotiations dominated occupier demand again, while prime rent has stayed the same, hovering around its peak level.
- With 38,000 sq m delivered in Q1 2023, new supply in Prague increased by 45% compared to Q1 2022, surpassing the 5-year average. However, Q2 saw no new delivery in the sector, resulting in a 22% year-on-year decrease in new supply for H1 2023.
- No new office project started in the past 12 months. Still, over 143,000 sq m of offices are under construction, of which 66,800 sq m are planned for delivery by the end of 2023, and 52% are already pre-leased.
- Gross take-up was 149,000 sq m, with 53% of lease renegotiations.
- The primary vacancy rate softened further by 30 bp over the quarter, setting at 7.3%.
- In Q2 2023, prime rent remained stable at the highest level among the CEE countries.
More than 0.5 million sq m of industrial space were delivered in H1 2023, but vacancy stayed below 2%, and rents remained at historic highs.
- The new supply amounted to around 286,600 sq m across 19 projects, with 83% already pre-leased.
- The total industrial stock in Czechia reached nearly 11.3 million sq m, with over 600,000 sq m scheduled for delivery during the remainder of 2023.
- Construction started on projects totalling 397,700 sq m in Q2 2023, and presently over 1.3 million sq m is under construction, with only 39% of this space vacant for occupation.
- Gross take-up in Q2 2023 reached 597,000 sq m, a 73% increase compared to Q1. Net take-up was 284,900 sq m, including over 72% of pre-leases.
- Despite a 42 bps increase from Q1, the vacancy rate remained low at 1.7% in Q2 2023.
- Headline prime rents remained at historic highs but are not expected to experience significant further increases in the short term.
Retail properties in all formats exhibit solid performance in Czechia, with more developments in the pipeline, and rental dynamics remain consistent.
- The only addition to the total retail stock in Czechia in Q2 2023 was the 7,800 sq m retail park Blansko.
- Presently, approximately 130,700 sq m of shopping centres are in the pipeline across the country, with only around 10,000 sq m under construction in the centrally located OD Máj in Prague.
- In total, 101,300 sq m of space are under construction within shopping centres and retail parks in Czechia. An additional 193,000 sq m in retail projects have already received planning permission.
- Prime rents for high street and shopping centres have remained stable since the end of 2021, while retail park rent has continued to rise.
Robust transaction activity and hotels’ performance in H1 2023 indicate a positive outlook for the remainder of the year.
- In H1 2023, four transactions totalling €47 million were closed in the Czech Republic, representing an increase of 52% compared to H1 2022. Although there has been limited visibility on yield shifts, we estimate that prime yields in Q2 2023 remained stable compared to Q1 2023 (at 6.25% in Prague for hotels operated under management agreement) as inflation stabilised. The cost of capital did not worsen.
- The hotel market in the Czech Republic is steadily recovering, with RevPAR reaching €63 for H1 2023, up 55% compared to H1 2022. The increase in RevPAR was primarily driven by a 32% rebound in occupancy, partly enabled by the pickup of flight connections to Prague International Airport. Hotel room prices also experienced growth during H1 2023, with ADR reaching €102, reflecting an 18% increase compared to H1 2022. Prague achieved higher KPIs than the Czech Republic, with a RevPAR of €69, occupancy at 64%, and ADR of €107 in H1 2023.
- As for the hotel supply, there were no new hotel openings in Prague during H1 2023. However, one conversion was completed: Alcron Hotel was fully renovated and rebranded as Almanac X, offering 204 rooms and reopening in January 2023. Looking ahead, we expect the room supply to grow by 153 rooms by the end of the year, with the planned opening of W Prague in December 2023. Additionally, we anticipate the Sir Hotel Prague from Sircle Collection to open by year-end, providing 76 newly renovated and rebranded rooms.
Investment dynamics remain sluggish, but asset repricing creates opportunities.
- Secondary investments in traditional commercial property sectors totalled €654 million in H1 2023, a 40% decrease from H1 2022 but a 15% increase from H1 2021.
- Additionally, around €39 million were invested in the residential sector, and four sale transactions were completed in the hotel sector.
- Retail properties accounted for 54% of the total investment volume recorded in H1 2023, followed by 17% and 15% spent respectively in office and industrial property sectors in Czechia.
- Most buyers (67%) in the Czech commercial real estate transactions in H1 2023 were of local origin.
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Explore our 5-minute Real Estate Market Snapshot, a video overview of the commercial real estate market developments presenting the key trends in real estate investment, logistics, office and retail sectors in Q1 2023.