Research

H2 2011

Prague Office market report

Highlights • Prague office take-up in H2 2011 was down on H1 but still enough to produce record full-year total of 276,187 sq m. Indeed, occupier activity has been buoyant, albeit boosted by landlord incentives – which have helped to underpin rental values. • Following a poor showing in 2010, last year saw the return of international investors to the Czech market. As a result, prime office yields hardened by 25 bps to end the year at 6.50% and investment volumes recorded a near fourfold increase on 2010. • However, speculative development has been limited by restrictions on the availability of finance. Pre-lets are a requirement for obtaining funding for major new schemes. • Prime office rents were unchanged during 2011 and ended the year at €240 per sq m per year – their level since 2009.

H2 2011

prague Office market report

Figure 1

Table 1

Office take-up vs new supply

Key occupier transactions, H2 2011

000s sq m

Quarter District Property

300 250 200

Size (sq m) Tenant

Type of deal

4

8

Palmovka Park II

10,800

Metrostav

Pre-lease

3

4

The Park bldg 6,8 & 10

6,393

Accenture

Renegotiation

3

5

Avenir Business Park

6,139

SAP

Renegotiation

4

8

Palmovka Park I

5,570

Subterra

Renegotiation

150

4

5

4,930

CETELEM

Renegotiation

100

4

8

Anděl City (Cetelem building) – Phase III River Garden

4,700

Monster

New lease

4

8

Karlín Hall I

4,353

Economia

New lease

4

8

Amazon Court

3,037

Equa Bank

New lease

4

4

Budějovická 3

3,024

OBI

New lease

4

4

The Park 9,10

2,985

Renegotiation

4

8

Corso II A

2,805

Anheuser-Busch Inbev MŠMT

4

8

Corso II A

2,732

MŠMT

Expansion

3

7

Lighthouse

2,670

Direct Pojišťovna

Renegotiation

4

1

Solitaire

2,332

BBH

Renegotiation

4

4

City Green Court

2,153

GlaxoSmithKline, s.r.o.

New lease

2011

2010

2009

2007

2008

2005

2006

2003

2004

2001

2002

0

2000

50

Take-up New supply



Source: Knight Frank

Figure 2

H2 2011 take-up by district

Renegotiation

Source: Knight Frank

Prague 10 Prague 9

Occupier market

Prague 8



Prague 1 Prague 2 Prague 3 Prague 4



Source: Knight Frank

City West 2, Prague

2

Prague 5 Prague 6 Prague 7 Prague 8

Prague 9 Prague 10

Prague office take-up amounted to 127,144 sq Prague 7 m in H2, down 14.7% on H1, but nonetheless enough to lift the full-year total to a recordPrague 6 breaking 276,187 sq m. There were some 153 leasing transactions in total during the second Prague 5 half of the year, of which Metrostav’s 10,800 sq Prague 4 m pre-lease deal at Palmovka Park in Prague 8 was the largest. Prague 3

Whilst there is still a degree of tenant Prague 2 consolidation taking place and some space is being released back on to the market, occupier Prague 1 activity is improving and a number of occupiers are in expansion mode. Indeed, on a positive note, the proportion of take-up accounted for by renegotiations declined to around 30% in 2011 – still high but significantly down on the 41% recorded in 2010. Going forward, corporate expansion should begin to account for a growing proportion of activity, although the general health of the market will depend largely on the Czech Republic’s key Eurozone trading partners such as Germany. The Prague 4 and 5 districts continued to dominate in terms of occupier activity in 2011,

accounting for 35.6% and 22.8% of take up respectively, with Prague 8 boosting its share to 17.6%. As is normally the case, Prague 1 and 2 recorded numerous smaller deals, mainly involving legal, professional and financial services companies. Vacancy rates edged down to end the year at 12% – a positive trend albeit not enough to put rents under serious upward pressure, with the prime figure still hovering around €20-21 per sq m per month. Indeed, with the economy now slowing, tenants are expected to retain the upper hand in leasing negotiations for the foreseeable future, with rent-free periods of around 1.5 months per year of the term certain and contributions to fit-out costs still widely available to tenants. New supply amounted to 82,800 sq m in 2011, higher than 2010 but still significantly lower than the 10-year annual average of 147,000 sq m. Indeed, speculative development is currently limited due largely to funding constraints, with developers required to have secured pre-lets before being able to obtain finance.

