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Czech Republic Real Estate Report Q1 2012

There are signs of healthy recovery in the Czech Republics real estate market in 2011, mainly because of a big increase in investment in new projects. Overall investment in the market is expected to reach EUR1.5bn in 2011, which is nearly double the EUR800mn invested in 2010. This investment growth is driven by foreign money coming into the Czech market. Foreign investment accounted for two-thirds of the real estate market in 2010 and so far in 2011 it has accounted for 90%.

There is evidence of increased demand for commercial space, particularly for offices in Prague, where vacancy rates may fall to less than 7.5%. According to Colliers, gross take-up of office space reached 173,000m2 in the first six months of 2011; 78% up on the same period of 2010.

However, despite the encouraging signs, our in-country sources remain cautious. Rents and capital values remained stable in 2010 after a difficult period in 2009, but we have seen a wide disparity in the first half of 2011. This has been attributed to an increase in the number of shopping centres in the country, which have improved facilities and have had a marked effect on rental rates. However, there is no indication that there will be anything more than gentle rises in rents and capital values in 2011. Yields are likely to remain at present levels throughout 2012.

It is hoped that the Czech Republics economic recovery will help the countrys domestic property developers, who are continuing to struggle to gain credit. The most notable casualty has been ECM Real Estate Investments, which declared bankruptcy in May 2011. GDP growth was 2.8% in Q111, which represents the strongest growth since the start of the economic crisis in 2007.

Business confidence remains fragile, though. Domestic investment in property is expected to remain subdued because of fiscal tightening and there are still uncertainties arising from the eurozone debt crisis, which could yet stop the Czech recovery in its tracks. The overall message is one of cautious optimism. Should the German economy, in particular, continue to grow, then the Czech Republic real estate sector remains the best positioned in Central and Eastern Europe to benefit.

Key Opportunities

- Real estate investment in is expected to reach EUR1.5bn in 2011, according to Cushman & Wakefield. This is nearly double the EUR800mn of investment that took place in 2010. - Real estate growth continues to be driven by a high level of foreign investment in the market. Foreign investment accounted for two-thirds of the market in 2010. This has risen dramatically to 90% in the first half of 2011, with Austria- and UK-based groups accounting for 70% of all deals. For example, UK investment fund EPISO bought an 80% stake in VGP.

Key Risks

• A more pronounced slowdown in eurozone growth than we are currently forecasting would weigh considerably on Czech growth. The country is heavily reliant on the external market for growth, particularly as government expenditures are dragged down by fiscal austerity and consumers struggle to bounce back from the global recession.

• The Czech consumer remains relatively weak. Factors such as elevated unemployment, rising inflation and fiscal austerity measures will continue to depress household expenditure where private consumptions continues to trail behind.

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