Commercial real estate market now growing on more solid foundations

The mushrooming of office blocks and industrial parks and warehouses around the Czech Republic, but especially in the Prague region is one of the most visible signs of economic transformation over the last 20 years. And one of the closest witnesses of those changes has been Robert McLean, the editor-in-chief of Central and East European Construction and Investment Journal, a publication he helped set up in the mid 1990s. Mr. McLean says the commercial real estate market has clearly bounced back from its recent crisis and appears to be building on more solid foundations. We asked him first of all to run down how the sector is now faring.

Robert McLean, photo: archive of Radio Prague

“When we talk about the Czech real estate market, by and large you tend to be talking about the Prague market, at least if you are talking about offices, for example. The Prague office market represents well over 90 percent, I think, of the total volume of investment that comes into the country. That market has been doing quite well. However, vacancies among new or modern office space has climbed up into the teens, up into the high teens. There is a fair amount of concern that it could go higher. Right now developers are in a period of a bit of a boom basically. I would say it is not as scary as it was back in 2007-2008 when there was a lot of different types of developers, some strong some weak, and everybody building a lot. There is some concern because there is a lot of speculative space being built at the moment, but it is being built by extremely strong, cash-rich developers. And that means that even if it takes a while for those buildings to fill up, so far, they are able to handle it. So it’s not the same sort of risk to themselves and the banks that are lending them money. In that sense, I would say that is doing quite well.

“Perhaps the biggest boom right now around the country, in Prague as well as in the regions, is the industrial market by which we mean warehouses and industrial investments. That has been on a tear just as it has been across the whole of Central Europe. We have major investors coming in, American money, Swedish money…They are hooking up with large industrial development platforms to build as much space as the market can handle right now. They have been building quite a bit. They have begun to get into some speculative development at the moment, but even that seems to be quite rational. You do not have a lot of empty sheds as you did in 2008. I would say those seem to be the two strongest markets right now.”

And the warehouse development is for specific customers waiting to occupy?

“Only right now are we starting to see real speculative development where developers will build space for occupiers that do not exist yet or have not declared their interest yet. For the most part they have been building for specific occupiers, sometimes it is an owner occupier situation. What they are doing at this point is that they might buy some land and build on it, say 18000 square meters for a specific client and then leave 2,000, 4,000, maybe 6000, square meters empty on a speculative basis. So it is being done on a fairly rational basis that way.”

Home grown development

And the investors coming into the market, are they the same people that were around five or 10 years ago or are we seeing some sort of change and are we seeing investors from Asia or China or places like that?

For the moment I would say that the market is not racing ahead and there does not seem to be any major concern that it is going to be doing any severe braking in the near future.

“Interestingly, the biggest difference at the moment is that there are a lot of domestic investors. When the foreign investors, by that we mean the investors who come in and buy the real estate that is being built, ran away from Central Europe, we found especially in the Czech Republic that there were a lot of domestic investors filling that void. Once prices had fallen quite a bit, once you had foreign investors that wanted to get out of the market, you had some very strong and powerful development groups that had built up their know-how and bought at very good prices and they were really strong investors up to about 2013, when you got a lot of the same old faces coming back, slowly putting their toes into the market and slowly getting involved in the market. There is a lot of American money coming over right now. I think we are finally starting to see some of the typical open ended German investment funds now getting involved in the market right now. There are some newcomers. I would say the American money is now one of the main impulses for Central Europe in general and increasingly in the Czech Republic. As regards China, I do not think there are any really big examples of that right now but we did just find out that Bank of China is going to open up a branch in Prague. We will see, that has still to be continued that particular story. “

And do you see this relative re-start of the market continuing for some time, it is probably related to the rest of the economy? Are there any factors that could put a brake on it, land, planning rules…?