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Prague region Prague North (Prague 7 & Prague 8)

Central M Malostranská

Prague 1

M Starometská

M

Nádrazí M Holesovice

M Hlavni Nadrazi Jirího z Podebrad M

M Museum

M Karlovo námestí

Prague 8

Florenc

Mustek M Národní M trída

M Krizíkova

M

Námestí Republiky M

M

M I.P. Pavlova

Prague 7

M

Vltavská

M

Námestí Míru

Prague 2

Andel

Palmovka

M

M Invalidovna M Krizíkova

E55

Vlatava River

Prague 9

Přírodní Park Šárka - Lysolaje

Ruzyne International Airport

Prague 7 Prague 8

Prague 6

E48

Prague 14

Prague 3

Prague 1

E65 Přírodní Park Košíře - Motol

Prague 2

Prague 10 Prague 15

Prague 5 Prague 13

Přírodní Park Hostivař

Prague 4 E65

Prague 11

River Vlatava

Přírodní Park Prokopské a Dalejské Údolí 

E55

Prague 12

Prague South (Prague 4) M Vysehrad

M Pražského povstání

Prague West (Prague 5) Radlická

M M

Stodulky

Prague 13

3

Hurka

M Pankrác

5 E6

Nové Butovice M

M Zlicín

M

Jinonice M

Prague 4 Prague 5

M

Luziny

M Kacerov

E50 M Roztyly

Luka

M

M Budejovická

E50 Chodov M

PRAGUE 4 HAS ONE OF THE LOWEST VACANCY RATES OF THE CAPITAL’S SUBMARKETS AT AROUND 7%

Central

development, initially led by Real Estate Karlín. Currently, there are two significant speculative office developments under construction in Karlín, namely River Gardens (18,300 sq m) and Rohan (8,427 sq m). The properties are both located on Rohanske nabrezi, and add to the River City office development and bring the total amount of space in this cluster to 83,750 sq m of grade A office space. Furthermore, Main Point Karlín is currently being fitted out for a single tenant, Koopertiva. This property is also located on Rohanske nabrezi and is connected to the River City project by a foot bridge. It provides 25,700 sq m of office space, bringing the total grade A stock in this cluster to nearly 110,000 sq m.

Prague’s historic centre commands the highest rents in the capital, with demand for offices mainly derived from professional services providers and consultancy companies requiring relatively small spaces. Development activity in this area is constrained by the tight configuration of the city’s layout, in addition to restrictive planning policies. The largest deal in central Prague in H2 was BBH’s renegotiation of 2,332 sq m in the Solitaire building.

Prague West Figure 3

A major part of the western market comprises the Anděl area in Prague 5 which is one of the capital’s busiest locations. It is also home to a large number of domestic and international businesses, notably IT and Telecoms, as well as media and pharmaceutical companies. The City West building saw a number of occupiers take space in the second half of last year. Elsewhere in the Prague 5 district, SAP and CETELEM also acquired space.

Prime rents € per sq m per annum 300 250 200 150 100

Prague 4 – which comprises most of the capital’s southern market – is the city’s most important decentralised office market and is well-connected to Brno via the motorway. Following a very active year in terms of takeup, the district currently has one of the lowest vacancy rates of Prague’s submarkets at around 7%. The biggest leasing transaction of the second half was Accenture’s 6,393 sq m renegotiation deal at the Park Building (6, 8 & 10), followed by OBI’s new lease for 3,024 sq m at Budějovická 3.

Prague North



New

2011

2010

2009

2007

2008

2005



2006

2003

2004

2001

2002

2000

50 0

Prague South

Redevelopments

The Karlín area of Prague benefits from its close proximity to the city centre and its connections to the Metro system. In recent years the area has been the focus of much

Source: Knight Frank

Figure 4

Table 2

Vacancy rates

Key development projects, due 2012-2013

%

District Project

16

Developer

Size (sq m) Status

1

Diamant

Private

3,400

Speculative – due 2012

4

Pankrác a.s.

