MARKET OVERVIEW Czech Republic Q3 217 1 Market Overview Q3 217 CZECH REPUBLIC
The Czech National Bank increased the base interest rates for the second time in four months to.5%. The shortage of labour is the theme of 217. By the end of September, the unemployment rate stood at a record low of 2.7%. With 2.7 bn of transactions reached by the end of Q3 (already at the full year figure of 215) we will see another strong year for Czech real estate investment. Yields are at cyclical lows with the exception of high street retail which experienced further minor yield compression. Q1-Q3 gross office demand grew by 23% y-o-y resulting in 389,3 sq m of deals. Vacancy was further trimmed in Q3 to 7.7% in spite of new office projects completions. An active development pipeline comprises some 39,9 sq m with 88,3 sq m due to come on line in Q 217. In spite of increased volume of speculative development, the markets successfully absorbed new space. The vacancy rate thus decreased further to 3.%. Limited availability increases the prospect of rental growth across the country. 2 Market Overview Q3 217 CZECH REPUBLIC
Q3 217 OVERVIEW > The Czech National Bank became the first central bank in Europe to raise interest rates back in August in this current cycle. That move and the recent 25 basis points hike on 2 nd November leaves the key 2-week repo rate at.5%. > The Czech National Bank (CNB) reviewed its forecast of GDP growth up for the full year on the back of Q2 s strong data (.7% year on year). The latest 217 forecast is set at.5%. > Further interest rates hikes are widely expected to continue in this pre-set trend of 25 basis points uplifts to allow both investors as well as local businesses to adapt to the changing conditions without any sudden shocks. > October s general election resulted in no outright majority for any one political party, however the ANO party fronted by local billionaire Andrej Babiš garnered 3% of the votes. So far Mr Babiš has not been able to form a governing coalition, with many other parties refusing to join forces with his party. It remains to be seen whether a minority government would be permitted by the Czech Chamber of Deputies. Therefore, we expect a drawn out process as the selection process of a new Czech government is rather complicated. > The labour market saw the lowest unemployment in the history of the Czech Republic i.e. 2.7% in September. Wage growth therefore accelerated across both the public and private sectors at an estimated rate of 7% for 217, with further increases expected next year. > The CNB expects GDP growth to reach 3.% in 218 and 3.1% in 219. Inflation is forecasted to exceed 2% (the CNB target), yet we do not expect the national bank to use other measures to control inflation other than base rate changes. > Wage growth and the continuing strong performance of export markets may actually render the CNB s inflation forecast conservative. > We expect the exchange rate of Czech Koruna against Euro to continue strengthening, tracking the interest rate hikes. In the last quarter of 217, it could stabilise around the 25.5 CZK/EUR mark. > While the first interest rate increase had little impact on the residential mortgage market, the second increase has already been reflected by higher mortgage costs. Further rate hikes should contribute to market stabilisation and may stymie further residential price growth. Prices are presently at such a level that an apartment purchase in Prague is not affordable for many middle class workers, even those with above average incomes. CZECH GDP GROWTH & FORECAST (ANNUAL VAR.%) 2-2 - - Source: Focus Economics CZECH UNEMPLOYMENT RATE (% OF ACTIVE POPULATION, AVERAGE) 8 7 5 3 Source: Focus Economics CZECH INFLATION RATE & FORECAST (CPI, ANNUAL VARIATION IN %) 8 2 Source: Focus Economics 3 Market Overview Q3 217 CZECH REPUBLIC
