Will the half time whistle blow for Czech’s real estate investment market?

Savills’ investment team provides consultancy in all areas of the real estate market, whether buying or selling. Experts from Savills are approached by funds and institutions, private investment companies, international and private investors and developers.

Our questions were answered by Fraser Watson, Director – Investment service, Savills Czech and Slovak Republics.

Can you summarise briefly how the real estate investment market performed in 2022?

To borrow a phrase from football commentators – it was a game of two halves! By the end of the first half of the year it was clear that the macro-economic landscape was changing radically and rapidly. With the final figures now in for the year’s transaction volumes standing at EUR 1.7bn (a 1% increase y-o-y), we note that just 27% of deals were concluded in the second half of the year. In a typical year the last quarter is the busiest as parties seek to conclude deals before calendar year end, however, in 2022 Q4 accounted for just 19% of the year’s volume.

What does that mean then for 2023? How will the investment market perform this year?

The over-used phrase of ‘price discovery’ is still very relevant for the Czech market and we see that the gulf in expectations between sellers and buyers still needs to be reduced. It may well play out that 2023 is another ‘year of two halves’, though the reverse of 2022, with muted activity until summer and an uptick in activity during the second half of the year. Despite the lack of current on-going deals, I think we could still reach an annual transaction volume of around EUR 1.5bn, i.e. just over 10% down y-o-y. The bottom line is, there are enough willing buyers out there and, whilst reduced in number comparatively speaking, we see enough deals underway to demonstrate that the market is still moving in at least some degree.

What’s behind this reduced deal flow? Is it attributable to any one factor?

It’s a good question. The short answer has to be ‘no’, there is no one single factor that could be pinpointed as the only reason for the reduced deal flow. A perfect storm of macro-economic events has dovetailed to bring us to where we are now. However, if pushed to give one thing that I think has had the most impact on investment market activity, I would have to say the increased (and volatile) cost of debt. With most investors using leverage to acquire assets, the speed with which borrowing costs have increased has caught the market off-guard. Buyers’ returns expectations are not met due to the increased cost of servicing debt, whilst simultaneously potential sellers are unwilling to accept the reduced price that is needed to generate the required returns for buyers.

What sector do you think is going to be the most transacted in 2023? And what buyer group will be most active?

For at least the last five years domestic investors have been the most prolific buyer group, taking at least 50% market share (by total volume) consistently each year (54% in 2022). In 2023 it is hard to imagine that this changes. The only caveat to that is if redemptions out of the domestic retail funds don’t rise to the point where Czech funds are more on the selling side of transactions than buying. We also expect European buyers to be active, which includes other CEE groups who have shown increasing regional activity over the last couple of years. Regarding the ‘most transacted sector’ in 2023, the safe bet would be offices, which have held that accolade for 5 of the last 10 years (including 2022, with 46% of annual volume share). For various reasons other sectors are unlikely to accumulate enough disposal volume to gain them the title of ‘most transacted’. What could change all of that would be a one-off portfolio disposal of significant volume, and we see that there is potential for that in the industrial sector in which a small number of owners hold a significant amount of assets.