The Czech economy is expected to fall into a mild recession at the beginning of 2023. However, predictions for the following years remain optimistic. This is important for the real estate markets because data shows that demand for offices, warehouses and retail spaces depends on the development of the economy, albeit with some delay. It is important to realise that what we observe in the economy now may have a full impact in 18 months.
Both landlords and occupiers have eagerly watched the progress of inflation, which is an essential indicator in indexation clauses existing in most leasing agreements in the Czech commercial real estate. According to the latest statistics, the consumer price index’s year-on-year change culminated in November 2022, when it reached 18.9%, while the annual inflation averaged 14.5% in the Czech Republic.
Very high inflation, economic stagnation and also very volatile and increasing interest rates negatively impact the investment market. The five-year euro swap, an essential rate for investors in commercial real estate, is currently at record high levels. Investors are, therefore, waiting for better financial conditions, or they are pending real estate prices to start decreasing to reach higher yields. However, this is not happening yet, partly due to the fact that rents keep growing in all market segments. Total investment volume in 2022 reached about €1.5 billion in the Czech Republic, 11% below the volume recorded in 2021.
The highest rental growth could be seen in logistics facing an unhealthy vacancy rate in the latest period (prime rents increased by more than 30% in 2022). At the same time, differences in rental conditions increase by various types of locations or building quality. Thus, prices of properties in less attractive markets and/or with lower standards are expected to decrease eventually.
The persistent global supply chain and logistics issues originating from the residual effects of the COVID-19 pandemics aggravated in 2022 with the increasing inflationary pressures amid major geopolitical tensions, including ongoing Russia’s war in Ukraine. Nevertheless, H1 2022 was positive for the commercial property markets in the Czech Republic in terms of occupier demand and investment transactions.
In the office property market in Prague, gross and net take-up exceeded the pre-pandemic levels. Due to the relatively robust occupier demand combined with the restrained new delivery, the vacancy remained unchanged at 8.4% in Q2 2022. Prime office rents increased by 13%, with further rental growth projected in the short term. With 215,700 sq m under construction, new office development is limited by surging construction costs and disrupted supply chain; however, this helps preserve a healthy balance in the office market.
Most of the COVID-19 pandemic restrictions relevant to the retail property market have now been lifted, and the sector continued recovering. Along with the record low overall vacancy in June and stable rental dynamics, shopping malls outperformed pre-pandemic levels in terms of retail sales in Q2 2022. However, the footfall was still 7% lower on average in the C&W portfolio. The attractiveness of the Czech retail market was proven by the entry of 15 international retailers in H1 2022, which is the highest figure since 2018 and is expected to at least double by the year-end. The interest in office buildings in Prague is a new noticeable occupational trend among retailers.
In the industrial property market, new supply amounted to 448,500 sq m, with over 900,000 sq m in the development pipeline until the end of 2022. Despite high development activity, only 33% of industrial space under construction is scheduled for speculative delivery. The strong performance and investment potential of the sector have been additionally proven in Q2 2022 by net take-up of almost 520,000 sq m and the vacancy of a historic low 1.5%, along with pre-leases accounting for 52% of gross take-up.
Around €1.1 billion was transacted on the investment market in H1 2022. Such significant investment activity reflected the 2021 market as most of the closed deals were completions from last year. Due to the constant flux in all key price-creating parameters, such as interest rates, inflation, rental growth, operating costs, and construction costs, we expect a significant slowdown in H2, and only the deals done in 2023 will be indicative of the new pricing environment.
The ongoing war in Ukraine will affect many aspects of the Czech economy. The following challenges will impact the Czech real estate market particularly: lack of workers leading to increasing labour costs, lack of raw materials essential for construction (especially various types of metal) from Ukraine and Russia, the higher price of products used in construction (including those manufactured in the Czech Republic) due to the rising cost of energy (oil and gas), and limited development as developers will review their plans and inevitably diminish their demand in the construction market. On the other hand, new opportunities may emerge, including additional labour from Ukraine suitable for jobs in the service sector, companies’ refocus on Central European countries instead of Russia, and an accelerated shift toward greener energy sources in the Czech Republic.
Following the promising development at the end of 2021 and beginning of 2022, several more significant transactions were closed in the Czech real estate market in Q1 2022, and the overall investment volume reached almost EUR 900 million, which is more than double that in Q1 2021, but about 44% less than in Q1 2020. With a 33% share in the investment volume, offices still prevailed, despite industrial assets gaining the most attraction. The structure of the investors confirms the higher importance of local (Czech and Slovak) sources of capital, with Western investors remaining generally cautious in the CEE region.
In what seemed like the end of the COVID-19 pandemic, real estate markets in the Czech Republic were heading back to their pre-pandemic levels during 2021 and early 2022: occupiers’ demand returned, and investment activity started to gain momentum in early 2022.
Developers’ activity in the Prague office market has been low: in 2021 the least amount of office space has been completed since 2016 and rising construction costs may slow the sector down even further. On the other hand, leasing activity is on the rise, helping to fill gaps in the market created by changes in corporate office use. Vacancy rates also remain relatively low.
The industrial real estate and logistics market is starting to respond to the unprecedented demand driven by e-commerce and automotive manufacturing. The total amount of industrial space under construction is now the highest in history, and the lack of construction opportunities is pushing new development further away from Prague, especially near the cities of Olomouc, Ostrava and Brno. 76% of the 1.1 million sq m under construction is already pre-leased, indicating that supply still outweighs demand. Rental prices thus continue to grow.
