New real estate projects will be completed in Prague, but inflation will drive the 2023 market

Rising costs for construction and financing mean higher prices in all real estate sectors, despite some new supply on the market. Staff

Written by Staff Published on 18.01.2023 07:30:00 (updated on 18.01.2023) Reading time: 3 minutes

The Czech real estate market will have a challenging 2023 due to rising costs, which will impact both projects currently coming onto the market and plans for the future. Changes will affect all real estate sectors: industrial, office, and residential housing, according to an analysis by real estate service firm Colliers.

Prices for construction materials are unlikely to decrease dramatically in the short term, and financing costs are also expected to remain high. Newly developed real estate projects will have more difficulty proceeding without revisions to their business plans or profit projections.

Increases in the cost of financing are likely to limit construction activity, especially among smaller developers where financing banks are more cautious, Colliers said. Inflation is expected to continue into 2023.

“The year 2022 represented some sort of a preparation stage. The year 2023 will represent a year where energy providers and consumers, landlords and tenants, companies and customers, and all others who produce and consume will try to balance between saving, spending, and investing responsibly, through increased productivity and despite higher financing costs,” Colliers said in a press release.

New residential projects remain out of reach for most people

Sales prices for residential real estate are currently out of reach for much of the population. Developers, planners, and authorities are currently looking for solutions to address Prague’s housing crisis. Developers may look to dedicate a portion of their projects to rentals.

Sales prices in newly built projects are unlikely to decrease significantly since construction and financing costs already putting pressure on profits.

“What can be expected, however, is the adjustment of prices on the secondary market of pre-owned apartments. Thanks to the fact the general increase in prices occurred fairly recently, many owners have much larger space to negotiate. Yet it can still be difficult to fully align expectations on both sides,” Colliers said.

More office space coming this year

Office rents in Prague will rise due to the inflation clauses in existing contracts. Rents for new contracts could also go up 10 percent or more. In the past, rental increases were primarily driven by supply and demand on the market, but now inflation is the key factor.

The prices are also causing companies worldwide to reconsider their moves or expansions. Some might be only postponed by several months or years, but cancellations won’t be that rare, according to Collier’s analysis.

There will also be new offices coming onto the market this year, adding approximately 140,000 square meters of office space. These are mostly parts of large multi-use developments built on largely brownfield locations.

“After two years of undersupply, such projects will be a welcome addition to the aging office stock,” Colliers said.

Retail spaces are being refurbished

Prague’s retail sector will also see some added or refurbished spaces. During the pandemic, many landlords of stores on Prague’s main shopping streets started partial or complete refurbishments.

On Na Příkopě street alone, four projects are undergoing refurbishments and several others are in the permitting stages. These could attract new brands and service providers.

“With authorities focusing on refurbishments of public areas and squares, the previously stalled look of Prague’s high street is slowly improving,” Colliers said.

As the prices of electricity and gas increase, food and beverage businesses are likely to be the first ones in danger. “When you add this to the two years of pandemic restrictions, you have a deadly mix for part of the market. As a result, we will probably see more units become available or offered for takeover, especially those which relied on tourism,” Colliers said.

Still no new Metropolitan Plan

Developers in Prague will also likely have to wait for new guidelines, as the Metropolitan Plan is unlikely to be approved this year.

The current zoning plan, which is over 20 years old, does not reflect the current needs of the city. A new zoning plan for Prague has been in preparation for over a decade. It should define clear development rules and simplify the permitting process.

A recent public hearing generated thousands of comments from both the public and local authorities, which will need to be addressed before the plan can move forward.

Record amount of industrial space

Across the Czech Republic, the large industrial market will continue to grow, and a record amount of space is under construction. The total market of large industrial buildings surpassed the 10 million square meter mark in 2022, and will soon reach 12 million square meters.

Most of the space in the pipeline is being leased before completion and industrial developers are continuing with their expansion plans.  

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