Czech Republic

Prague offices are still a lure for tenants and investors

18 December 2017

The number of rented offices in the capital city this year is approaching a new record. According to data from BNP Paribas Real Estate CR, the international consulting company, last years result, when there was more than 300,000 m2 offices rented in Prague, will most likely be beaten. By the end of September this year, there was around 270,000 square meters of newly rented administrative sites. The last quarter is traditionally the strongest period of the year for concluding contracts.

This is a positive message for the domestic real estate market. However, it has its impacts on tenants and investors alike. The first group must prepare for the next expected increase in rent, and investors must then expect the growth in rental income to be offset against ever higher real estate prices. Thanks to this, we can predict significant investment activity in 2018

Lenka Šindelářová MRICS, Head of Research & Consultancy at BNP Paribas Real Estate Czech Republic

According to her, the appetite of investors is also convincingly demonstrated by the expected balance of €3.5 billion for commercial real estate that has changed (or is changing) hands. It will be comparable to the record year of 2016. For the first three quarters of 2017, investments of more than €2.7 billion have already been made, up 84% on the previous year.

There is a large demand from new tenants for administrative space, and the limited availability helps to develop sites outside established office centres. These include, for example, Prague 6 or Prague 9.

Investors are looking for developers in locations they have previously overlooked, and new office buildings occupied here may mean returns of higher than 100-125 basis points than in exposed areas of the city

Stewart Thomson, country Head BNP Paribas Real Estate explains on the back of similar investment deals recently taking place, for example, on the outskirts of Prague

New investment opportunities not only attract foreign funds, but also Czech investors. They now worth 30-40% of all realized investment transactions, and for offices it is more than half. With BNP Paribas Real Estate CR's low return on equity and bond markets, they have also increased the activity of other domestic entities, especially investment funds. Domestic private capital, which is directed not only to the segment of transactions up to €10 million, but also to higher prices of between €10million and €20 million.

The resulting compression of returns on equity (and commodity) markets - and hence capital overruns on the real estate market - have led to higher house prices in the last few quarters. As a result of this, revenue declines. BNP Paribas Real Estate CR's internal analysis suggests that the cross-sector yield should stabilise next year. This will also be assisted by reported slight increases in interest rates. In other words, it is about "raising" money for investors, including those outsourced by the lending banks.