Real Estate Investment in the Czech Republic, economic outlook and the privatization of the country. Commercial Real Estate analysis for the 1st quarter of 2011

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CZECH REPUBLIC
By Lilia Tome
Spring 2011
REAL ESTATE INVESTMENT & ECONOMIC OUTLOOK

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• Introduction – Investment Climate
• History & Economic Transition and Privatization
• Country General Information
• Economic Outlook
• Commercial Real Estate Analysis
• Investment Recommendations
CZECH REPUBLIC AGENDA

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INVESTMENT CLIMATE
• One of the most developed transitional economies
• European Union Member
• First country in Central and Eastern Europe accepted into the OECD
(Organization for Economic Co-operation and Development)
• The country is a NATO member fully integrated in other major
international organizations such as the IMF, WTO, and EBRD
• The Czech National Bank has maintained
exceptional monetary stability since 1991
• The Czech Crown is fully convertible
CZECH REPUBLIC INTRODUCTION

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• Size area: 78,866 km2
• Population: 10.527m (Sep 2010 est.)
• Population growth: 0.62% (average, 2006-2009)
• Land boundaries: Austria, Germany, Poland, Slovakia
• Language: Czech
• Government type: Parliamentary democracy
• EU entry date: 1st May 2004
• Education: Literacy 99.8%
 Labor Force is considered highly educated
CZECH REPUBLIC GENERAL INFORMATION

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• After World War I, The Bohemian Kingdom became
Czechoslovakia (was among the 10 most Industrialized
nations in the World)
• After World War II Czechoslovakia:
 Was more or less physically intact
(avoided air bombardments and invasions)
 With help of Soviet Union, Germans and
Hungarians were expelled
• For 41years (1948-1989) was a Communist State
• Between 1989 - 1993 the pacific Velvet Revolution
ended the Communist government
CZECH REPUBLIC HISTORY OF THE COUNTRY

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• The Velvet Revolution in 1989 ended Communist control in the Czech Republic
• Economic reform and privatization were priorities for the new government
• One of the first goals was the extensive restitution of property that had been seized
from its original owners during the Communist takeover.
• Real estate made up the largest segment of assets to be restituted.
 Farmers, businesses, and religious orders were the main recipients
MORE THAN EIGHTY PERCENT OF THE CZECH ECONOMY IS NOW IN PRIVATE HANDS
• TRANSITIONAL ECONOMY is an economy which
is changing from a centrally planned economy to
a free market
• PRIVATIZATION is the transfer of property or
enterprises from the state to private ownership,
and the creation of a financial sector
• RESTITUTION involved the return of private
property to original owner, or their heirs
CZECH REPUBLIC ECONOMIC TRANSITION & PRIVATIZATION

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• In Prague 6
• Neighbors :
 President Vaclav Havel’s
 Turkish Ambassador
 Spanish Ambassador
 Swiss Ambassador
 Japanese Ambassador
Market Price: $5,000,000 (sale)
$25,000 (lease)
Aprox 4,500 Sq Ft +3 floors
2 car garage, basement, double lot
CZECH REPUBLIC A RESTITUTION CASE

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• The Czech economy grew 2.3% in 2010  German economic recovery
• For a small, open, export-driven  Czech economy is very sensitive to changes
in the economic performance of its main export markets (80% exports go to
Western Europe, 1/3 to Germany)
• Czech financial system has remained relative healthy
• Economy has not been directly affected by the debt crises
• Czech crown (CZK) has been on a general appreciation trend since 2001
• The budget deficit was 5.2% of GDP (Goal to be 3% 2013)
• Government debt was expected to reach nearly 40% of GDP
• Inflation rate increased to 1.5% in 2010 (from 1.0% in 2009)
• Unemployment rate by Nov. 2010  7.1% (according to Eurostat)
CZECH REPUBLIC ECONOMIC OUTLOOK

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General Data
CZECH REPUBLIC ECONOMY OUTLOOK

