Possible revival on the logistics and industrial market in the Czech Republic in 2011

2010-09-06

The logistics and industrial market in the Czech Republic has been one of the areas of the property market most severely affected by the ongoing economic crisis. Two years ago demand for such space skyrocketed in the country and prompted an increase in the construction of warehouse and distribution facilities. However, since 2009, the enthusiasm of banks and investors for investment in the construction of such space has waned because of the worsening macroeconomic situation.

42% slump in leasing activity in 2009
In 2009, rental activity on the warehouse and industrial market in the Czech Republic was worth 394,000 m², which reflected a 42% reduction in comparison with 2008, according to Colliers International (CI). Approximately 24% of leases involved renegotiation or the renewal of existing contracts.
Prague remained traditionally the most popular region in terms of logistics and industrial rental in the Czech Republic, accounting for 59% of all such transactions. The year 2009 saw the end of the speculative construction of logistics facilities, whereas in the industrial arena some speculative projects were carried out, but only sporadically. The economic downturn had an adverse effect not only on the developers of such space, but also on tenants.
Hope for recovery on this market was already felt toward the end of 2009. More than two-thirds of leases in 2009 were concluded during the second half of the year. Conversely, in 2008 about 60% of all rental activity in the country took place during the first half of the year. Renegotiation of leases was one of the main trends in 2009, and this continued in 2010. The most costly lease in 2009 was concluded by the Electroworld electronics retail chain, which renewed its contract in TPark Modrice in Brno, for an area of approximately 21,000 m².

Highest vacancy rate found in Central Moravia
In 2009, an area of 442,000 m² of industrial and logistics space was added to the Czech market, according to CI. The most extensive area was that of a 51,000 m² logistics facility delivered by the developer VGP in its park in Horni Pocernice, near Prague. The vacancy rate in the Czech Republic climbed from 20% to 23% between the beginning and the end of H1 2009. With rental activity slowly picking up in the second half of last year, there was a slight reduction in the vacancy rate of 1 p.p. in H2 2009. The regions with the highest warehouse and industrial space vacancy rates at the end of 2009 were Central Moravia (62%), Plzen and the D5 motorway area (31%) and North Moravia (26%).




Another trend in 2009 against the background of the economic crisis which affected tenants was an increase in the amount of industrial and warehouse space being sublet. Tenants offering space for subletting were sometimes more flexible than the developers themselves. They accepted short-term leases and offered lower rents in a move to save costs for space which they could not afford to cover. The downturn eventually prompted numerous developers also to reduce rents and offer better conditions to tenants in financial difficulty last year. Such deals included short leases of three to six months and rent breaks.

VGP delivered most space in 2009
The Czech industrial and logistics market was dominated last year by the developers VGP and CTPInvest. In 2009, in terms of total newly-leased space, CTPInvest lost its leading position to VGP, which rented more than 68,000 m² of logistics and industrial space. VGP was followed by the US firm ProLogis, with 51,000 m² rented. CTPInvest, in turn, leased 34,600 m², placing itself in third position. In 2009 the other major developers, PointPark Properties, Panattoni, Orco/Heitman, Valad, Segro and Amesbury, focused on filling their existing industrial and logistics space and extending the contracts with their existing tenants.

Last year the companies VGP, CTPInvest and ProLogis were responsible for the bulk of industrial and warehouse space in the Czech Republic. CTPInvest led the field, with a portfolio of 1.27 million m² of industrial and logistics space spread among 20 parks across the country. The second most prominent developer in terms of the total stock of industrial and logistics space is ProLogis, with 605,000 m². The third largest developer on this market in terms of its overall portfolio, the Belgian developer VGP (with 380,000 m²) owns the largest industrial park in the country, the VGP Horni Pocernice Park, near Prague.
The Omikron Group was a new entrant on the Czech industrial and logistics market. In 2009 the firm built its first warehouse park, with 5,000 m² of GLA, in Nupaky, near the D1 motorway, and then delivered a warehouse complex with almost 1,400 m² in the town of Hostoun, close to the R6 expressway.



No major changes on the market in 2010?
In 2010, retail, wholesale and logistics will continue to account for the bulk of demand for industrial and logistics space in the Czech Republic, according to CI. Renegotiations are expected to play a major role in rental activity in this arena by the end of the year. Again, Prague is expected to be the most prominent locus of rental activity on this market in the second half of 2010, and to be followed by western Bohemia and northern Moravia.
With the exception of some projects initiated by VGP, there will be no speculative construction in this market during 2010. That is the main reason why competition between the main developers is not expected to change significantly.
The vacancy rate continues to remain high in the regions, with north and central Moravia to the fore. The most substantial reduction in the vacancy rate, according to CI, is expected to be witnessed this year in the Prague and the Plzen and D1 motorway areas. In eastern Bohemia, south Moravia, the regions Usti nad Labem, Liberec and Ostrava, vacancy rates and rents are expected to remain stable.

Demand expected to grow
The total stock of industrial and logistics space in the Czech Republic exceeded 3.6 million m² in mid-2010. Approximately 70,000 m² were delivered in H1 2010, of which 63,000 m² were pre-rented in 2008. Total demand for industrial and logistics space in the first six months of 2010, according to CI, reached 400,000 m².
With a very low number of new completions and growing demand, the vacancy rate fell by 2.9 p.p. from the end of 2009 to 16.5% in mid-2010. There was a reduction in the vacancy rate in all of the regions of the country, with the exception of north Moravia. The vacancy rate in this region increased by 8 p.p. at the end of 2009 to 34% in mid-2010.



Demand for industrial and logistics space is expected to grow in the second half of 2010 and next year, mainly as a result of the appearance of manufacturers on the Czech market. The potential for new demand is estimated by CI to be at least 28,000 m² in Prague and 130,000 m² outside the capital. The vacancy rate and rents on this market are expected to stagnate at least in the second half of 2010. According to estimates from the developers VGP and CTPInvest, with more companies expected to invest in the Czech Republic in 2011, when the economy is likely to return to growth, and because of the convenient geographical position of the country and the quality of its facilities, the total stock of the industrial and logistics market is expected to start to pick up again in 2011 and to exceed 4.85 million m² by 2013.

Marius Dragomir
PMR Correspondent