PRAGUE Office market report H RESEARCH. Highlights

RESEARCH H2 2008 PRAGUE Office market report Highlights • Office take-up in 2008 was 262,000 sq m, 42% above the 2007 level and only 8% below the cy...
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RESEARCH

H2 2008

PRAGUE Office market report

Highlights •

Office take-up in 2008 was 262,000 sq m, 42% above the 2007 level and only 8% below the cycle high of 2006. Prime office rents in the city centre rose to €276 per sq m per annum, an increase of 21% from 2007.



2008 was a record year for office completions with 281,000 sq m of new supply delivered, much of it focused in the Prague 4 district. The vacancy rate increased as a result, however, rising to 9.0% at the end of 2008.



The economic downturn will impact on levels of occupational demand in 2009 and although prime office rents should remain stable, tenant incentives such as rent free periods are likely to increase.

• In common with the rest of Europe, the financial crisis has severely impacted upon activity in the Czech investment market. In Prague, prime office yields softened by around 150 basis points in 2008 to 6.75%.

H2 2008

PRAGUE Office market report

Figure 1

Prague occupational market

Market balance million sq m

%

0.30

20

Prague office take-up in 2008 was an impressive 262,000 sq m, 42% above the 2007 level and only 8% below the cycle high of 2006. Take-up was also remarkably stable throughout 2008 with circa 65,000 sq m recorded in each of the four quarters. In general, the majority of last year’s transactions were the result of churn among local occupiers, particularly

0.25

financial institutions. 0.20

15

Prime office rents in the city centre rose to circa €23.00 per sq m per month in 2008, an increase of 21% from 2007, while prime rents in the inner city submarkets outside the CBD

0.15

achieved circa €18.00 per sq m per month. 0.10

10

The delivery of a host of new developments to the Prague market in 2008 was key to the healthy take-up. Indeed, 2008 was a record year for office completions, with some 281,000

0.05 5

2008

2007

2006

2005

2004

2003

2002

2001

sq m of space delivered, much of it focused in the Prague 4 district. Consequently, the total 0

million sq m. Given the record levels of new supply, the vacancy rate increased to 9.0% at the end of 2008,

Vacancy rate

Take-up

volume of leasable office stock increased by 15% in 2008, to stand at approximately 2.5

up from 5.8% at the end of 2007. Looking ahead, however, the financial crisis will curtail the

Source: Knight Frank

extent of planned speculative development over the next two years, and we now expect just 150,000 sq m to be completed in 2009, 20% below the 10 year annual average. While we do not anticipate further rental growth in 2009, the reining in of speculative development should at least prevent the market from becoming over-supplied, thereby keeping rental levels relatively stable. However, tenant incentives in the form of rent free periods are certain to be increased as the downturn impacts upon occupier demand.

Table 1

Key leasing transactions H2 2008 Vyšehrad Victoria, a 4,750 sq m development in Prague 4, was developed by Skanska and completed in June 2008.

Figure 2

Completions

Scheme

Tenant

Size (sq m)

Location

Quarter

Trianon Building

Česká spořitelna

12,700

Prague 4

Q4

Kolben Cube

ČKD Praha DIZ

8,000

Prague 9

Q3

Raiffeisen Centrum

Raiffeisenbank

7,000

Prague 4

Q4

Factory Office Centre

JNJ Business Services

5,500

Prague 5

Q4

Gemini - B

Hill’s Pet Nutrition Manufacturing

3,600

Prague 4

Q4

Explora Jupiter

DHL

2,900

Prague 5

Q4

Raiffeisen Centrum

Provident Financial

2,250

Prague 4

Q3

Corso II A

Clearstream Operations Prague - Deutsche Börse Group

2,200

Prague 8

Q4

Campus

VŠEM

2,150

Prague 5

Q4

Kavčí Hory Office Park

Nutricia

1,650

Prague 4

Q3

Corso II A

Alpha Management / Havi Logistics

1,370

Prague 3

Q3

Palladium

Garris

1,305

Prague 1

Q4

million sq m 0.30 0.25 0.20 0.15 0.10 0.05

Source: Knight Frank

2

2009

forecast

2008

2007

2005

2006

2004

2003

2002

2001

0.00

2000

Source: Knight Frank

www.KnightFrank.com

www.KnightFrank.cz

Prague region Central M Krizíkova

M Malostranská Námestí Republiky M

Prague 1 M Staromestska

Mustek M Národní M trída

M

M Karlovo námestí Andel

M Florenc

M Hlavni Nadrazi Jirího z Podebrad M

M Museum M I.P. Pavlova

M

Námestí Míru Prague 7

Prague 2

Ruzyne International Airport

P Prague 6 Prague 1

Pr

The historic street layout in Prague city centre means the supply of modern office development is relatively restricted in the area. However, demand for space is strong here, particularly among small professional and consultancy firms. Consequently, Prague’s central district commands the highest rents in the city with prime rents of circa €23.00 per sq m per month as at end of 2008, an increase of 21% on the 2007 figure. The Palladium, a major mixed-use development by EPD including 19,500 sq m office space accounted for 62% of the district’s total office take-up in 2008.