The pandemic has had a positive effect on online sales and retailers are reducing their brick-and-mortar stores in both size and number. On the other hand, the adoption of omnichannel strategies by major e-commerce platforms creates some new demand. New discount chains entering the Czech market are also doing very well.
Unfortunately, the optimism did not last long. The Russian invasion of the Ukraine is putting businesses in a difficult position again: pushing up inflation, interest rates and overall uncertainty.
The situation on the Czech economy is gradually improving as the industrial companies start to recover from the crisis. However, a return to the pre-pandemic conditions is still unlikely in 2022. According to Moody’s, GDP supported by higher private consumption and an improved foreign trade balance could grow by 5.2% in 2022. Outlooks of unemployment and possible reduction of the current account deficit also remain positive. Nevertheless, the rapidly growing inflation will play a significant role in the coming months. The Czech National Bank is expected to increase the base rate further, which might reach 4% at the end of Q1.
The Government decided not to implement any severe anti-pandemic measures in reaction to the current and hopefully the last COVID-19 wave in the Czech Republic, which brought more than 40,000 daily new cases at its peak at the end of January. However, eating in restaurants, going to the cinema, and many other leisure activities still require a valid COVID-19 certificate, and face masks are obligatory in most public places.
The demand for offices in Prague revived in the second year of the pandemic. On the other hand, the office new supply in 2021 was the lowest since the last five years, as the ongoing pandemic forced both office developers and tenants to postpone their decisions. More than a million sq m of modern warehouse space is currently under construction in the Czech Republic, and the industrial stock is approaching the 10 million benchmarks fast. 76% of the area under construction is already pre-leased, proving the persistent record demand on the market. Cushman & Wakefield data from the shopping centres showed 2021 sales 21% below the levels reached in 2019, while footfall lagged by 32% on average. Despite the ongoing challenges brought by the COVID-19 pandemic, the Czech retail market and physical retail segment remain attractive for retail brands, as the arrival of thirty-eight new international brands last year confirms.
Czechia’s economy is on its way to recovery from the pandemic-induced recession. After a record-breaking contraction, which continued into the spring because of a severe third wave of Covid-19, the economy is set to recover to its pre-pandemic levels by the end of this year.
By the end of October, about 57% of the population was fully vaccinated. However, the number of cases has been growing exponentially in the past several weeks with the arrival of the new Covid-19 variant. It is still to be seen whether the widespread vaccination and the large previous waves will reflect in much lower hospitalizations and fatalities in the months to come. In any case, it seems unlikely that the newly formed liberal Government will impose further global restrictions or country lockdown.
The Prague office market activity is healthy, downsizing eased a bit, and the inflow of sublease space halted. On the other hand, the demand may be affected by the supply chain and consequent automotive industry crisis, potentially leading to a drop in GDP growth. The number of relocations will also be affected by the historically highest fit-out costs accompanied by higher rental expectations from the developers.
The Czech industrial market is currently characterized by a minimal vacancy, record-high rents and historically highest take-up volume. Warehouse space under construction reaches almost 900,000 sq m, 74% of which is already pre-leased.
Covid-19 negatively affected turnovers and footfall in projects across all retail scheme types and geographies. While the average footfall annual decline 2019/2020 reached 35 %, differences among individual centres were significant, ranging from 10% in regional convenient schemes, such as retail parks, to 65% in comparison-based projects in city centres. About 31,000 sq m of retail leasable area is currently under construction within retail parks; an additional 38,000 sq m is being built or redeveloped in shopping centres and mixed-use schemes in the Czech Republic.
The Czech real estate market showed some interesting development over the first half of 2021:
Uncertainties with the future of office jobs, together with the caution of developers, is leading to the lowest annual supply of new office space in Prague since 2016. Leasing activity remains stable, albeit still below a 5-year average. The demand is distinguished by a continually low pre-lease take-up contributing to the delayed start of the construction of several planned projects.
According to Cushman & Wakefield’s Global Manufacturing Risk Index, the Czech Republic ranked fifth among the top manufacturing destinations globally, the first in Europe, evident from the record net demand, and the lowest vacancy rate in Q2 2021. A significant number of projects is currently under construction, with more than 70% of the planned deliveries already pre-leased.
After the complete opening of stores in the middle of May, both turnovers and footfall in shopping centres increased immediately above levels in the same period last year. Sales in May and June were even higher than in the pre-pandemic year 2019, while footfall kept relatively low. Hypermarkets and supermarkets performed the best, 30% above their turnovers in 2019 on average.
The situation in the high street locations is more complicated, with the lack of, especially international tourists. The total weekly metro passengers in the city centre stations reached only 50% of the pre-pandemic levels, in contrast with the locations driven by locals and office employees, which are getting closer to normal. The occupancy level in Prague’s hotels was just 10% during the first six months of this year, with revenue remaining far below the average of the pre-coronavirus years.
At the end of June, life in the Czech Republic shifted again towards the normal state, proven with the long-awaited opening of the first Primark store in Prague’s Wenceslas square. This 4,600 sq m store within a brand-new Flow building was ready to open in Autumn last year, halted by the numerous retail restrictions. However, even two weeks after the grand opening, significant queues in front of the shop’s entrance are common. Another eight new European brands entered the Czech market and opened their brick-and-mortar stores this year, mostly fashion and F&B retailers. This year’s first half has been the strongest in the past three years.
As the remaining restrictions are being gradually lifted (the Government announced 30 June to be the last day of compulsory face masks in public areas), companies continue to restructure the way of working of their employees. According to the recent Cushman & Wakefield survey among office tenants, the transfer from full office/full home-office work schemes to hybrid office models seems inevitable. The reduction of office workspaces and investments into leisure spaces and amenities will be the most visible trend in the second half of 2021, continuing further.
