Is Prologis pushing for growth right in the next few years? Or are you in asset management at the moment with your Czech portfolio?
Everyone’s goal is to grow, but there are two ways to do it. You can grow the value or the size of your portfolio. We are targeting both. To grow in size, you either need to acquire your competition and/or their parks, or else you need to develop your land bank. In the Czech Republic, we “sold-out” our land bank during the COVID times and monetized (or put into production) 90% of the land that we had acquired in past. For the past two to three years, we’ve been rebuilding the land bank almost exclusively with prime locations like Prague.
We are also open to growth through acquisitions. Recently, we added a building of more than 17,000 square meters in Rudná to our portfolio through a buy-and-leaseback agreement with DSV, incorporating it into Prologis Park Prague-Rudná.
Haven’t you always had one eye on the exit, when it came to new development. Which meant that you preferred major cities because of their liquidity?
In the past, we looked at Ostrava and other secondary locations, but these days we don’t have any more assets in them. We reduced our portfolio over the last decade to focus primarily on Class A locations. In Central Europe, that means Prague, Brno, Bratislava, Budapest as well as Warsaw, Poznan, Wroclaw, Central Poland, and Upper Silesia. These are the locations where have the main focus.
In the last two to three years, we made new land acquisitions, and should be able to develop 180,000 sqm of space in the Prague area (and a bit near Pilsen). At the moment, we’re working on entitlements and permitting. Construction should be able to commence soon in the Prague area.
Right after COVID, we saw arguably unhealthy rise in rental prices, especially around Prague. That seems to have calmed down since then. How would you compare the current situation?
Prime industrial rents almost doubled from between about 2017 and 2023. Of course, the unprecedented spike in demand during Covid along with very, very low vacancy levels drove that. Vacancy has risen slightly increased in the Czech Republic, but that’s mainly in secondary markets. What we see now is stability, following an approximately 10% correction in rents after 2022. Now we see rents increasing a bit, especially within Prague’s borders. We think that will come also in the greater Prague area eventually.
You say you want to grow the value of your portfolio but that requires rent increases. Doesn’t that make you dependent on the market?
You can influence your rental revenues directly by having assets in prime locations. We have approximately 30% market share in the Prague area, and that’s where we have over 80% of our portfolio. It’s also where the chances for rental increases in the future are the best. The value of your portfolio depends on the quality of your customers. That’s primarily about the location, but it also depends on maintaining the building’s standards. If you modernize your assets in these locations, you can ask for A class rent levels, even if they’re 20 to 30 years old.
Your park in Rudna is maybe a good example of this. It’s not within Prague’s borders but it’s changing as a location.
It’s true. Rudna is 6 km from Prague, but it’s developing into a kind of business park. We see many companies setting up their headquarters there. In a way, it’s like a revival from a couple decades ago when there was no Class A office product in Prague. Once new offices were built, the amount of demand for offices in our parks fell. For the last two years, though, we’ve been seeing a return of demand. Parks close to Prague are becoming good locations to set up large offices or to relocated operational teams. Rudna has developed into a real business park, not just a logistics park.
The flip side of that process is Sportisimo, which left Rudna and moved to Ostrava.
When you run a company that employs thousands of people in your warehouses and you operate hundreds of retail stores, you really have to decide where your center of gravity is. You need to evaluate all inputs such as labor costs, transportations costs, location of your stores, etc. Moreover, almost the same day Sportisimo left, we re-leased the space to DB Schenker. They’re providing high value add services for their customers there.
Are you saying Prague will be increasingly attractive to companies with fewer employees?
Not always. We have customers around Prague that are pretty labor intensive. The fact is that Prague acts as a kind of magnet for employees. You pay mployees more, but at least you can find and hire new ones if you need.
Are you interested in building for last-mile logistics within city limits?
We are, but it’s quite difficult to compete for land with the residential developers. It’s a super-heated environment sector, where prices for new apartments grew by 12% in Prague in one year alone. That allows developers to pay more for the land. In order for us to be able to compete, rent prices for Prague warehouses would need to grow even more. It’s happening, but the growth would need to be more significant.
Is Prologis set up to do anything else but big box development?
These days, when we speak about the Prague area, we’re finding we need to cut the buildings into smaller units. That’s something we’re happy to do. So, if a building has 10,000 sqm, we can lease it to three to four customers, since our buildings are designed to make that possible. The closer the land is to Prague, the smaller units we’ll be offering.
We don’t really want buildings with 200 sqm – 300 sqm units that tenants service with small vans. But on the edge of Prague, we want to develop units that will start from 1,000 sqm to 1,500 sqm that are accessible and serviceable by trucks and small cars. We see good demand for that.
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