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CORRUPTION IN THE PUBLIC SECTOR
“Transparency and accountability are critical to
restoring trust and turning back the tide of
corruption”
Czech Republic is:
 Global ranked 54/178
 Regional ranked 24/30
Source: Transparency International
Corruption Perceptions Index 2010
CZECH REPUBLIC TRANSPARENCY AND CORRUPTION

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Maintaining an open trade and investment climate has been a key
element of the Czech Republic's efforts to strengthen its market economy
• Advantageous location in the center of Europe
• Relatively low cost structure
• Well-qualified labor force
• Foreign and domestic investors are treated identically. Both are subject to the
same tax codes and laws
• A 15% withholding tax is charged on repatriation of profits
• This tax is reduced when double taxation applies  For U.S companies with
more than 10% of shares on Czech company the rate is rate is 5%
CZECH REPUBLIC FOREIGN INVESTMENT

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Foreign Direct Investment (FDI)
Leading Foreign Investors Foreign Investment by Sector
2009 1998-2010
7% 1% Manufacturing
Germany 9%
Netherlands Financial Servc
32% 26% Austria 43%
Real Estate
France 19%
15% U.S Utility Services
5% Swiss 21% Transp &
5% 6% 11% Others Telecom
Source: CzechInvest
CZECH REPUBLIC FOREIGN INVESTMENT

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Total investment volume in 2010 €664 M
48% more than in 2009 but still
37% lower than in 2008;
Assets acquired manly by Czech investors
 Investment activity with €384 million
 Small to medium sized office and retail
 Activity was in Prague & Metro Area
 2011 will have similar total transaction
volume with sustained appetite from
domestic based investors.
CZECH REPUBLIC INVESTMENT MARKET UPDATE Q4 2010

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CZECH REPUBLIC INVESTMENT MARKET UPDATE Q4 2010

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OFFICE SECTOR
• Q4 had investment deals for just below
€100 million
• Q4 showed highest level of absorption in
2010 in Prague (71,500 sq.m)
• Vacancy level over Q4 at 13.15%
• Prime yields in Q4 held firm in Prague
• Tenants still have the power  lease
renegotiation, upgrades & consolidation
(9,800 sq.m Oracle renewal)
CZECH REPUBLIC COMMERCIAL REAL ESTATE

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RETAIL SECTOR
• Stable inflation and unemployment rates
decreasing  stronger retail environment.
• Adjusted retail sales rose by 3% Q3 2010
• Good occupier demand for prime retail in
Prague which have out-performed the
market during the downturn
• Retail rents have remained stable over the
fourth quarter
• No plans for new development
CZECH REPUBLIC COMMERCIAL REAL ESTATE

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INDUSTRIAL SECTOR
• The continued economic growth driven
by the accelerating industrial output
•  Levels of demand for modern
industrial space in the country
• Strong activity IN Q4 was evident in
Prague, and the regional cities of
Ostrava and Pilsen
• Strong occupier activity + low
development activity, vacancy rate fell
10.6% by the end of Q4
CZECH REPUBLIC COMMERCIAL REAL ESTATE

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CONCLUSIONS
Economic recovery will continue in 2011 and the industrial sector will
expand by another 6.2%
New Industrial (logistic) development of well located
prime assets offering secure and long term
Increase in demand for core office space could be seen by the
rising employment levels and economic growth but its positive
effect on rents will be affected by speculative development
pipeline
CZECH REPUBLIC INVESTMENT RECOMENDATION

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• Domestic banks belong to major European banking groups  Very conservative
 Czech banks were healthy throughout the financial crisis.
 CR had no need of capital injection into the banking system
• Foreign investors have access to loans in local markets at market terms
• Prague Stock Exchange  small, only 15 companies listed
• 2010 trade volume USD 20.4 billion of stocks
• 2009 trade volume USD 24.5 billion
• Average daily trading volume approximately USD 81 million
• The PSE index increased by 9.62 percent in 2010.
• The secondary market has Limited Transparency
• Prices on the Prague exchange are unreliable, with large
differences between bid and ask prices
CZECH REPUBLIC EFFICIENT CAPITAL MARKETS

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VISIT THE CZECH REPUBLIC
Fantastic Beer
Magnificent Castles
Romantic Cities
CZECH REPUBLIC THANK YOU