The Czech National Bank last week expressed its worries about the state of the office rental real estate market.
Basically, the bank was, and is, worried that low interest rates are causing some investors to over extend themselves and buy property for rent in the often highly volatile market where real estate deals add up to hundreds of millions of crowns. Governor Miroslav Singer added that in many cases bank loans for buying up office property are not backed up by other assets. In other words, if the buyer cannot fill the office complex with people willing to rent at the right prices then the whole venture could turn pear-shaped.
But the latest news from the Czech office market might make some reassuring reading for the bank governor.
According to the business daily Hospodářské Noviny, the office market in the capital Prague, the main market in the Czech Republic, is booming. Economic growth means many companies now feel flush and are looking to move themselves and their employees into upgraded facilities. The problem though is that the flow of new high quality office space on the Prague market has dwindled to a trickle. The paper reports that the offer of new office space is now at its lowest level for the last 15 years. According to research from Prague Research Forum, this year developers will bring just 39,600 square metres of office space onto the market. That’s around a fifth of the space that came onto the market last year.
The districts of Prague 4 and 5 as well as Prague 8, particularly the Karlín district, are still the focus of most development interest. On the other hand, the possibilities for development in the city centre are seen as extremely limited after most of the biggest and easiest projects were realised already over the last decade. This in spite of the fact that office rents in the centre of Prague command a price of around 530 crowns per square metre a month, around a fifth more than rents in the outer centre of Prague and sometimes around twice as high as the edge of the Czech capital.
Prague Research Forum says the office vacancy rate, a key indicator of how the office rentals sector is faring, has started to decline already towards the end of 2015 and has been on the slide ever since. It now stands at around 13 percent of the total, down from its peak of around 17 percent in mid-2015. At what price that vacant space is being occupied is another question, but some rental fee to pay off the mortgage is probably better than no income at all.