DTZ: German funds vacate their position atop the Czech real estate market (CZ/DE)

In the first half of 2010, the volume of capital invested in domestic commercial real estate increased by 233% year-on-year. However, according to the international consulting firm DTZ, it is not advisable to attach too much importance to the aggregate amount of €215 million, taking into consideration investors' continuing low rate of activity in comparison with the period from 2005 to 2008.

"More interesting than the numbers is the profile of the investors and purchased properties," says Ryan Wray of the investment department at DTZ. "If not for a pair of Austrian investors seconded by an investment group from the United States, the Czech Republic would look like a local market driven exclusively by domestic capital."

The difference in the preferences of domestic and foreign investors warrants closer inspection. The Austrian fund Hypo Real Invest, which has realised two transactions in the Czech Republic this year and is planning more, focuses on high-quality office properties with creditworthy tenants and long-term contracts. The most active representative of domestic investors to date is the company CPI, which is also seeking properties in attractive locations with long-term leasing and a strong tenant base, albeit across various sectors. With regard to the development of the domestic legislative environment, there has been a general weakening of German investment funds, which for years had comprised one of the driving forces of the Czech property market.

According to the Prague office of DTZ, several factors have contributed to the clear dominance of domestic investors. Since the fall of Lehman Brothers in 2008, capital markets have seen numerous international investors shift their attention to well-established, traditional markets. This left a gap in local capital markets, which domestic investors stepped in to fill. The financial crisis also pushed larger institutions into a situation in which they are forced to far more thoroughly examine and consider every investment opportunity. Conversely, the more flexible optimization of decision-making processes has enabled investors possessing knowledge of the local environment to respond more rapidly and with a greater degree of flexibility. Thus, local investors have shored up the Czech market even during the period of global uncertainty.

International competition in the area of prime real estate has also been weakened by the persistent passivity of German open-ended investment funds. A suspension of redemptions was announced in response to the uncertainty ensuing from changes prepared by the German finance ministry which will be focused on making the functioning of capital markets more transparent while ensuring greater protection for investors. The proposed measures, which for example include a 10% reduction in asset values, have led to a significant outflow of capital from the given funds due to investors' fears with regard to further developments.

The reforms have been neither finalized nor approved yet and, according to Ryan Wray, it is thus not possible to estimate their long-term impact. Nevertheless, in the short term it is highly improbable that German open-ended investment funds will feature prominently on the Czech investment market. Whereas German investors accounted for more than 40% of the market in 2008 and 2009, in the first of 2010 their share of the market was less than 5%.

Year-on-year growth of 233% on the investment market and the number of transactions prepared for the second half of 2010 are positive signals, though they do not necessarily indicate the market's full recovery.

"I believe this shows that the market has reacted to the events of 2008-2009. The investors, international and domestic, are focused on sustainable income. They are exploiting the discounts on capitalization rates before the market heats up again, and they are taking advantage of opportunities where financing is in place at levels more favorable than those achievable today," Ryan Wray explains.

Source: DTZ

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