Fred Hlobil: New industrial vacancy is denting rents

Published: 23. 10. 2023

With the benefit of hindsight, was it a good idea to start your business in the middle of a crisis?

I think it was definitely a good idea. The whole market has a different dynamic now. There’s been a big change, in the sense that until Covid, the market was controlled by the big corporate agencies. Since then, it started changing. The biggest visible change is JLL leaving the Czech market and a local group, iO Partners taking it over. That’s a private investment without a listed corporation with a big platform behind it. You’re seeing private groups grow across Europe nowadays, companies like DILS, or here people like Jakub Holec.
The corporate agencies grew to a huge scale, but then the market dynamics changed. The market structures have changed. You have the office sector for example, which is really challenged across the globe because of home-office. Industrial was going up but at the same time, retail was going down. Reshaping a big business around these types of structural changes isn’t easy when they’re challenged with heavy overheads. So, they need to restructure in order to adapt.

So, after 20 years building up experience and clients, you think you got the timing right?

I think I went at exactly the right time, after Covid. The markets were recovering, though there have been new challenges over the last 12 months. You can see that across all the sectors but in particular, the investment sector dried up. There’s a lack of liquidity now. There’s plenty of money in the system, but there are problems because of a lack of money coming into real estate and due to the valuations of existing portfolios. So, it was perfect timing for me because of my size, I’m fast, quick and dynamic and it’s very easy for me to adapt every month to whatever changes there are.

So, with no deals happening, what do you focus on?

I’ve established a few main focus areas. One is land sales acquisitions which is doing fantastically. I’ve got a few very well-established, local Czech landowners who prepare land sites for potential development and then tendering to developers. My relationship with them is very good. That works on the basis of advisory at the beginning, helping them go through the process, then selling the site and bringing the investors for it. Besides that, I’ve established along leasing department where Chris Larue is responsible for it. The difference with the big boys is that we really try to differentiate ourselves by bringing deep expertise into it. We are linked to different sorts of advisors beyond just real estate who are helping us to provide above-standard service. And we are not restricted only to the Czech market. Last year we helped a client establish itself in Slovakia. Why Slovakia? We saved millions them of Euros by moving to cheaper transport and warehouse location.

The third leg of the business is that I do a variety of consultancy work for investment funds and banks. For example, I’ve been advising a bank where I advise regularly on the commercial side of their acquisitions. Not the valuation but the commercialization which is linked to the redevelopment of assets they acquire. I advise them on whether the commercial terms of the tenancies are not okay and whether there’s any potential uplift. Redevelopment potential is another important part of the job. That’s regular advisory work where I meet my corporate colleagues who do their RICS valuations, whereas I do the commercial side. I like this because it’s creative work. I look at it to say what I’d do with it — whether there’s some sort of business potential.

Given the current market conditions, are tenants moving towards or away from BTS solutions?

There are a number of companies with the rise of rents asking for BTS solutions. We are working on about five of this right now. We’ll see if whether it’s going to be the way forward because even these sorts of occupiers need to raise financing at a certain point. But that’s something which six or seven years ago was not the case at all. Occupiers were not asking for it.

Are Czech-based companies still unwilling to pay rent versus owning?
It’s true, a lot of Czech companies are happier owning their real estate. They can’t compare markets like German vs. the Czech market because they’re not established outside. Of course, a lot of investors especially from the UK and Germany see better opportunities today in their home markets compared to the Czech Republic. But not everyone is established all across the continent. So, you’re right, if you’re locally-based that you try to reinvest your money at home.

Germany’s manufacturing industry is falling apart at the moment. Will it cause a wave of distress coming here in the Czech Republic? Or great chances to buy land?

I think the difference between Czech Republic, Nordics and UK is that in the Czech Republic the land in most cases isn’t financed by bank loans. The owners have their own equity in it. As such, I don’t expect huge pressure on land costs. There might be some changes and some distress, but not on a wider scale as in Germany, UK and Nordics. Where the loans were used for land banking.

But the industrial real estate sector is affected with 50,000 sqm of new vacancy hitting the sector every quarter since the beginning of the year. It’s not a huge amount, but it’s higher that it used to be. You’ll get hundreds of thousands of sqm within the space empty. Vacancy is going to rise and you can see that it’s pushing rents down slowly. Some developers are going into speculative construction. It’s not a huge wave like before the last crisis. But still, you can see bits and pieces of spec construction, or they start construction and then wait to find a tenant. You’ve also got plenty of subleases on the market.

You don’t think this will cause widespread pain, then?

No. I expect it to slow down more than it has so far. I expect vacancy to rise and for rents to go down a bit. I expect construction is already coming down, but not on the scale of the way it’s happening in Germany.

So, I can’t justify some scary headline about a market crash to help push subscriptions?

No, I don’t see that in the next couple of months, but we’ll see what happens next year.

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