Prague 2

Prague 5

Prague 4

Prague 13

Prague West (Prague 5) Radlicka

M Prague 12

Jinonice M Nové Butovice M

M Zlicín M Stodulky

M

Hurka Luka

M

Prague 13

Prague 5

M Luziny

The area stretching westward from Anděl is host to a diverse group of office occupiers including IT&T, pharmaceutical and financial occupiers, plus some back office functions. 47,250 sq m of development was delivered in the district in 2008, 17% of the Prague total, with the largest scheme being Explora Jupiter, a 19,700 sq m development by Quinlan Private Golub. Prague 5 accounted for a quarter of the city’s total take-up in 2008, with the largest transaction in H2 comprising JNJ Business Services’ 5,500 sq m pre-lease at the Factory Office Center, which is set to complete in June 2009. Prime rents within the Anděl area are currently €17 - €18 per sq m per month, while elsewhere in Prague 5 prime rents range from €13.50 - €14.50 per sq m per month.

3

Prague North (Prague 7 & Prague 8)

Prague 8 Nádrazí M Holesovice

Prague 7

Palmovka

M

Vltavská

M M Invalidovna

M

M Krizíkova

Prague 9

Prague 8 Prague 14

rague 3

Prague 10

Prague 15

Office development to the north of the city is predominantly located in the Karlín area of Prague 8, although more recently development has occurred across the Vltava River in Prague 7, with schemes such as the Classic 7 Business Park, Holešovice, providing 42,500 sq m of office space. A key completion in 2008 was Corso II A (13,050 sq m) while other prominent schemes are scheduled for completion here in 2009 including Futurama Business Park at Invalidovna Metro station in Prague 8, and Buildings A and B of the Prague Marina Office Center in Prague 7. Prime rents in Prague North are currently approximately €14.00 – €14.50 per sq m per month.

Prague South (Prague 4) M Vysehrad

Prague 11

M Pražského povstání M Pankrác

E6 5

Prague 4

M Budejovická

M Kacerov

E50 M Roztyly

E50 Chodov M

The Prague 4 district to the south of the city has been a key focus of new office supply over the past decade. Accounting for a third of the city’s takeup in 2008, the area has emerged as the most significant decentralised office location within the city and is the location of choice for a range of large multi-national occupiers, particularly in the banking and finance sector. In 2008, a further 130,950 sq m of space was delivered in Prague 4, or 45% of the city’s total, with major completions including ECM’s 43,800 sq m City Tower and Hochtief’s 36,800 sq m Kavčí Hory. The district was host to Prague’s largest leasehold transaction in H2 2008, with Česká Spořitelna acquiring 12,700 sq m at Hochtief’s Trianon Building which is scheduled for completion in March 2009. Prime rents within the Prague 4 district currently stand at €17 – €18 per sq m per month.

4

H2 2008

PRAGUE Office market report

Figure 3

Prime rents € per sq m per annum 300

250

200

end 2008

end 2007

mid 2008

mid 2007

end 2006

end 2005

mid 2006

mid 2005

end 2004

end 2003

mid 2004

150

mid 2003

Crestyl are currently seeking a pre-lease for Libeň Dock 01, a proposed 9,000 sq m scheme in Prague 8.

Source: Knight Frank

Prime yields % 10

Czech-based investors also made significant purchases, accounting for 19% of total transactions in 2008. These tended to be more speculative, such as the purchase of the Telefonica O2 portfolio which consisted of assets located across the Czech Republic, 25% of which was subject to leasebacks to Telefonica O2, the remainder of which was vacant.

8

Following 10 years of steady decline, yields began to shift upwards over the course of 2008 with confidence weakening significantly following the banking crisis of autumn 2008. This has been reflected in prime office yields moving outwards by around 150 basis points in 2008 to approximately 6.75%, while negotiation powers have shifted back firmly to the purchasers’ side. 2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1997

1998

6

Source: Knight Frank

Czech Republic population

In terms of the outlook for 2009, the combination of falling interest rates in the Czech Republic and the EU combined with rising yields should be seen as a stimulus to the investment market but, until banks return to the lending market and/or the German funds remove their suspensions, we do not forecast a major increase in investment activity. Nevertheless, if yield levels continue to shift outwards over the course of 2009, greater numbers of opportunistic investors may be tempted into the market, particularly if there is an increase in the number of forced sales during the year.

Table 2

Prague data

Key investment transactions H2 2008 10,446,000 1,212,000

Scheme

Purchaser

Vendor

Prague unemployment rate

2.0%

The Park

DEGi

Signa Property Funds

Czech unemployment rate

4.4%

Palác Anděl

DEGi

Realtia

Prague GDP growth

3.5%

Carpathian plc

Czech GDP growth

3.6%

Varyáda shopping Invesco centre (Retail)

Czech inflation (Jan 2009)

2.2%

Prague population

Source: Czech Statistical Office/Experian

5

In common with the rest of Europe, the financial crisis has severely impacted upon activity in the Czech investment market. In 2008, total investment in the Czech Republic amounted to €1.06 billion, a 60% decrease from the record level witnessed in 2007. The number of transactions also decreased significantly, driven instead by a handful of large transactions. The office sector accounted for 60% of the total transaction volume in 2008, with retail making up 30% of the volume. German investors were the most active, accounting for approximately 40% of total transactions, with groups including DEGI, SEB and GLL making significant purchases focused on grade A office and retail projects in Prague. However, in October the majority of German investors were forced to withdraw from the market following large redemptions from the funds by major institutional investors.

Figure 4

4

Investment market

Albatros Národní Pražská Správa Česká Spořitelna Nemovitostí Source: Knight Frank

Size (sq m)

Location

Price

116,000

Prague 4

€235.0m

14,500

Prague 5

€57.0m

18,430

Karlovy Vary

€52.0m

Prague 1

€11.0m

4,100

RESEARCH

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Matthew Colbourne Senior Analyst +44 (0) 207 629 8171 [email protected]

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