Tomáš Trčka (Trigea): The worst of the repricing is over

Published: 13. 03. 2024

Western Europe has gone through a pretty substantial repricing of real estate assets. Many people question why they’ve been so steady here, relatively speaking, suggesting the domestic funds are inexperienced. Does the volume of local capital create its own market?

This is nothing new. We went through it in 2008 and 2009. But this crisis, if you can call it that, is different. As you say, there are a lot of Czech funds with a lot of money to invest and for a long period there haven’t been any assets to buy. When someone puts an office building on the market you get 5 or 6 Czech funds fighting for it. I’m not worried about the pricing of Czech properties. In Poland and Germany, it’s not that they are more mature markets, but there are simply many more opportunities.

We also had more inflation in the Czech Republic [than in Europe], so we’ve increased the NOI of the buildings by a lot at a time when there’s minimum vacancy. So, it’s not true to say pricing is holding steady. They may remain steady in terms of the absolute value of the building, but relatively speaking, if you have a 10% bigger NOI, under normal circumstances you’d have a 10% higher value. For me, prices here have already fallen at least by 10%.

Let’s talk about a specific building. We bought Midpoint, we had 100% NOI when we bought it one year ago and today, we have 110%. That’s not an imaginary number, we simply get 10% more rental income. That’s a very strong argument.

Midpoint, Wroclaw

Ultimately then, you’re not worried that prices could still fall significantly?
To be honest, I’m not very worried about a huge drop in value. Maybe there will be a small one on selective assets, but I think we already have the worst behind us.

It certainly appears Czech funds aren’t coming under pressure from their banks and investors.
The larger domestic players are retail funds with lots of cash, so they’re not too sensitive to external financing. If a bank comes and says, ‘you have to repay the debt‘, they just repay the debt. That’s how it is with Trigea. The first building we bought nearly five years ago was Galerie Louvre. We’re supposed to refinance the debt this summer, but if the conditions aren’t right, we’ll just repay the debt with cash and wait for better conditions. This won’t affect the performance of the fund significantly. It’s a rather smaller building, of course, but we have this advantage that we can repay the debt and be picky about the conditions.

What was the leverage back then?
The original leverage was around 70%, which was quite high, because the banks were more generous before Covid. But Galerie Louvre is a perfect building, it’s still 100% occupied, and it’s fully indexed. We shouldn’t have any problem with the refinancing.

If you just repay it, would Czech investors be experienced and active enough to ask why you’re parking money in cash?
In our case, we’re fully-invested. On average though, Czech investors aren’t so educated [about RE investment funds] so it’s very important for them to choose the right fund and the right manager. But the situation today is completely different than three years ago when the rates were basically zero. You couldn’t afford to keep the money in cash since you paid a fee for that.

Today, the situation is completely different. And it’s also part of the strategy of the funds who are fine with doing nothing for the time being. If you can collect 6.5% on deposits, you can be picky. You’re not under pressure. But if the rates go below 3% then you can’t be as picky and will have to invest in properties that produce the highest return.

Institutional investors around Europe have had trouble raising new funds but Czech retail investors just keep putting money in, even though the market has changed.
It’s been steady, but I think the good news is that Czech investors are starting to be picky about which funds they put their money in. They’re getting more educated. While most funds are still taking inflows, there are several funds that have outflows as well. I’m happy to see that the good funds are still seeing inflows.

Are real estate funds ingrained enough here to survive a crisis of confidence if a couple funds were to have problems? Is it a fragile situation?
It could always happen. We all know there are funds we might not recommend to our friends and family. But I also see there’s more education within the population. Investors and even journalists are asking more questions about their acquisitions and their finances.

How did Trigea end up being the investor that bought Arkady Pankrac? It was a bit of a shock for many for such a large, prominent asset go (again) to a Czech fund.
We’d been shopping in Poland for a couple years but we were desperate to buy a Czech asset. We got interested in a shopping center in Pardubice but didn’t end up making a bid. Then, that same seller came to us with Arkady. Our first reaction was obvious — ‘it’s too big for us, we’re not interested’. So, we kept looking. But I mentioned it at some point to one of our shareholders, Radim Lukeš. He said if the asset was good enough, we should look for a way to make it happen. Once we did all the calculations, we realized that it wasn’t so impossible. For something that big, you have to have the full commitment from the whole group and I have to say, both Petr Borkovec and Radim Lukeš were very supportive. Once we committed last summer to buying it, not once during the process did I think we’d fail.

Covid hit shopping centers hard but it also hurt the office sector. Is it still an attractive asset class for you?
I’m still a big fan of offices and Trigea was founded as an office fund originally. But the lack of supply made us change the strategy. I’m glad about this now, because the portfolio we have now is more balanced, with 30% office, 30% retail and 30% logistics, though it will tip more towards retail now after Arkady. For me, the fundamental issue about the Czech office sector is that they’re still mostly full. Downsizing is happening in some places, but not everywhere. Take Trigea for example: we want to expand our own offices but there’s no room, so we might have to go to a different location.

Also in ThePrime

Radka Novak: Prague office space running out

ThePrime Investment Survey: 2024 will be busier…probably

AFI City 1 in Vysočany now fully occupied

Support ThePrime. Get access to the entire archive. Only €8/month!

You May Also Like…

Verified by MonsterInsights