“I think planning issues, that has been a sore point for a long time. That tends to put a brake on the pace of development, which in some way may be a healthy handbrake that helps prevent things from moving too quickly. But developers, office developers in particular, have been quite frustrated how long it takes. And there has been a bit of confusion about how the city [Prague] wants to go about getting new buildings constructed.

Photo: Kristýna Maková

"But in terms of how long this particular push can go on, I would echo what you say and it depends a lot on the economy. And the potential brakes: the potential problems are the same ones that we see in the European economy in general. What is going to happen if there is a Grexit, if Greece falls out of the euro-zone what is the impact of that going to be? I think last year there was a good deal of fear about what was going to happen in Ukraine. There have been a lot of things hanging over the market. But what I find interesting is that despite these real concerns, despite fairly major geo-political or economic events that still could come, the market does still seem to be moving along, still treading along. At the end of the day, especially in real estate, it just depends are people filling the space that is getting build and how much of the speculative stuff is getting built at any one time. And for the moment I would say that the market is not racing ahead and there does not seem to be any major concern that it is going to be doing any severe braking in the near future.”

Second placed Prague

Is Prague in some way losing out regionally to maybe Warsaw or lagging Bratislava? On a regional basis is Prague performing fairly well?

“I would say Prague is running a very strong second, which at the end of the day it should probably do and is appropriate given the size of the market in general and the size of the economy. Without doubt, Warsaw is the most liquid market in the region. Without a doubt, the rest of the region looks to Warsaw to set the standard. They have really set the bar at what can be accomplished. Poland really has a real lot going for it. It is not just that it has a large capital city with realistically around 2 million people living around there and it is a growing environment as well. But it has major cities around it. You have got several cities, probably eight cities, with more than 500,000 people living in them. And that creates a sort of momentum of its own. Companies want to go there not just to get into Warsaw but because they know there is business to do in some of the regional towns. And I know, I am not just talking about developers but ordinary companies that know that they can get people. At this point, I think that the biggest potential brake for Central Europe, the biggest hurdle is a lack of people. And that is something that Poland has got in abundance.

Warsaw, photo: archive of Radio Prague

“If you have large university towns, investors know, large corporations and companies know that they can go in there and get people. The prices are right and the skills are definitely right and Poland is a major outsourcing market now. The thing is that people often turn up their noses at outsourcing. But these are not just accounting jobs. These are jobs where you can get young people into a working frame of mind. They are completing their training by becoming quite proficient in the language and culture of business. And the country is simply producing quite a lot of them. For the Czech Republic, I would say, one of its biggest problems right now is to get enough pockets of skilled labour at one point. There has been a lot of investment here, there has been a lot of investment and it has been a very positive story, but it can only go as far as there are people. Because at that point it becomes more expensive and less efficient to invest here.”

Is there room for some of the cities outside Prague to develop more? Brno is quite developed but is there room for some of the others, Liberec, Plzeň, Ostrava, Olomouc to take some of the overspill from Prague if there is some of that?

“It really comes down to numbers in universities. When you talk to investors and people who look at these things from an analytical point of view, it really comes down to where can you get a few thousand people, where do you get traditions of education. Towns like Ostrava definitely have a chance in part because there is that entire agglomeration of Southern Silesia. Ostrava has a chance, there is still a lot to do but it has got a university, an airport, a fast train goes there. Brno is doing quite well I would say. They have a very strong technology park there and in both cases the cities are trying to drive growth there. The same is the case with Plzeň but it is simply going to come down to a game of numbers.”

Without a doubt, the rest of the region looks to Warsaw to set the standard.

You mentioned the American investment, is there any specific reason for that?

“I think that what is interesting is that perhaps two, two-and-a-half, years ago we were getting strong signals that Americans believed in Europe and especially Central Europe and that there is a lot to be done there. If anything they were more positive than the Europeans themselves about it. They saw the market being down but the long term figures as being positive to get involved in the market then and they simply did it, they did it in bulk and they really did come over and create platforms and ways for investing in the market.