Acquisitions on the domestic investment market are closely linked with the liquidity offered in the financial markets and relative costs of capital. The Czech Real Estate investment market includes a diverse range of investor type including domestic and foreign institutional investors, mutual and pension funds, investment and asset management companies and private investors. Whilst these investors have diversified investment strategies they share a common denominator; they almost invariably use debt financing as a basis for deriving higher returns from their assets. Given the developments of global financial and real estate markets in recent years investors and lenders have adopted a more conservative approach to the acquisition and funding of real estate. And yet, according to DTZ, the Czech market last year showed considerable resilience reaching the second highest level of investment activity since 2007 – approximately €2.199 bn.
“It is reasonable to expect that investment volumes will decline in response to higher costs of equity and reduced availability of debt funding, however, the banks and investors have in essence reacted in tandem; both are applying higher risk profiles. Banks reflect this by an increase in general debt margins to ca. 300 b.p.s above Euribor and a focus on minimum debt service coverage ratio of 1:1.25; whilst investors target higher yields, strong tenant covenants and longer term secured income. These two approaches are simple variations of the other.” explains Ryan Wray, head of the investment department at DTZ’s Prague office. Along with higher financing costs the market has experienced a shift in the leveraging banks are willing to offer. In general most debt providers are comfortable at 65% LTV whereas in the past 70% and above was relatively easy to secure. In reaction to this investors are seeking debt alternatives, looking to private equity and mezzanine finance structures. Although these structures are generally more expensive, they provide a means for investors to bridge the funding gap at a given moment, and thus also increase the likelihood that the transaction will complete.
At present, banks financing investment transactions across all commercial property segments, i.e. retail, offices and industrial projects. However, the individual terms offered differ depending not only on the quality of the real estate asset but also the financing partners exposures to a given sector or client. “Everyone is happy lending on a prime Class A office project with long-term leases to fortune 500 companies; but that does not mean that properties in secondary locations with shorter leases do not attract debt finance” explains Ryan. “Provided the real estate fundamentals are correct in terms or location and construction plus there is a reasonable remaining lease term of ca. 3yrs and DSCR of 1.25, most active banks will offer financing terms.
Even with the somewhat more cautious (and costly) banks’ policies investment volumes grew in the last quarter of 2011: at the continental level by 7% in the total y/y aggregate, and by 17% compared to 3Q 2011 levels. Further the Czech Republic exceeded these trends with a final transaction volume of €2.2 bn, the second highest volume in history and close to its formidable neighbour and competitor for investment funds, Poland, which reported a total volume of €2.5bn for 2011.
It is expected that this year revenues from properties will remain stable: yields for Class A office properties are around 6.25 -6.5%, for retail properties around 6.0-6.2525% and 8% for long term let industrial properties. “At the beginning of 2012, the overall investment sentiment and prevailing caution of all the market players has resulted in a slight slowdown in investment activity, nonetheless we expect this to improve by the mid-year as several currently on-going transactions will be concluded which will stimulate the market again,” said Ryan Wray.