02 JuneAt the beginning of this week, the Czech Government abolished almost all business restrictions, following the continuously improving pandemic situation and the recent decision of the Highest Court. As a result, life in the country returned to normal except for a few preventive measures, such as face masks on public transport or a limited number of people in stores. About 13% of Czechs have completed the vaccination.
According to the Czech Statistical Office, the economic sentiment indicator measuring the confidence in the Czech economy reached 99.7 points in May, which is five percentage points higher than in April. In addition, the consumer confidence indicator increased by 8.9 percentage points in the same period - both indices showing reactions to the released restrictions.
The mood among investors in the Czech real estate market is optimistic again, with great interest in buying and a high amount of capital on the market. Logistics properties are at the top of investor preferences today. While the work from home schemes do not seem to be affecting Prague’s office market very much yet, investors’ interest also returns to retail, particularly projects involving supermarkets and retail parks. The private rented (residential) sector recently got a lot of attention too. However, opportunities in this segment remain scarce.
A gradual easing of lockdown restrictions continues in the Czech Republic. The number of new COVID-19 cases is similar to figures last seen in September 2020, and hospitals are treating a decreasing number of COVID-19 patients.
Since 10 May all retail and services could open with anti-pandemic measures, including a maximum number of people per shopping area and obligatory respirators. Customers can visit cafes and restaurants with outdoor space only, provided they have a valid antigene test or vaccination certificate.
Mandatory weekly testing of COVID-19 will remain in companies or offices until the end of June.
Almost 30% of the Czech population received at least one shot of the COVID-19 vaccine, which is slightly below the EU average.
The improving epidemiological situation finally enabled the Czech Government to release the anti-pandemic measures that have been in place since Christmas. Daily increments of new cases oscillate around 2,000, a rate which was last seen in September. The vaccination programme is finally speeding up and people over the age of 55 can now register to receive a vaccine. More than 3 million doses have been administered with around a million Czechs now vaccinated completely.
According to the development of a seven-day incidence of cases per 100,000 inhabitants in each of the 14 regions, the Government will gradually introduce 6 packages of measures. In 7 regions, including Prague, children can return to kindergartens and senior schools on 3 May, with continued regular testing. Galleries and museums may reopen. On the same day, across the whole country, beauty services may also resume trading. The rest of retail, except indoor restaurants, can start opening the following week.
According to a preliminary estimate of the Czech Statistical Office, GDP decreased by 0.3%, quarter-on-quarter, in Q1 2021. In the year-on-year comparison, it fell by 2.1%, which is a better result than expected. Employment increased by 0.2%, quarter-on-quarter, and the unemployment rate keeps slightly above 4%, which is one of the lowest rates in the EU.
The State of Emergency which lasted 188 days in the Czech Republic ended on 12 April, lifting the districts lockdown, night-time curfew and the ban of alcohol consumption in public places. Stores selling children’s apparel and stationery, farmers markets and laundry services may also reopen. Zoos and botanical gardens opened their outdoor premises with a maximum occupancy of 20%.
Schools resumed classes for Grades 1-5 on a bi-weekly basis, but children must be tested twice a week. All other children and students continue learning online. The limit of the number of people who can meet remains at two, while up to six pairs can do sport outdoors provided they are at least 10 metres apart.
According to the latest forecasts of the Ministry of Finance, the GDP should grow by 3.1% this year and 3.7% next year, mainly due to the expected recovery of private consumption. The inflation forecast was reviewed to 2.5% from the previous 1.9%, while the unemployment rate should increase to 3.6% in 2021 from 2.6% in 2020.
The country has been under its strictest version of lockdown for over five weeks now. Closed schools, mandatory testing in offices and factories and a ban on non-essential travel between municipalities and districts have borne some fruit. New daily COVID-19 cases have dropped to roughly a third of the peak, a month ago, and the number of COVID-19 patients in hospitals is decreasing at long last, albeit by a little. And while the numbers are still far from low, the Government is lifting some restrictions from Monday 12 April.
Most importantly, the State of Emergency (in effect since October) will not be extended, lifting the curfew and the travel ban automatically. Stores selling children's apparel and stationery as well as laundry services will be allowed to open. Zoos and botanical gardens can open their outdoor premises. Schools will resume classes for Grades 1-5 on a biweekly basis, but children will have to be tested twice a week. All other children and students will continue learning online.
Vaccinations are ongoing, with the number of doses available being the main obstacle to faster progress. Two large vaccination venues are set to open in the coming days in the two biggest conference centres in Prague, increasing capacity for the envisaged rise in vaccine deliveries in April and May.
The country has operated in a state of emergency for 6 months already. Finally, 3 weeks after the Government imposed another strict lockdown, the reproduction number and the number of new COVID-19 cases started to decline in the Czech Republic. The speed of improvement will seemingly not allow for easing of restrictions anytime soon, but some measures could be abolished after the Easter holiday in early April.
The Government decided to prioritise comprehensive testing over industry closure. From 6 April, the testing will be extended to smaller companies with up to 10 employees and to self-employed people who meet others within their activities. Up to 4 million citizens will thus undergo regular COVID-19 testing each week in the Czech Republic.