Q3 21 Q 21 Q1 211 Q2 211 Q3 211 Q 211 Q1 212 Q2 212 Q3 212 Q 212 Q1 213 Q2 213 Q3 213 Q 213 Q1 21 Q2 21 Q3 21 Q 21 Q1 215 Q2 215 Q3 215 Q 215 Q1 21 Q2 21 Q3 21 Q 21 Q1 217 Q2 217 Q3 217 Q3 217 OVERVIEW > Following a strong start in the first half of 217, with Q1 at 1. billion and Q2 at 5 million worth of transactions, Q3 tailed off the pace a bit with some 5 million of deals being closed. Total cumulative investment volumes therefore reached 2.7 billion by the close of Q3. Notably this figure was actually already equal to the full year figure for 215 and testimony to recent growing levels of investor interest in Czech real estate. > On a year on year (y-o-y) comparison and despite the record-breaking year of 21, the three quarters of 217 also showed an increase of 71% on the same point last year. > The largest transactions in Q3 were in the range of million to 7 million: The Blox office building in Prague was acquired by CFH Group for 8.5 million, Oasis Florenc was purchased for 3 million by Corpus Sireo as they entered the Czech market for the first time and the Královo Pole shopping centre in Brno was acquired by CPI Group for an estimated million. > Overall, we have seen investment flows coming into the Czech real estate market form a remarkable 18 different foreign countries since the start of 217. > With the exception of high street retail properties, where prime yields compressed by 25 basis points to 3.5%, all other property prime yields remained unchanged. Office yields were.85%, shopping centre yields were 5% and industrial was.25%. > We still expect some squeeze in pricing for the best and most exclusive product, whether this be rare down-town opportunities such as high street retail or prime office buildings. > There are an increasing number of local Czech (and Slovak) buyers active in our market. We expect this will continue to develop and evolve as the market matures. This is excellent news as it gives an increasing number of options for the investors seeking an exit and helps to make the market more liquid. > An interesting recent trend is the export of Czech capital to other CEE markets, examples being REICO and CPI who have recently acquired properties in neigbouring CEE countries. INVESTMENT VOLUMES IN THE CZECH REPUBLIC ( MILLIONS) INVESTMENT SHARE PER COUNTRY OF CAPITAL ORIGIN (Q1-Q3 217) PRIME YIELDS (%) IN THE CZECH REPUBLIC 1 3 5 3 2 5 2 1 5 1 9 8 7 5 3 5 - % 8% 3% 2% % 211 212 213 21 215 21 217 OFFICE RETAIL INDUSTRIAL HOTEL OTHER 2% 12% 9% 19% PRIME OFFICE YIELD 35% PRIME INDUSTRIAL YIELD PRIME HIGH STREET YIELD PRIME SHOPPING CENTRE YIELD CZECHIA GERMANY USA SWITZERLAND UNITED KINGDOM ITALY LEBANON THAILAND SLOVAKIA OTHER Market Overview Q3 217 CZECH REPUBLIC
sq m Q1'9 Q3'9 Q1'1 Q3'1 Q1'11 Q3'11 Q1'12 Q3'12 Q1'13 Q3'13 Q1'1 Q3'1 Q1'15 Q3'15 Q1'1 Q3'1 Q1'17 Q3'17 Q1'18 Q3'18 Q1'19 sq m PRAGUE 1 PRAGUE 2 PRAGUE 3 PRAGUE PRAGUE 5 PRAGUE PRAGUE 7 PRAGUE 8 PRAGUE 9 PRAGUE 1 SUPPLY & VACANCY > In Q3 217, total office stock in Prague reached 3.28 million sq m with three new office buildings completed i.e. Drn (formerly known as Palác Národní, 7,7 sq m) and Mechanica 1 and 2 (1,1 and 11, sq m respectively). These newly completed buildings on average were 5% leased at completion. > Office vacancy rate continued in a downward trend, reaching 7.7% by the end of Q3. > 71% of this vacant stock was housed in Class A space, with the remaining 29% in Class B space. > In Q3 217, another building i.e. Palác Ara, was temporarily withdrawn from the stock due to it undergoing an extensive upgrade. This meant there were now six existing buildings in the process of being modernised, which together totalled, sq m. MODERN OFFICE STOCK & VACANCY IN PRAGUE DISTRICTS 1 8 2 Occupied Stock Vacant Stock Vacancy Rate, Prague Research Forum VACANCY RATE DEVELOPMENT & FORECAST 17% 15% 13% 11% 9% 7% 5% DEMAND > Gross office take-up in Q3 reached 13, sq m, net take-up (excluding renegotiations and subleases) reached 99,9 sq m. > For the Q1-Q3 217 period, gross take-up posted strong results of 23% growth y-o-y ending up at 389,3 sq m. > Net take-up for the same period was also up and totalled some 278,7 sq m, up 21% y-o-y. > Quarterly net absorption reached 51,9 sq m. Cumulatively for the first three quarters of 217 the net absorption reached 15,7 sq m, which showed a healthy rise of % y-o-y. > At the close of Q3, some 39,9 sq m of new office space was being constructed in Prague, with 88,3 sq m due in Q 217, of which 5% had already let by the end of Q3. > The pipeline for 218 comprises some 1,7 sq m, with 2% of the space already having tenants committed to lease. With current demand levels, we expect vacancy levels to only mildly oscillate below the level of 1%. > Shrinking vacancy is good news for landlords as some have been able to secure higher rents. Prime office space in city centre Prague is now leasing for 21/sq m/month; the rents for premium space can be even higher, however, this is limited to only a few trophy assets. > Those buildings vacated by tenants relocating to modern properties will be forced to follow the trend of complete or partial refurbishment in order to maintain their competitiveness, given the number of expected future pipeline completions. 18% 1% 1% 12% 1% 8% % %, Prague Research Forum TAKE-UP 5 5 35 3 25 2 15 1 5-5 VACANCY RATE OPTIMISTIC SCENARIO, Prague Research Forum PRIME RENTS ( /sq m/month) REALISTIC SCENARIO PESIMISTIC SCENARIO 21 211 212 213 21 215 21 Q1-Q3 217 RENEGOTIATIONS, RELOCATIONS & SUBLEASES NET TAKE-UP NET ABSORPTION City Centre Inner City Outer City Average 19.5-21. 1.5-1.5 13.-1.5 13.2 FORECAST 5 Market Overview Q3 217 CZECH REPUBLIC
