DESPITE SOLID GROWTH IN Q1-Q3 2022, THE CZECH ECONOMY IS HEADING FOR STAGNATION
The Czech economy is experiencing inflationary pressures from various sources, causing prices to rise rapidly. Domestic and foreign factors such as higher energy prices and increased producer margins are pushing consumer prices. Despite this, household incomes remain solid. The Czech economy will continue to operate despite ongoing problems with global logistics and supplies of materials and components for production. Given its significant industrial orientation, these problems will slow growth in total domestic economic activity until mid-2023. However, their impact on GDP will be smaller than last year and gradually disappear next year.
Inflation peaked during the summer and will slowly decline, especially once the energy price cap comes into effect. However, this does not mean that a return to 2% inflation will be quick, given how broad-based inflation is. The central bank has switched to a wait-and-see mode and will not implement any further rate hikes. Instead, it expects to start cutting rates in the spring of 2023. Still, the return of short-term and long-term interest rates to their equilibrium values will take until 2024.
In Q3 2022, over 511,000 sq m of warehouse space was completed within 18 industrial parks. As a result, the modern industrial stock amounted to 10.6 million sq m. Additionally, developers plan to deliver 340,000 sq m by the end of this year, 72% of which is already pre-leased. During the first three quarters of 2022, gross take-up exceeded 1.8 million sq m, increasing by 2% year-on-year. The vacancy rate was reported at 1.0% end of Q3 2022, which is the lowest figure in the modern history of the Czech market. The shortage of vacant space results in continuous upward rental pressure.
Although gross office take-up grew by 11% q-o-q, net take-up increased by 0.5%. In Q3 2022, relatively robust occupier demand combined with limited new supply resulted in the vacancy rate decreasing by 0.3 pp compared to the previous quarter. After the increase of 13% in Q2 2022, during Q3 prime rents were stable. Given the evident shortage of quality and well-located office space in Prague, prime rents are forecast to grow to €30.00/sq m/month. At the same time, the price gap keeps widening between the office schemes, subject to their age, quality, and location attributes.
Performance of the shopping centres remained stable: while the footfall kept about 8% lower compared to pre-pandemic levels in Q3, mall sales remained well above their 2019 volumes (20% on average). Despite that a major part of the sales growth can be accounted to the rising prices of goods and services, sales grew more significantly in some categories, such as Household Goods, Health & Beauty or Electronics. However, in general, retail sales volumes (in real prices) have continued declining since May 2021, according to the official statistics. Some tenants, especially those weakened by the previous Covid crisis, may struggle with further expansion, refurbishment or development. On the other hand, others might use the opportunity to access prime locations that were previously not available to them.
The total volume of investments in the traditional real estate sectors accounted for €146 million in Q3 2022, predominantly in Prague office transactions, totalling €1.2billion year-to-date, which is still about 33% more than the volume reached in the same period last year. Four office transactions were closed last quarter, including BB Centrum Gamma, Green Point, Immorealoffice portfolio and Lannův Palác, all in Prague.
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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