A year ago, the Czech Republic imposed the first rigid restrictions to fight against the new disease, which led to a relatively low number of infections and almost no deaths in Spring 2020. Yet, the country is now in the fourth and so far, the most severe wave of the pandemic, with over 12,000 average daily cases and nearly 22,000 deaths to date. Dozens of hospitals across the country are facing a lack of ICU beds and staff have declared a special emergency state, substantially reducing all non-emergency care.
The current anti-pandemic measures include: closed schools, restrictions on retail and services as well as restrictions on people's movement between municipalities and districts, and the obligatory wearing of respirator masks in public places from 1 March. Despite significant pressure from experts and health-care providers, the Czech Government decided not to close industry and businesses but agreed on compulsory testing in all companies with more than 50 employees.
Meanwhile, the vaccination programme is speeding up, helped by the extraordinary supply of vaccines from several EU countries and increased capacity in the vaccination centres.
Despite strict anti-pandemic measures, which have been in place since mid-December in the Czech Republic, the positive development in new COVID-19 cases, seen throughout January, seem to have reverted. The experts have already confirmed the prevalence of the British variant of the coronavirus in the population, most probably leading to another exponential growth of new cases in the country in the coming weeks. Thus, the discussion about the easing of current restrictions ended before it could start. The Government is likely to hold the original plan to partially open schools and shops at the beginning of March, but no one can discount there being another lockdown like the first hard lockdown if the situation gets worse.
After almost one month of strict lockdown, there is a decline in the number of new COVID-19 cases as well as related hospitalisations in the Czech Republic. However, the Government remains cautious in the easing of the anti-epidemic measures: the country experienced the steepest daily rise in new infections several days after the re-opening of shops, restaurants and schools in December. Some hesitance, frequent changes of the current anti-epidemic system, as well as ambiguous communication from the authorities has lead to a high level of uncertainty, especially for personal services, F&B, and accommodation providers. Consequently the willingness of people to abide by the rules diminishes.
As at 25 January less than 2% of Czech citizens, mostly within the high-risk groups, have received their COVID-19 vaccine. The speed of inoculation is limited by the vaccine shortages from Pfizer-BioNTech and Moderna, which will hopefully improve soon once the vaccine from Oxford-AstraZeneca is approved by the European Union.
The Czech National Bank published its first estimate of the COVID-19 impact on the Czech economy. After the bottom of the economic cycle was reached in April 2020, the Czech economy started up quickly again and it seems it was quite resistant to the second lockdown. Electricity consumption, which is used by CNB as a proxy to estimate economic development, stopped decreasing. The number of kilometres driven by trucks on Czech motorways is growing year-on-year. And the delayed figures on industry and exports also show year-on-year growth for the period October-November (industry) and September-November (export). If this development continues, there is a chance of a record year-on-year GDP growth in the second quarter of 2021.
The relatively normal operation of the Czech economy during December did not last long: only 3 days after the release of some measures, including reopening of shops and most services, the number of COVID-19 cases began to increase again and has been growing since. A strict lockdown following the highest anti-epidemic system level was re-imposed on 27 December, with further closure of shops, services and schools (with few exceptions).
Although as in other countries gatherings were limited, Christmas holidays encouraged people to socialise. The number of active cases exceeded the peak of the second wave at the turn of October and November. The Czech Republic currently reports one of the highest numbers of active cases and deaths per million in the world. The vaccination programme, which started at the end of the year with healthcare workers and critical infrastructure staff, gives great hope, even though the Government faces criticism for being too slow and unprepared. According to the current plan, most of the population should be inoculated by the end of summer.
The country’s position in the anti-epidemic ranking system moved to the third, less restricted level on 3 December. All shops and services may open again but limited to one person per 15 sq m of operating area and a queue management system inside and outside of all shops.
Food courts in shopping centres are further restricted, they may only sell take-away food. Children’s play spaces remain closed. Bars and restaurants may now operate again, with restricted opening hours between 6.00 to 10.00. A maximum of 4 seated guests per table is allowed. Outdoor events are allowed with up to 50 people, while 10 people can meet inside.
Following the reopening of shopping centres after the first wave of the corona crisis, both performance indicators grew again, and revenue even exceeded last year’s figures in a year-on-year comparison. The impact on footfall and turnover was lower in the second wave, with footfall slightly growing in recent weeks. With Christmas approaching, we expect customers to return to shopping centres as soon as they can, resulting in an exceptional increase in footfall and revenue. >>View the data
Following examples from other countries, the Czech Government introduced an anti-epidemic system (PES), which scores the COVID-19 situation daily on a 1-5 scale with corresponding measures.
All five levels of risk require a state of emergency to be in effect, which is likely to remain at least until 12 December. The number of new daily cases has been decreasing since the end of October, although the weekly average remains relatively high at around 4,500. The good news is that the number of people in hospitals, as well as daily deaths, continue to fall.
As the situation has been improving over the last weeks, the country is currently in the fourth risk level, which means some relaxation of the restrictions. From 23 November up to 6 people can gather, curfew was shortened to between 23.00 and 5.00, sports are now permitted outside. Only shops with essential goods may remain open outside of the curfew times and the number of people inside the store at any one time is limited to 1 person per 15 sq m of operating area. Shops must remain closed on Sundays and public holidays.
The Czech GDP is expected to contract by 6.3% in 2020 and the forecast for the following year has been moderated to 5.7%, as the second wave of COVID-19 has forces the government to re-impose strict containment measures, including closed schools, shops and restaurants.
The number of new cases recently started decreasing. However, the country currently hasthe highest number of COVID-19 patients in hospital per 100,000 (almost 2,000% up from the spring peak) according to the NYT.
