Q3/2023: CZECHIA'S ECONOMY IS SLOWLY RECOVERING FROM A PERIOD OF STAGNATION
Recent data indicates that the economy has emerged from a minor contraction, but challenges in the industrial sector and among Czechia's trading partners, especially Germany, may limit immediate growth prospects. While the first half of 2023 saw a nearly stagnant Czech economy due to weak domestic demand, stronger exports, and increased fixed investments, it is uncertain whether this rebound will be sustained.
High interest rates have hampered private consumption and fixed investments, particularly in residential real estate. Government spending, which previously supported the economy, is expected to shift towards fiscal consolidation as energy prices stabilise. The labour market remains robust, with only a slight uptick in unemployment, and a moderation in inflation is expected. The central bank is currently in a wait-and-see mode, and it's hoped that current policy rates will be sufficient to bring inflation back to target levels. Policy rates are expected to decrease gradually next year.
Office
Prague office market showed positive absorption for the eighth quarter in a row, but developers’ activity remains limited, keeping stable vacancy rates and rental levels, especially in the city centre.
- Six office buildings were completed in Q3 2023, totalling 60,400 sq m, including the long-awaited Masaryčka, located in the city centre.
- Over 85,800 sq m of office space is under construction, with approximately 68% already pre-leased.
- Gross take-up reached 88,200 sq m, down 34% y-o-y, with renegotiations accounting for 50%.
- The overall office market recorded a positive net absorption of 41,800 sq m.
- The vacancy rate experienced a slight increase, reaching 7.4%. When considering the „grey space“ available for sublease, the overall vacancy rate reached 8.9%.
Industrial
The industrial pipeline remains strong amidst decreasing demand.
- The modern industrial stock reached 11.44 million sq m in Q3 2023, with over 182,800 sq m across 10 industrial projects delivered to the market.
- By the end of 2023, another 300,000 sq m is expected to be completed, bringing the total stock closer to the 12 million sq m mark.
- The total industrial space under construction exceeded 1.4 million sq m in Czechia, with the majority located in the Karlovy Vary, Pilsen, and South Moravia regions.
- Occupiers‘ demand slowed down, reaching only 181,600 sq m in Q3 2023, representing a decrease of 69% compared to Q2 2023 and a decrease of 62% compared to the same period last year.
- The demand was primarily driven by logistics and transportation companies, comprising 43% of the gross take-up.
Retail
Retail properties in all formats exhibit solid performance in Czechia, with more developments in the pipeline, and rental dynamics remain consistent.
- Approximately 88,200 sq m of retail spaces were under construction within shopping centres and retail parks in the Czech Republic in Q3 2023, with retail parks accounting for most of the projects under construction.
- Two retail parks were completed in the third quarter of 2023, adding 8,400 sq m of new supply.
- Regarding shopping centres, only about 17,000 sq m is currently under construction in OD Máj in Prague. However, several other high-street projects are undergoing reconstruction in Prague, including 100 Yards and the Fairmont Hotel.
- Another 175,000 sq m of shopping centre projects across Czechia have already received planning permission, with long-awaited retail schemes such as OC Brno Dornych or Ameside in Pilsen being one of them.
- While shopping centre footfall remained slightly below the values of 2019, turnovers experienced continued growth compared to the pre-pandemic period, reaching around a 20% increase YTD.
- Meanwhile, the vacancy rate in shopping centres remains around 4-5%, as it did in previous years.
Hospitality
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
Investment activity slips in Q3 2023, with signs of recovery.
- The total transaction volume for the first nine months of this year reached around €1,026 million, marking a 25% decrease compared to the previous year. A similar pattern of weak performance was observed in 2020, which was heavily affected by the COVID-19 pandemic.
- The most significant transaction in the third quarter was the sale of the Via Una banking palace on Na Příkopě Street 33 in Prague, acquired by Trinity Bank from a fund within the Commerzbank group.
- So far this year, the retail building category accounts for 46% of the transactions, including the sale of the Trei retail portfolio, the partial sale of the Arkády Pankrác shopping centre, and the sale of the Atrium Palác Pardubice centre. In total, there were 11 transactions in this sector during the first three quarters.
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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 Q2 2023.
