Country focus: Czech Republic

01 / The czech Economy

The credit crunch does not seem to have had very much impact on the Czech economy, at least so far.

A slight slowdown of GDP growth is predicted this year, although the fall, from 6.6% in 2007 to 4.5% this year still leaves figures looking very healthy.

However, inflation is on the increase, with the consumer price index up to 7.5% at the beginning of this year, when the country’s unemployment rate fell to 4.7%, its lowest level since the mid-nineties.

02 / the property market

Residential

The long-awaited increase in VAT rates in the housing sector from 5% to 9% occurred without creating any major impact on the real estate market. The Czech Republic is recently counted among the few countries (together with Bulgaria, Slovakia, and Cyprus) where house price growth has accelerated in spite of the sub-prime crisis.

Offices

In 2008, a record-breaking more than 300,000m2 of office premises will be supplied to the Prague market. According to estimates, more than 270,000m2 of new space will be finished and offered for rent, while the vacation rate continues to drop, from 7.7% in 2006 to 5.8% in 2007. Office rents have still not settled after several years and at the end of 2007, the nominal rent for prime office space in Prague city centre was €19.50-20 (£16) per m2 per month. Yields have dropped towards 5%.

Retail

The Czech retail market, in the years to come, will be influenced by increased expenditure, especially in the higher-income groups.

The largest volume of increase in retail spaces is still being accounted for by large shops, especially the wide product-range hypermarkets. Currently, more than 230 hypermarkets are open in the country. The capacity of space for lease in Czech shopping centres with floor areas above 5,000m2 has reached a total of 1.75 million m2.

Industrial and warehousing

In 2007, up to 870,000m2 of warehouse premises were leased, representing an increase of 43% compared to 2006, with a non-occupancy rate exceeding 9%.

The modern warehousing premises market was controlled by three key developers until 2007: CTP Invest, ProLogis and VGP together accounted for 70% of the total construction volume. More recently, direct foreign investments in production and assembly have been making way for projects in the sphere of strategic services and technology centres.

Hotels and tourism

Prague is experiencing a boom in the development of luxury five-star hotels. Fifteen upscale hotels in Prague are currently under construction or have recently been completed. One result of this rapid increase in the availability of hotel beds is that the occupancy rate of hotels in Prague had been steadily decreasing since 2004; this indicator has dropped year-on-year by 0.7% to where it now stands, at 70%. For hotels with three and fewer stars, even greater occupancy losses have been reported.

In the recreation and tourism sector, golf is flourishing. By the end of 2007, there were 74 courses in the Czech Republic and many other projects under construction. Increased interest has been reported by operators of spas and “wellness centres”, although the profile of the customers is changing significantly; while traditional spa locations have been losing domestic clients, due to changes in health-insurance coverage, the number of foreign visitors has been increasing.

03 / construction costs

The Czech construction market has enjoyed a relatively stable growth period over much of the past 15 years and despite a slight slowdown during 1997-99, the construction industry retains a prominent place in the Czech economy.

In 2007, the construction industry showed real growth of 6.6% at constant prices and the volume of construction works reached CZK263bn (£8.7bn).

According to the official figures, general construction costs rose by 4.6% in 2007, although unofficial figures indicate that the price hikes are a fair bit higher at between 5 and 8%. The increases can be put down to a number of factors, which continue the trend from the previous year:

• Due to the real estate investment boom, the increased demand has created a market that has become considerably less competitive than it was in previous years
• Big contractors in the market have introduced restrictive trade practices
• The price of some key materials has risen considerably following the boom in commodity markets
• Subsidiary costs have increased due to the higher levels of demand and increasing costs of energy, fuel and labour
• There has been an increase in the rates of bankruptcy, mainly in government contracts, which has lead to a decrease in supply.

For foreign investors and developers investing in euros, the recent enormous strengthening of the Czech koruna against the euro and other currencies has pushed up the costs of investment very significantly; it has been estimated that this has led to an increase of costs of more than 15%.

Material and labour

The costs of material and fabric used in the construction industry increased by 2.6% overall last year and further inflation in materials prices is expected, due to increased consumption in the emerging markets. Since the whole Czech economy has enjoyed substantial growth, this has had a knock-on effect on the construction sector.

The increased level of construction activity means that construction labour rates have run well ahead of wage inflation in other industries; construction earnings rose by 8.4% in 2007.

04 / The future

The mortgage crisis in the US became the main financial event of 2007 and the knock-on effect continues to affect global and local real estate investment markets. Unease in world capital markets has also influenced the Czech investment market and it is likely that this situation will continue over the following few months with further problems likely to crop up.

The current investment environment is not best suited to the operation of Czech open or close-ended real estate investment funds, which were established under Amendment Act 189/2004. The transactions volume for 2007 amounted to approximately €2bn (£1.6bn), but could have been better, and the mortgage market crisis reduced liquidity with the fall in the number of transactions.

Forward transactions remain common on the real estate market in the Czech Republic. However, active asset and property management is still required to ensure that property values are increased or, at worst, maintained at their current levels.