Q3 results from the commercial property markets show that the quarterly net demand for office space was the lowest in the last decade and intensive growth of available space for sublease continues as employers consider more flexible working schemes.
Demand for industrial properties is no longer dominated by manufacturers. Logistics, distribution and e-commerce have been driving demand since the start of the pandemic.
The outlook for the retail market seems to be the most complicated: while regional shopping centres were recovering fast in Q3, Prague schemes, and high streets in particular, are struggling with the lack of tourists, office employees and people in traffic hubs, meaning their way back to sales growth will be more difficult in the periods to come.
In the meantime, activity in these sectors on the capital markets side in the Czech Republic (year-to date), was down by two thirds in comparison with 2019.
The Czech Republic, celebrated as a first wave success with infection rates among the lowest on the continent, is now among the highest with daily cases exceeding 10,000 in the past days. Existing restrictions were apparently not working, partly due to the fact, that they were neither widely accepted nor followed by the public. Several rounds of announced containment measures culminated in an inevitable lockdown, which will come into effect on 28 October.
Restrictions on free movement exclude essential shopping, travel to and from work, family or health care facilities visits. People can also visit parks and recreational properties. The number of people that can meet in public places has been limited to 2, weddings or funerals may have a maximum of 10 guests. People must not leave their homes between 20:00 and 5:00 and most shops will have to close on Sundays. Working from home should be obligatory whenever possible, although this restriction is still at the discretion of individual employers.
The Government is trying to prevent the collapse of the already stretched health care system, yet the peak of the pandemic in the Czech Republic seems to be some way off.
Current country-wide restrictions, which should be applied until the reproduction rate is reduced to below 0.8, include closing schools (except kindergartens), clubs, bars, restaurants (take-away is possible), indoor and outdoor sport and cultural facilities. Only two people may shop together, a maximum of 6 people can gather outside and face masks are still obligatory in all buildings and on public transport. Working from home is recommended although not mandatory.
Compared to the measures during the first wave of the pandemic, all shops can now open and there is no restriction on free movement of people. However, the public budget has already been stretched considerably and the economy could be affected much more than previously expected.
At the end of August, the second wave of the COVID-19 pandemic broke out in the Czech Republic. Obligatory face masks were reintroduced first on public transport, later with the increasing number of infected people, also in all indoor spaces at the beginning of September. Other measures followed shortly afterwards, including limiting opening hours of bars and restaurants to 10pm. Although, the Czech Republic reports the third highest number of average daily cases in Europe after Montenegro and Spain, current measures seem to be working, and the growth of new cases has started to slow down.
According to recent figures, retail sales returned to pre-Covid levels over the summer, especially in convenient shopping centres and schemes in regions. On the other hand, with the mitigation of risks, footfall remains low as people try to avoid spending time in shops and rationalise their purchases in general.
Construction has slowed down in the office market in Prague. The recorded vacancy rate has not yet increased dramatically, but the figure does not include sub-leases, which are becoming more common. There is still interest in premium premises, but overall, vacancy is expected to grow as individual companies prepare to streamline the use of leased premises in connection with the sudden increase in the popularity (or sometimes even the necessity) of working from home.
The Czech industrial market is the least affected, largely due to its flexibility, which allows for a relatively rapid construction of new real estate if there is a demand. Consequently, we have been seeing a further decline in speculative construction.
The end of summer and the beginning of a new academic year have brought an expected rise in the number of newly confirmed COVID-19 cases. In Prague, the current situation is already showing signs of community transmission, although cases are mostly reported in the younger and middle-aged generation, with predominantly asymptomatic or mild disease. The increased incidence in Prague is not different from the situation in large agglomerations in Europe. As of 1 September, the Ministry of Health reintroduced some measures including mandatory face masks at healthcare and social service facilities, on public transport and in public offices and voting rooms in the Czech Republic.
In the meantime, the Czech Statistical Office reported a more accurate estimate of the Czech GDP in Q2 2020, which dropped by 11% y/y. This negative development was caused mainly by a decline of foreign demand, household consumption and investment activity. The economy is expected to fall by 7.2% in 2020 and subsequently strengthen by 5.0% in 2021 according to the Czech National Bank. The CNB analysts are of the opinion that regarding the key indicators and data from industry or retail, a slight economic recovery should take place as early as Q3 2020.
The weekly average number of new COVID-19 positive patients exceeded 200 during the first half of August. This is a number close to values reached in the Czech Republic at the beginning of the pandemic in April. Several countries including popular holiday destinations such as Greece have responded to the growing number of infections by imposing some entry measures for Czech tourists. The measures were however cancelled after a few days following diplomatic negotiations.
Despite the fact that the higher amount of positive cases was partly caused by more frequent testing and that the share of people with severe course of the disease is smaller than 2%, the Government has decided to reintroduce a comprehensive obligation to wear face masks on public transport, indoor public spaces including shops and public events regardless of number of participants from 1 September. On the other hand, the obligatory quarantine of infected people without symptoms will be shortened from two weeks to 10 days.
Discussions regarding participation in the upcoming regional and partly Senate elections, which will take place at the beginning of October, ended with a compromise. Even if voting by mail will still not be possible, parties in Parliament finally agreed on three methods of voting under quarantine: drive-in voting, creation of special polling stations, such as nursing homes, and electoral commissions that would visit people’s homes.
