Let’s start with Czech capital. Its dominance of the local market is evidence of real wealth in the country and faith in property as an asset class. But you could also see it as a sign the market is becoming less international.
It’s both. The positive side is that in the Czech Republic and Slovakia, we have the legal infrastructure for local capital. This local capital correctly (rationally) sees real estate as an excellent investment, given the country’s level of affluence and the lack of supply in Czechia. At the same time, if you look at international capital, if they want to deploy half a billion euro into buildings that are similar to each other in order to create a consistent portfolio, they can’t really do that in Czechia with the current availability of product.
They could do it in the Czech Republic, Slovakia and Poland, but then they would be in three different countries with three different sets of regulations and laws. It’s very difficult for international capital to access these markets not only because of the lack of product or it’s being expensive, but because of the small size of the market. That’s definitely a negative point.
In that sense, Poland has the advantage of being the largest of the markets. In industrial and maybe in the future with rental residential, you could build a big, consistent portfolio there and you could manage it effectively.
Is that just the bad luck of being a small country or is there something the Czech Republic could be doing differently that would mitigate the issue?
I think technology will help. As technology improves, it will become easier to manage complicated situations in terms of legal matters, leases, local laws and regulations. Then there’s the fact that you have reliable advisors on the ground because you don’t have to do things in-house. But overall, yes: it’s mostly the bad luck of being a fairly small market.
Is that an argument for you to do as the Czech president suggests and commit to switching to the Euro?
It would help massively. If the Czech Republic switches to the euro it will massively boost the interest of western capital into Czechia. Because you lose one huge, problematic topic: currency risk. And you lose the whole discussion over having a Czech koruna market but euro denominated leases. It will massively help rental residential because suddenly the whole question of whether to finance in EUR or CZK goes away.
How are you finding MIPIM?
There are fewer CEE people here. Prague and Ostrava don’t have a stand and many people from Prague didn’t come this year for the first time. But overall, the mood is better than last year. I feel like the western world here is more active than last year. The outlook is positive, even though there are concerns over the political situation and Russia’s invasion of Ukraine.
So why is it better? What’s changed?
All the parameters are better. Interest rates are lower than a year ago, and the outlook is they will go down very quickly. The Czech inflation numbers are lower than expected because we’re already at 2%, which people didn’t think would happen until next year. That means the inflows into Czech funds will grow because people won’t put their money into the money markets — they’ll put it into real estate. Also, energy costs are almost back at pre-Covid levels and the occupational markets have held up quite well. It’s true offices are a question mark, but all of the other sectors are generally very healthy, so there’s no rational reason to be pessimistic. We have all reasons to be optimistic.
Domestic capital in the Czech is a huge proportion of the local market, unlike in Poland, where it’s always been largely foreign-dominated. Has the repricing in Poland been more severe in part because the international investors have put Poland on hold?
Definitely. The shift we’ve seen in Poland on industrial yields from 4-ish to 7-ish is massive, though I think that repricing is pretty much over. If you have foreign capital in a country which is sensitive to sentiment then it can come in very quickly but it can also leave quickly. At the same time, I see that this time around we’ll get Polish local capital involved in the market. We’re already seeing the signs. It started with fairly small lot sizes in retail parks of around €10 million. But it will expand.
What sort of structures do they invest through?
They don’t have proper legislation for it in Poland so they are investing directly, mostly high net worth individuals. Polish capital will find a way to engage with the market eventually. I think in the next five years, or more probably two years we’ll see Polish local capital becoming a force on the market.
Will we come out of this with a small discount between CEE and Western European properties?
I think what we’ll see is more of a disconnect between yields in CEE and Western Europe because the dynamics of those markets are quite different. Before, Poland in particular followed what was happening in France and in Germany. I think there will be less of this correlation in the future because the occupational markets in some areas of Poland can be better than in France and Germany. And because there will be more local capital and Czech capital.
If you look at Czechia now compared to Germany, we are seeing a different dynamic. The pricing is sharper in Czech in some areas. And it’s logical for many reasons.
So, the discount could be reduced?
We could actually come out of this with a premium in Czechia over some western markets.
What’s the impact of tighter financing on deal flow? What impact will it have on pricing?
One thing it does is it puts pressure on owners of real estate to invest in ESG. That’s not even up for discussion anymore. It’s a given that people will invest the maximum that’s economically feasible. The other thing is that people are looking for more creative structures to raise money. They’re looking for mezzanine financing, JVs, bond issues. They’re looking for more partners for their platforms because they realize they can’t rely on banks to cover all of their needs. We see Czech banks and financial groups being more engaged and more open about hybrid financing structures in the Czech and Polish markets.
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