AFI Europe’s Czech portfolio now spans six office buildings totaling around 150,000 sqm, after the company closed its acquisition of the 40,000 sqm Port 7 from Skanska in June. It also manages almost 900 build-to-rent units under the AFI Home brand, all fully occupied, with another 1,600 units in development across three Prague districts. The first, Nová Elektra in Prague 9, will be followed by around 520 units at AFI Home Strašnice in Prague 10, with construction on the Port 7 site expected to start next year.
Karin Shalev Shogol says the company’s approach is simple: “We are ready to build. As soon as the permits are in place, we move forward.”
AFI Czech Republic’s CEO spoke to ThePrime about why Czechs are warming to renting, why record supply hasn’t brought prices down, and why AFI is buying offices but not building them.
How many of your tenants are on the fence between renting and buying? Are your projects a stepping stone?
We are seeing a real shift in the Czech market. If in the past renting was a temporary solution until someone can afford an apartment to buy, today we definitely see more and more people who see this as their long-term solution. They see the benefits in renting, which are the flexibility, the mobility, the ability to change from a 1kK to a 3kK, or to a different location entirely, to move to a different country, or to have all the technical and maintenance aspects being taken care of by the landlord. It’s about choice. For many of them, it’s really a way of life. There is even a certain appeal today in living in a high-quality, professionally managed BTR project, where residents know they will be well taken care of.
That’s why who the landlord is matters enormously, and I think every long-term BTR investor should take that responsibility seriously.
Tenants need the security of knowing that they can live here as long as they want and make it their home. We also try to accommodate our tenants as their lives change. At an event last week, a tenant told me he was single when he moved in a few years ago. Then his girlfriend wanted to move in, and we were able to move them to a 2kk in the same building. They didn’t even have to move their storage.
That’s the rational argument, but for a lot of Czechs there is still a psychological barrier to renting.
I agree, but there is a mindset shift. A Czech friend told me that a few years ago suggesting to someone that they rent rather than buy could almost be taken as an offense. Today, the conversation is very different.
In Germany, most people rent. What is the upside, for society and for families themselves?
First of all, I don’t think the goal should be to promote either ownership or renting. What matters for a healthy housing market and for society is to have the choice, to rent now and own later, or the other way around. The benefit of renting is, first of all, the allocation of capital. You don’t have to lock your capital into one investment. You have the mobility to change where and how you live as your circumstances change. Andof course, the responsibility for repairs, maintenance and the operation of the building sits with the landlord rather than the resident.
But that model only works well if tenants can rely on a professional, long-term landlord.
In Berlin, around 85% of people live in rental apartments, sometimes for generations. I think it’s a psychological, or maybe a cultural, matter.
There are more than 6,000 flats on sale in Prague. Developers always blame soaring prices on the lack of supply. Why isn’t greater supply leading to lower prices?
Six thousand units on the market seems like a large number, but we need to look at what happened in the years before. There’s a cumulative lack of new apartments, thousands per year compared to demand. This surge of supply is just covering a part of that accumulated deficit. The other side is that Prague keeps attracting people and creating jobs. I’m confident demand will grow continously. That’s also the underlying assumption behind our growth phase, and why we are looking for more and more land forresidential development.
How about rents? You have 1,600 units in your pipeline and others are doing the same. What happens to BTR rents?
Sales prices have an effect on rents, but rents will not necessarily grow at the same pace. Rents are directly linked to the disposable income of families, so there is a structural limit to how much they can increase compared to sales prices.
If you look at the BTR pipeline in absolute numbers, AFI is the biggest player in the market. Even if you add everyone’s projects together, the underlying demand remains significantly greater than the new supply currently coming to the market. So I’m confident occupancy will remain high and rents will increase, perhaps slightly above inflation. But for us it’s really important not to optimize every single rent. We hold and manage our AFI Home buildings long term, so we focus on the satisfaction and retention of our existing tenants.
Is inflation having an immediate impact on your development costs?
We are in a much more stable position now than we were after COVID and after the war in Ukraine started. We do see labor and construction material costs increasing, and of course that affects how we underwrite projects. Our strategy is to engage with our general contractors well in advance. We work with large, stable contractors that we’ve had positive experience with. We try to lock in prices as early as possible, and we calculate with contingencies. So yes, prices are increasing, but in a way that we can manage.
Berlin held a referendum to nationalize large institutional portfolios. It’s a city you know extremely well. Does that level of concentration lead to less investment or poor maintenance?
Berlin has a structural housing shortage of around 220,000 homes needed by 2040, so political pressure for intervention was inevitable. But we need to differentiate between creating new homes and reallocating existing ones. Moving units from institutional owners with more than 3,000 units (around 200,000 units in total) to the municipality is a reallocation. It doesn’t solve the shortage. What a city or a country should be doing is bringing in investors and developers and allocating land for development, to create more homes. And the sooner, the better.
How do you rate Prague’s Metropolitan Plan and the new construction law?
I congratulate the city and the state on these steps. They were in the making for many, many years. I remain optimistic about their effect, but time will tell. We’re in a growth phase, basically looking for the next AFI City. The Metropolitan Plan gives us more certainty about what we can build on a piece of land, and that brings us a step closer to the first yes-or-no decision.
You surprised a lot of people when you bought Port 7, instead of focusing on residential.
Globally, office is still the majority of AFI’s portfolio and in Czechia it’s currently 70% of our portfolio. Developing offices is not something we were planning at this point in time. Port 7 fits our strategy of holding A-class assets long term, and it’s fully leased with very good tenants. The availability of adjacent land for a BTR project completed the deal for us.
Is residential squeezing out office development the way it squeezes out industrial?
Surprisingly, office vacancy in Prague is very, very low, at about 5.7%. So, you’d definitely have to argue that there’s space for new space. Would a new office building find tenants? I would definitely say yes. Having said that, office rents are still much lower than BTR rents, and if you count sales, the gap is even bigger. Microsoft Excel answers the question. That said, we evaluate every opportunity case by case. I’m not ruling out any interesting investment or development.
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