The Government responded to the increasing number of new cases of COVID-19 last week. The daily diagnosed infected patients have doubled in the second half of July from an average of 100 to 200. The Government reintroduced a comprehensive obligation to have face masks at indoor events for more than 100 people beginning 26 July and from 27 July the capacity of mass events was reduced to 500 people. However, at large events, it is possible to create up to 5 separate sectors with 500 people per sector. Other measures against the spread of the disease are very local. At the end of June, nationwide measures ended and were introduced at the regional level. Now they are even more specified at the district level, as there were significant differences between districts within individual regions. The Ministry of Health publishes a map with their evaluation. Currently, only 9 districts out of 76 show a risk of possible community spread, among others the capital city of Prague, however, the situation in these districts is still under the control of hygienists.
GDP adjusted for price influences and seasonally was 8.4% lower q/q in Q2 2020. It dropped 10.7% y/y, according to figures from the Czech Statistical Office. The negative development was caused mainly by a drop in foreign demand, lower household consumption, and investment activity. Gross Value Added (GVA) decreased in almost all economic sectors. The development in the industry as well as in commerce, transport, accommodation and hospitality had a significantly negative impact on the drop of GVA.
Nevertheless, the Czech economy has surprised with its resilience. According to preliminary estimates by statisticians, results had positively exceeded expectations, even though it had certainly been the worst drop in the country’s history. Economists claim it was caused by the relatively favourable development in retail at the time when the economy started re-opening in May and when consumers compensated quite significantly for unrealised retail expenditures in the preceding 6 weeks could be considered a better-than-expected result under these conditions. The better result for the second quarter improves the outlook for the year-long GDP at the level of -7% to -8%.
The situation regarding COVID-19 has started to change in the past few weeks in the Czech Republic: the number of active cases has reached figures similar to those in April, which was the peak period of the pandemic. However, this time the outbreaks appear only in some closely monitored counties and the majority of positively tested people have the asymptomatic course of the disease. In the Moravian-Silesian region, the obligation to wear face masks on public transport and indoors has been reintroduced and bars and restaurants must be closed from 11pm until 8am.
The Czech economy continues its road to recovery, as the economic activity responds to the lifting of lockdown. While the labour market has been relatively resilient so far and the Czech Republic had the lowest unemployment rate in the EU in May, further increase in unemployment is expected as the short-term work scheme winds down.
A few recent transactions show that investment sentiment is improving significantly in the Czech Republic. Czech investors are gradually returning to the market, looking for opportunities to allocate their capital. However, the mood on the market is still cautious and a return to previous levels of activity could easily take another two years.
The Czech Republic continues easing restrictions imposed due to COVID-19. As of 1 July, face masks are no longer required on public transport and in public buildings, including shopping centres. Restrictions on restaurant opening hours have been lifted. Face masks are required only on the Prague metro, in medical establishments and in parts of the north-eastern Moravian-Silesian region, where infections have spiked in two neighbouring coal mining areas. The area most seriously impacted is the mining town of Karvina. Several hundred miners and their family members have been tested positive. Most have only mild symptoms. They are being quarantined and the authorities are tracing their contacts to limit any further spreading of the virus. Access to the area remains without restrictions.
Business associations presented the government with 30 measures to support economic recovery. They are proposing lowering the fuel tax and introducing extraordinary write-offs for newly acquired assets. The Automobile Industry Association is demanding that the state support liquidity and employment by anchoring the German Kurzarbeit model in Czech law.
The COVID-19 situation continues to improve in the Czech Republic. The limit for attendees to organised events was increased from 500 to 1,000 people and even up to 5,000 people if they are separated into sectors. The operation of swimming pools, zoos, cultural facilities and playgrounds within shopping centres have returned to normal as well. The obligation to wear face masks inside buildings and public transport is expected to be abolished from 1 July across the whole country except for Prague and places with local outbreaks.
Country officials are still devoted to preventing a second wave of the disease, which has already occurred in some countries. Nevertheless, the Government has declared that it will not be possible to restrict the economy to the same extent as in the spring even if there is an increase in the number of cases. If restrictive measures are put in place again, they will certainly first curb large events or only apply them to certain locations.
Despite the shops reopening, retailers in shopping centres have still been recording lower sales than in the same period last year. This is the case regardless of whether the shops could be opened during the lockdown period or not. Many retailers are therefore changing their strategy. They are focusing on online sales channels and some brands intend to reduce the number of stores they occupy.
On Sunday, 14 June the total number of coronavirus infections in the Czech Republic exceeded 10,000. However, the number of active cases remains below 3,000 since mid-May and the situation is stable enough for epidemiologists to recommend further relaxing of preventive measures. The Ministry of Health is now focusing on the timely detection of local outbreaks of infection, which are under control. At the same time, early warning system mechanisms are being set up across the country.
Travelling to most EU countries is now possible without the COVID-19 test and airlines are resuming their flights abroad. Nevertheless, the number of tourists expected to visit the country will be significantly lower than in previous years. The hotel and high street sectors will be hit hard particularly in Prague, which has been one of the most visited cities in Europe recently.
The situation regarding the spread of the COVID-19 infection has remained stable for 6 weeks now and the Government is continuing with the planned relaxation of lockdown measures. There are still some restrictions on borders, the maximum number of people that can meet is 500 and face masks are obligatory on public transport.
According to Oxford Economics, GDP declined 3.6% in Q1 2020, which is the sharpest quarterly contraction in history and a fall of 5.2% is expected for the year 2020. Some restrictions will still be hampering the recovery in hospitality, tourism and culture, while many consumers will delay durable purchases. At the same time, investment plans are likely to be delayed rather than lost, but the prevailing uncertainty will exacerbate the output shock in H1 this year.
