The Czech Republic is the second most sought-after location in CEE-6
The total volume of investments in the Czech Republic in the 4th quarter of 2023 amounted to 164 million euros, with the majority of activities being office real estate. The full-year results for 2023 were relatively weak, with the volume of investments reaching only 1.15 billion euros and falling for the third year in a row. Volume in 2023 also represented the lowest total seen since 2014. In addition, the number of transactions just barely exceeded 40 cases.
Despite a slowdown in investment volume of around 32%, the Czech Republic remained an attractive enough destination benefiting from sufficient investment capital to defend its position as the second most sought-after location within the CEE-6 region, at a time when almost all countries within the group recorded a similar or greater decline in investor activity.
The revival of the retail trade attracted investments in the Czech Republic
In terms of sectoral breakdown, there was a recovery in retail trade in 2023, which led with a 41% share of the total volume of transactions, although two significant transactions mainly contributed to this. In second place was office real estate with a 34% share, although measured by the number of transactions carried out it would be in the leading position. Residential real estate had a 13% share and industrial and logistics (I&L) real estate accounted for only 9% of the volume. “The increase in residential transactions was mainly due to the increase in the number of investor groups focused on this asset class. At the same time, more developers were open to the idea of divesting projects as the market saw a slowdown in apartment sales. Forward purchases were the most typical model used for the acquisition of newly built residential projects that were sold to investors," explains Omar Sattar, Head of Investments at Colliers, adding that the sector breakdown was somewhat different in the Czech Republic than in the entire CEE-6 region. Regionally, office transactions secured the largest share (33.7%), followed by retail (29%) and then I&L (27%).
Revenues continue to decline
Yields in some asset classes continue to move downward. This is largely due to the bid-ask spread, which remains a hallmark of current market conditions. However, this gap is expected to narrow during 2024, according to Colliers. “Our end-2023 core yield view was 5.25% for industrial and logistics (I&L) assets, 5.50% for office and 6.00% for shopping malls. Prime yields for office assets increased by 50 basis points compared to Q4 2022 and by 150 basis points compared to Q4 2021. For industrial and logistics assets, prime yields increased by 25 basis points year-on-year and compared to year-end 2021 by 125 basis points,” Omar Sattar calculates.
What will 2024 bring?
Expectations for 2024 can be described as slightly optimistic or even positively realistic. Given current conditions, especially in the context of persistently elevated credit costs, volumes in the CEE-6 region could reach up to €6.0 billion in 2024. In the Czech Republic, the total transaction volumes could end at the level of previous years, i.e. in the range of 1.2 to 1.4 billion euros, and stop the current trend of decreasing annual transaction volumes.
"Some transactions have already been announced, so the foundations of the investment market for 2024 have already been laid. The recent sale of the Olympic Garden by CPI PG to a local investor should positively influence other investors to continue their investment plans for further deployment of capital in the Czech Republic," he comments Omar Sattar and adds: "Even more significant was the confirmed sale of the shopping center Arkády Pankrác after the inspection by the antimonopoly office. The real estate fund Trigea became the proud owner, which thus added a new crown jewel to its growing portfolio. The announced sale price was approximately 265 million euros, which not only underlines the strength of the capital of Czech investors, but also represents almost a quarter of the total annual investment volume in 2023."
ESG an important aspect in the world of investments
Although the Central and Eastern European region has a relatively younger real estate stock compared to Western Europe, it can be expected that in 2024 ESG aspects will play a more significant role here than in previous years. This is also evidenced by a recent survey by Colliers among investors. According to him, ESG is becoming a key strategic element of investment decision-making, especially in the EMEA and APAC regions. The share of investors moving into the phase of ESG-based divestiture and acquisition strategies has reached 25%, compared to just 10% two years ago. Thus, value-added divestiture and acquisition opportunities can be expected to enter the market in 2024, with investors raising capital to convert existing assets from brown to green.
A view of the neighbors In Slovakia, 19 investment transactions were recorded in 2023 with a total volume of approximately EUR 668 million. The majority of transactions concerned offices (71%), followed by retail (15%) and industry (14%). 91% of the buying capital came from the CEE region, with a further 7% from the Americas and 3% from the wider EMEA region.
In Q4 2023, investment returns remained at the level of the previous quarter. Revenues from office space in Bratislava were recorded at the level of 6.25%, or 7.75% for development in CBD and on
the periphery. Income from industry in the Bratislava region has stabilized at 6.00%, while the national average is estimated at 6.25%. Retail returns for traditional shopping centers were then estimated at 6.50%.
For 2024, asset prices in the investment market are expected to continue to converge towards more realistic values and equilibrium. The rebalancing of prices is expected to lead to more activity in the market as buyers are under pressure to deploy capital and sellers face loan repayments and refinancing. Industrial and logistics facilities will remain the preferred asset type for both domestic and foreign investors. Specialized properties such as data centers or cold storage/dark warehouses will also be interesting.
