High construction costs, complex permitting processes and the related uncertainty of investors regarding potential returns are behind the halt in office space construction in the Czech Republic. This follows from the statement of experts contacted by the Czech Press Agency. According to them, construction would be realistic if the market would be willing to pay more for rent than the current average. After the covid-19 pandemic, although demand for offices is growing and vacancy rates are falling, investors prefer to wait for the real estate market to stabilise and interest rates and inflation to fall, the experts said.
The Prague Research Forum, citing its analysis, stated last week that not a single construction of office space in Prague started in the second quarter of this year. The last time office construction started in the capital was a year ago. The office vacancy rate fell to 7.3 percent quarter-on-quarter and demand for offices rose 23 percent year-on-year. The highest monthly rents have stabilised at 26.50 to 27 euros (about 650 crowns) per square metre for prime offices in the city centre, at about 18 euros (about 433 crowns) in the wider centre and 15 to 16 euros (about 370 crowns) in the outskirts.
According to Eduard Forejt, director of business development at investment company Passerinvest, the main factors that go into the economics of projects are land acquisition, construction costs, costs such as services, salaries and marketing, and then income and revenue.
“Land acquisition has risen to historic highs in recent years. Construction costs have risen unprecedentedly to more than a multiple of the values of five to seven years ago. Added to this is the rise in soft costs. So the increase in all categories of total building investment costs is currently a ‘killer’ mix of changing conditions that is driving the projected economics of office building construction into the red,” Forejt said.
His words were confirmed by Bank Creditas analyst Petr Dufek. “Building at a time when money is basically at its most expensive and construction costs are still the highest is more challenging with regard to the potential profitability of projects. It is definitely better to put the brakes on early than to end up with tens of thousands of metres of vacant office space that would not be in demand,” Dufek said.
According to Forejt, in order to make office space lucrative for investors again, rents would have to be EUR 26 to 30 (CZK 625 to 725) per square metre. According to him, rent increases are expected. “But such a rent increase has to be accepted by the market, and that takes time, which is happening right now, when they are simply not building,” Forejt said.
According to experts, construction is also complicated by complicated permitting processes that prevent the construction of office buildings even in regions outside Prague. “Demand in Pilsen and Ostrava is growing and new projects will not be able to cover this increasing demand. It is necessary to enable the conversion of land into building land and speed up the permitting processes,” said BH Securities economist Štěpán Křeček.
However, according to the interviewed experts, a revival of office construction this year cannot be expected.
Source: CTK