23,853

Speculative – due 2012

12

Budějovická 3

4

City Green Court

Skanska Property

16,300

Speculative – due 2012

10

4

BB Centrum G

Passerinvest

5,454

Speculative – due 2013

8

5

Baawer House

Private

3,000

Speculative – due 2012

6

5

West City A2

Finep

18,000

Construction for KB – due 2012

7

Classic 7, ph II

Afi Europe

10,455

Speculative – due 2013

8

Keystone

REKG

6,500

Construction for Průmstav – due 2012

8

River Garden

HB Reavis

18,300

Speculative – due 2012

8

Rohan

Karimpol

8,427

Speculative – due 2012

14

4

Source: Knight Frank

4

2011

2010

2009

2007

2008

2005

2006

2003

2004

2002

2001

0

2000

2

Source: Knight Frank

H2 2011

Prague Office market report

Investment market

Czech Republic data Czech Republic population

10,562,214

Prague population

1,262,106

Czech GDP growth 2011

1.8%

Czech GDP growth 2012 (forecast)

0.7%

A total of €2.25 bn worth of property was transacted in the Czech Republic in 2011, a near four-fold increase on the €576 m in 2010. The figure comprised just 19 transactions and was boosted by a number of large portfolio deals, particularly in the first half of the year.

Czech inflation

1.90%

Czech unemployment rate

6.50%

Czech National Bank 2W Repo Rate

Around half of total investment in 2011 was

0.75%

in retail, boosted by the completion of four

CZK/EUR exchange rate

25.80

CZK/USD exchange rate

19.94

Source: Czech Statistical Office/Czech National Bank/European Commission. December 2011 data quoted unless specified

shopping centre sales totalling €854m. Indeed, 2011 saw the sale of Olympia Brno, the largest regional shopping centre in the country, in addition to others including the Palac Flora scheme in Prague, Forum Usti and Forum Labem (northern Bohemia) and

Figure 5

Forum Nova Karolina. The revival in retail

Prime yields

transactions comes at a time when Czech

%

consumer confidence is somewhat fragile, but from an investment perspective shopping

12

with shopping centre yields now down to a similar level to prime offices. Prime office yields hardened by 25 basis points over the year to stand at 6.50% by the year-end, as transactions in Prague and Brno have demonstrated. Evidence from Q3 transactions suggests that yields would be 6.75% for buildings in Prague 5 and 8, although prime centrally located assets would be likely to command sharper yields. Activity in the secondary sector remains limited due to a disparity in purchaser and vendor price expectations – a gap which may close with the expected bank sales of secondary assets belonging to nonperforming loans in 2012. However, overall investment volumes in 2012 are not expected to reach those of 2011 when there were a number of exceptionally large deals.

centres offer portfolio characteristics

10

which help to mitigate risk, not to mention the ability to add value through asset

8

management.

6

More international investors returned to the Czech market in 2011, with German, Austrian,

4

US and UK investors all active and competing 2

2011

2010

2009

2007

2008

2005

2006

2003

2004

2001

2002

investors accounted for over 90% of 2000

0

for the best assets. Indeed, international transaction volumes. Increased competition has exerted downward pressure on yields for prime stock across most areas of the market,

Source: Knight Frank

City West 1, Prague

Table 3

Key investment transactions in the Czech Republic, H2 2011 Quarter Property

Purchaser

Location

Sector

Portfolio

Logistics

Usti/Ostrava

Q1

VGP Parks

VGP

Q4

Multi

Q3

Forum Usti and Nova Karolina Olympia, Brno

AEW Europe/ Tristan Capital Meyer Bergmann

Q1

Europolis

The Somerston Group Europolis

Rockspring & ECE (50:50 JV) CA Immo

Q4

Portfolio/various

PPF

Q4

Palac Flora

Q4

VGP Parks

AFI Europe and Avestus VGP

Q4

Forum Liberec

Multi

Source: Knight Frank

5

Vendor

Size (sq m)

Price (€ million)

Initial yield (%)

368,000

300

7.95

Retail

85,000

300

6.90

Brno

Retail

85,000

253

6.40

Prague

Portfolio

230,000

234

n/a

CPI

National

Office

180,000

219

n/a

Atrium Euro RE

Prague

Mixed-use

37,600

191

6.50

Tristan Capital Partners

Portfolio

Logistics

n/a

135

8.5-8.75

Tesco

Liberec

Retail

23,000

110

7.00

RESEARCH

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Stewart Thomson Head of Investment and RICS Valuations +420 22 421 77 62 [email protected]

Matthew Colbourne Senior Analyst, International Research +44 (0) 207 629 8171 [email protected] Carly Tompsett Analyst, International Research +44 (0) 207 629 8171 [email protected]

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