The unemployment rate rose 0.6pp to 3.6% in May since the outbreak of the crisis, a large increase by historical standards. On the other hand, it is still relatively low in the European context, attributed to the Government’s policies supporting employment.
The European Commission approved the Czech public support programme COVID - rent. The programme means compensation for the period from April to June 2020: the state will pay 50% of rents to tenants if lessors provide a discount of 30%.
Despite the significant easing of measures since 11 May, the situation regarding the spread of COVID-19 remains stable in the Czech Republic and people are gradually returning to their normal lives, including shopping, going to restaurants and leisure activities.
According to our estimates, in the first 2 weeks after the shopping centres reopened, the number of customers was only 30% lower than in the same period last year. Equa bank reported, that payment card transactions have returned to their pre-COVID level in the middle of May. In some categories, such as clothing and footwear or health and beauty, they have even been recording an increase.
The number of people returning to the office from their home office is increasing as well. This trend is visible, especially in the increasing intensity of individuals and public transport in large cities. Cultural events are still limited to 300 people, and it is mandatory to wear face masks inside public buildings, as well as on public transport.
All road and railway crossings with Germany and Austria have been open since 26 May, but people must still have a negative test for COVID-19 and tourists are not allowed to enter the Czech Republic. Cross-border contact with Slovakia is easier provided the traveller returns within 48 hours. Border closures except for commuters persist in Poland.
The spread of COVID-19 remains stable/good with only some local outbreaks. As of 25 May, most facilities and services can be opened, and are working again with primary schools; public gatherings are allowed up to 300 people. The Government Ministers also supported the easing of the border regime from 26 May.
Importantly for tenants and landlords, the Government approved a long term negotiated support programme, COVID-rent, which means state compensation of rents up to 50% provided the landlord offers a 30% discount off the rent and the tenant pays the remaining 20%. The maximum amount of support will be CZK 10 million for the period April to June. The European SURE loan programme has also been approved in the amount of €100 billion. It should help fund kurzarbeit or direct assistance for self-employed people.
According to an e-shop solutions provider Shoptet, 210 new online shops were established by companies in April 2020, including producers of liquors, toys and furniture. The main reason for this is the creation of a simple sales channel able to work under any circumstances. Over 70% of companies plan to keep their new e-shop.
After over 2 months The State of Emergency in the Czech Republic ended on Sunday, 17 May. The number of new cases has remained below 100 since 30 April and the last wave of easing restrictions is expected to be implemented on Monday, 25 May. Restaurants, cafés and accommodation facilities, as well as swimming pools and zoological gardens should reopen. Mass events for up to 300 people is expected to be permitted, medical and social facilities will allow visitors and elementary schools will open for pupils. At the same time, face masks will no longer be obligatory outside, although many are expected to continue to wear them. There is also debate about the gradual opening of borders.
Economic performance in Q1 2020 dropped 3.6% q/q and 2.2% y/y, according to preliminary estimates by the Czech Statistical Office. This was caused by the cost shock and the disintegration of the supply chain and the forced and voluntary closing of shops. The subsequent demand shock will probably not be as dramatic but likely to be longer instead. Recent forecasts by the Czech National Bank suggests, that the economy will fall by 8.0% in 2020.
According to the Labour Office, the number of unemployed persons rose to 3.4% at the end of April, which is a relatively low number in the EU context. Unemployment is expected to continue to rise as employees won't be able to get further compensation after the end of the State of Emergency.
From Monday 11 May a significant lockdown easing means people can visit shopping centres, gardens, restaurants, or go to cultural events for up to 100 people. Barbershops, massage services, manicures and pedicures can start operating again. The ban on the operation of international rail and bus transport was also lifted.
In the Czech Republic, people must still wear face masks in public spaces until June. Although epidemiologists admit that it is likely to be reintroduced in the autumn with the onset of a new flu season.
The Government approved the National Reform Programme of the Czech Republic 2020 (NRP). The document describes measures aimed at restoring economic development and its long-term sustainability. The document will be submitted to the European Commission, which evaluates the Czech economic policy and then proposes recommendations. The NRP has been adapted and updated to consider cabinet action in response to the COVID-19 pandemic.
The Ministry for Regional Development is preparing an extraordinary action plan for the rescue and subsequent restart of the tourism sector for the period 2020 - 2022.
Czech embassies in selected countries have started to accept applications for government visa programmes. This primarily applies to programmes pertaining to workers. Entry will also be enabled for holders of long-term visas so they can accept residence permits. Upon entry into the country, they will have to present a COVID-19 test. The measure also legalises the stay of foreigners whose residence permit expired during the State of Emergency. This is a reaction to the acute shortage of foreign workers in some Czech companies.
The epidemiological situation continues in a positive direction in the Czech Republic with only dozens of new cases daily. The Government has therefore decided to speed up the loosening of preventative measures. The retail market is eagerly awaiting 11 May, when shopping centres and stores over 2,500 sq m will be reopened. Many traders were relieved, as this step was not planned to take place until 8 June.
Negotiations are ongoing regarding other forms of government aid to companies and entrepreneurs. There is talk, for example, of rent compensation, where the tenants, the landlords, and the state would share the rent of closed establishments in thirds (i.e. equally). In addition to compensation, investment incentives and subsidies to support business real estate and infrastructure are being prepared, extended, or expanded. This would also apply to individuals to reduce the energy intensity of real estate and/or improve rainwater management.