' sq m SUPPLY & VACANCY CZECH INDUSTRIAL STOCK & VACANCY (in sq m) > Some 18, sq m were delivered to the market during Q3 217, bringing year to date completions to 7,1 sq m. PRAGUE PLZEN 2 15 1 1 > In line with the latest trend, newly delivered space was to a large extent occupied: average occupancy on the new space was 82% and seven out of 11 properties were already fully let at completion. > The total stock by the end of Q3 stood at.75 million sq m. > Countrywide average vacancy dropped by a further 5 basis points and stood at 3.% at the end of September. DEMAND > Gross take-up in Q3 reached 31, sq m, showing a 5% y-o-y increase. Net take-up in Q3 was 188,2 sq m and showed a significant increase of 8% y-o-y. > Year to date (ytd) gross take-up reached 93, sq m, down 3% y-o-y, while ytd net take-up reached 52,5 sq m, which was an 11% increase y-o-y. > Some nine deals were signed during Q3 for industrial space in the excess of 1, sq m. Among the largest deals was the new lease of Miraintex at CTPark Brno (11,5 sq m) and the renegotiation of O.T.E.C. at Segro Logistics Park Prague (1,5 sq m) > In Q3, manufacturing companies contributed the most to the net take-up with a share of some 55% which represented some 1,1 sq m of newly occupied or committed space. > Prague dominated net take up in Q3 with a share of 3% as well as ytd net take-up (38%), followed by Ústí nad Labem region with 37% and 15% respectively. > Steady level of demand pours oil on the speculative development fire, yet projects, which commence speculatively are often leased prior to completion. > Premises totalling 81, sq m were under construction across the country at the end of Q3, which was up 18% (by 1, sq m) from the previous quarter, in spite of new completions. Some 29,7 sq m of the new build space is due in Q 217 of which the vast majority was already leased. > Continued investor appetite for modern well-positioned industrial space will create opportunities for owner occupiers to re-engineer the capital employed in their business through a sale and leaseback transaction. CENTRAL BOHEMIA USTI NAD LABEM OTHER 8 REGIONS, Industrial Research Forum ANNUAL SUPPLY (in sq m thousands) 8 7 5 3 2 1 SOUTH MORAVIA MORAVIA-SILESIA, Industrial Research Forum TAKE-UP (in sq m) 1 5 1 25 1 75 5 25 899 85 25 299 93, Industrial Research Forum PRIME RENTS ( /sq m/month) 8 1 2 1 2 2 2 8 OCCUPIED STOCK VACANT STOCK sq m 21 211 212 213 21 215 21 217 H1 218 COMPLETIONS PIPELINE 212 213 21 215 21 Q1-Q3 217 NET TAKE-UP RENEGOTIATIONS & RELOCATIONS Prague Brno Ostrava Plzeň.25-.75.1-.55 3.8-.1 3.95-.25 Market Overview Q3 217 CZECH REPUBLIC
w 39 offices in 8 countries on continents United States: 153 Canada: 29 Latin America: 2 Asia Pacific: 79 EMEA: 111 2.3 billion in annual revenue 17 million square meters under management 15, professionals and staff MARKET CONTACT: Ondřej Vlk Head of Research Czech Republic +2 22 537 35 Ondrej.Vlk@colliers.com Omar Sattar Managing Director Czech Republic +2 22 537 18 Omar.Sattar@colliers.com Iva Caňková Head of Office Agency Andrew Thompson Head of Capital Markets Czech Republic & Slovakia Petr Zaoral Head of Industrial Agency Marcel Kolesár Head of Valuations Colliers International Czech Republic Slovanský dům, Building B/C Na Příkopě 859/22 11 Prague 1 +2 22 537 18 About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is a global leader in commercial real estate services with 15, professionals operating from 39 offices in 8 countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 1 outsourcing firms by the International Association of Outsourcing Professionals Global Outsourcing for 1 consecutive years, more than any other real estate services firm. www.colliers.com Copyright 217 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. 7 Market Overview Q3 217 CZECH REPUBLIC