| Author: |
Martina Marečková |
| Publication: |
Czech business weekly |
| Date: |
2.5.2006 |
An increasing trend of investment in the Czech real estate market means that investors must now explore more regions and market segments for attractive opportunities, says Glen Lonie, a partner for tax and legal services at PwC.
European real estate investors can expect healthy returns for the industry this year, according to the investment report Emerging Trends in Real Estate Europe 2006, which was published in March by the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC). Lonie, who has worked in CEE for 13 years, joined the Prague-based branch of PwC in 2000. As a real estate industry leader for the CEE - CIS region in PwC, Lonie feels that Prague has great potential for both investment and development.
Q: The Collective Investment Act is expected to be signed into law by President Václav Klaus in the coming weeks. In your opinion, what effect is the law going to have on the Czech real estate market? Do you think there's potential for real-estate funds here?
A: The introduction of new Czech real estate funds will have a number of effects. First of all, it opens up the Czech real estate market to retail investors. This wasn't really possible before, because the previous law required a minimum investment of Kč 2 million (Euro 70,500). It also didn't allow for a proper mix of development and investment activities. With these new funds for retail investors you've got a more crowded market place, whereas there's already too much money looking to buy a limited supply of property. Either these funds will need to look at a niche that international funds aren't in at the moment, or they will be competing with existing investors, which could have an impact on property prices and returns.
Q: Do you think the market will develop here along the lines of Germany, for example?
A: Germany is probably not the best benchmark to measure against, as the German open-end fund sector has recently had some problems. Because properties were overvalued in Germany, people got very nervous about the funds. If people change their minds about investing in real estate they can take their money out of the fund, but the fund can't sell the real estate to get a quick return. The issue then is that you have a short-term security backed by longterm illiquid assets. The key to avoid this situation is acquiring properties into the funds at appropriate values. With the Czech funds, in addition to the possibility for open-end funds similar to those in Germany, there will also be so-called funds of qualified investors. This second type of fund will likely look at more educated investors who are looking at doing collective real estate investments. The fact that the new funds have an advantageous tax rate of 5 percent means that funds of qualified investors will also be popular to international investors.
Q: Do you have a more specific outlook on the Czech real estate market than that which was presented in the Emerging Trends in Real Estate Europe 2006 survey published in March by PwC and the Urban Land Institute?
A: The Emerging Trends in Real Estate survey is created through an interview process with leading opinionmakers in the real estate markets as to their expectations for the coming year. The main trend I see is an increasing amount of money still looking to invest in Czech real estate. This means that pricing is going up and yields are going down. To secure investment opportunities, investors are looking into all classes and types of property. Investors are also looking to buy into ongoing development projects or to forward purchase properties to secure better returns. There is also a move out to the regions. Although Prague is still popular, there is increasing development and investment in Plzeň [West Bohemia], Brno [South Moravia] and Ostrava [north Moravia].
Q: In what segments?
A: All segments are attracting interest, but activity in the regions has become more focused on office and hotels. Retail has historically been more widely spread, as any city with a reasonable size of population has been serviced by shopping centers. Logistics, by its nature, grows according to where the roads and population centers are. Logistics also follows FDI [foreign direct investment], so if you currently have large plans in North Moravia, then there will be greater need for logistics properties to support, for example, [South Korean carmaker] Hyundai.
Q: In this survey, you also said that the CEE - CIS region will be driven this year by investment in shopping centers and retail. How long do you think this trend can continue in the Czech Republic?
A: To me the key issue seems to be saturation. When you get too many centers opening in one location at one time you can't attract the tenants into all the centers. If you can't get brands to go into the centers, then it can be difficult to get the balance to attract shoppers and deliver a profitable center. Of course, there are always opportunities to improve existing centers in the future.
Q: Apart from retail, what sectors are attractive for investors?
A: Logistics is very popular now, and there are a number of reasons for that. Obviously there is increasing domestic wealth, there's a lot of FDI that needs support, and the fact that the Czech Republic is very well located geographically, not only as a hub for Central Europe but also for servicing Western Europe, particularly Germany and Austria.
Q: Compared to other CEE countries, how is the Czech market different or specific?
A: The Czech Republic very closely tracks Hungary and Poland. Poland's market is much bigger market than the Czech market, because it has a large population as well as six large regional cities with more than a million people, whereas regional cities in the Czech Republic have 300,000400,000 people. This leads to greater possibilities for office markets in Poland. The Czech Republic has a much better infrastructure than Poland and may be a better center for logistics. Prague is obviously a major tourist center, so it has very good possibilities for the hotel market. A lot of the major hotel operators find it difficult to secure sites in Prague, because hotels have been a very popular segment over the last few years.
Q: How are other markets developing in the region?
A: Slovakia is an up-and-coming market. Another country that is very popular now is Russia. Because it is a huge country with a very poor stock of existing property, it provides major development opportunities. A lot of the funds were initially only focused on Central Europe and often only Prague, Budapest and Warsaw, as capital cities in EU member states. As yields have compressed so much in Central Europe, there has been a move to the East in order to get the returns investors are looking for. Romania, Bulgaria, the countries of former Yugoslavia, and Ukraine are now on investors' lists.