Travel across the border is also returning, albeit cautiously. Trains and buses will start crossing the border again starting on 11 May, and Václav Havel's Prague Airport has announced the resumption of its first flights. Although due to strict measures, including a possible two-week quarantine after return, it is still recommended not to go anywhere unless necessary. The restoration of international tourism will likely not take place until July, but the specifics regarding which countries this will apply to remain unknown. It is probable the re-opening will focus on countries of Eastern Europe, including Austria and Croatia, where the situation with the spread of COVID-19 is not as serious as in some Western European countries.
The hospitality industry is, therefore, trying to benefit from the increased interest in spending holidays in the Czech Republic. Many travel agencies have already reserved domestic hotels and even campsites to compensate for losses from cancelled foreign trips.
The epidemic situation in the country has been improving rapidly and the lock-down rules have been relaxed.
Based on a decision by the Government, the Czech Ministry of Health, together with the Ministry of Industry and Trade and the Ministry of Education, Youth and Sports, have updated the schedule of easing of entrepreneurial activities and measures at schools and educational facilities.
Instead of 5 stages, business activities will be relaxed in 4 stages by 25 May 2020.
Stores with an area of up to 2,500 sq m can open on 27 April 2020. However, stores located in shopping centres can only open on 11 May (still almost a month earlier than was previously planned).
Also on 11 May, gyms and fitness centres, driving schools, zoos and botanical gardens (except for indoor areas) can reopen.
The Government made it possible for universities and spa facilities to open with a limited regime. Rules have been changed for crossing the state border.
Conditions for opening of some services related to the tourism remain unclear.
Parliament confirmed the prolonging of the current state of emergency until the end of April and the Government announced long-awaited release plans for lifting the restrictions for businesses and services in 5 waves:
- 20 April – crafts, farmers’ markets, car showrooms
- 27 April – shops sized up to 200 sq m
- 11 May – shops sized up to 1,000 sq m
- 25 May – restaurants only with window sales or outside seating, beauty services, museums, galleries and zoos
- 8 June – shopping centres and business premises over 1,000 sq m not located in shopping centres, rest of restaurants, hotels, taxis, theatres or mass events with a defined number of participants
The plan is based on the proposal of epidemiologists who see shopping centres as places with a very high risk of infection. Therefore, closed units in shopping centres over 5,000 sq m should open as late as the last wave, regardless of their individual size. This decision has been consequently criticised by many stakeholders and some shopping centre owners endeavour to amend the decision.
On the other hand, epidemiologists admit that the release measures might be reduced, should the number of newly infected people increase to around 400 people per day (currently fluctuating around 115).
The Chamber of Deputies has approved the extension of the state of emergency until 30 April 2020, which includes closed borders and movement restrictions.
However, the Health Minister said that the uncontrolled spread of the coronavirus has been halted and it is possible to prepare for a gradual return to normal life, as the share of positive cases among the overall number of conducted tests continues to fall. Consequently, on 6 April the Czech Government approved the easing of selected emergency measures and a system of a smart quarantine using mobile operators’ data has been put in place.
A widespread discussion about the COVID-19 measures and its impact on the economy has been in full swing. In its analysis, the Czech National Bank said that the economy slowed even before the outbreak of the pandemic. However, restrictive measures do not trigger a classical recession, it is the immediate shutdown of some parts of the economy. Therefore, the Government has adopted a wide range of fiscal measures and is preparing to release restrictions.
In March, the unemployment rate in the Czech Republic (3%) was not yet affected by measures to counter the spread of the coronavirus and showed a much better result than the markets were expecting. That said, many expect the coronavirus to impact the unemployment rate over time to 8%.
Preliminary Q1 2020 data on real estate markets show about 75% y/y decline of investment activity in the Czech Republic. Office transactions were down by two thirds.
It has been 3 weeks since the start of the state of emergency in the Czech Republic and the Government proposed its extension at least until the end of April. However, current growth of the number of confirmed cases became linear and the strict crisis measures including restrictions of the free movement of people could be moderated soon.
Meanwhile, impact of COVID-19 on Czech real estate became clearer: construction activity is expected to slow down in the short-term mainly due to foreign labour shortages and social distancing measures. This will cause delays in the completion of new office, industrial and residential buildings, and refurbishments.
Occupiers have postponed many office leasing transactions, with companies more interested in shorter and more flexible lease terms. Retail and hospitality sectors are the hardest hit segments, similarly to the other European markets. There are both positive and negative effects in the logistics sector. On the one hand it is facing difficulties due to suspended deliveries of goods from abroad and the risk of employees being quarantined. On the other hand, the increasing demand for e-commerce will help the sector.
The global pandemic has accelerated the implementation of digital technologies in many aspects: from a digitalisation of the school system, attempts to use telehealth solutions for at-home symptom checking or extensive use of contactless payments to the effort to sell more online. In the end, we may see a transformation of the Czech economy with many positive outcomes.
Shortly after the first confirmed cases in the Czech Republic at the beginning of March, and prior to many other countries in Europe, the Czech Government gradually introduced strict measures to prevent an outburst of COVID-19, including obligatory wearing of face masks, closed borders, schools and most shops.
Subsequently, the number of patients among the most vulnerable elderly people as well as the number of dead is still relatively small, and the Czech healthcare system seems to cope with the challenge well.
The Government has provided relief and compensation for Czech businesses. The Czech Republic had one of the lowest levels of public debt and unemployment in the EU before the crisis which promises a comparatively fast recovery for the Czech economy after the crisis.
However, many companies are able to continue their business: the office based professions have successfully moved to the home office and e-commerce operators report up to four times the turnover they normally see this time of a year.
We are witnessing an unprecedented social cohesion in the whole Czech Republic with the common motto “We can do it together”.