Lately the word “crisis” has been on everyone’s lips. And even though the growth of the Czech economy is slowing down as well as the rise of real estate prices, according to the economist of the CZECH FUND, Lukáš Kovanda, it does not seem that we are experiencing a major economic recession yet. After all, according to Eurostat's latest data, despite the cooling on the real estate market, the prices of domestic real estate are growing twice as fast as elsewhere in Europe. Real estate will therefore be a good investment, even if, eventually, a crisis comes. And, according to Kovanda, there is a big investment opportunity in the relatively overlooked commercial real estate.
Does that mean that real estate prices have not hit their ceiling yet?
The prices will continue to rise, however slower than in previous years. The Czech economy is expecting a slowdown, but not a crisis or recession. Even this year, wages and salaries will rise at an above-average pace. The unemployment rate will neither fall any more, nor grow significantly. The foreign threats are lurking, but before they happen, a substantial part of the year will be gone. The sputtering of the German economy from the second half of the last year can only be temporary. Similarly, it is conceivable that President Trump will moderate or end the trade war with China because he wants to be re-elected next year, and the trade war is a threat also to the US economy. If the Brexit does not end as a total economic crisis, which is unlikely, and if the Chinese debt is not totally out of control, the international threats to the Czech economy will be weaker over the course of the current year. However, it is an impulse for the price rise of Czech real estate.
We are talking mainly about flats, but what is the situation on the commercial real estate market?
The consumer mood of Czech people is still at a relatively good level. It's no longer a historical, 20-year high as last year this time, but thanks to wage growth and still low inflation, people remain optimistic. Retail sales will grow at around 4 percent this year. Their dynamics will slow down slightly but will still remain at a relatively high level. Speaking about the commercial real estate, it should be just retail, which should be doing well, but of course a certain number of buyers will move to online world of e-shops. I would not even count on office vacating this year. A little worse will be the situation in the area of industrial and logistics buildings. There may be a certain drop in customer’s demand, specifically due to the speculative development of the past period, which in a time of deteriorating conditions in the domestic industry, does not necessarily need to meet the reality.
However, if there is an economic slow-down or a crisis, how would this be reflected in a slump of property prices?
A certain slow-down is coming, no doubt. But this is far from calling it a crisis. Far from the one we had ten years ago. It was a “100-year flood”. If now we had a “10-year flood”, the crisis will be moderate. During the last crisis no bubble burst, why should it burst now? Ten years ago, the prices fluctuated, for a few years we had a stagnation or a slight decline in real estate prices by ten, maximum fifteen percent. And then it went up again. Commercial real estate was also under pressure but got over quickly. Several shopping centres, not so well located, were in troubles, however the segment itself did not experience any dramatic slump. And industrial buildings and logistics? Last year's construction boom was, to a considerable extent, stimulated by the expansion of capacities, so it is obvious that even in this sector we do not have enough buildings. The crisis will stop this boom, it is clear, but if it is not at least a “500-year flood”, it will not be worse than the crisis ten years ago.
Investing in real estate investment funds is more and more popular; how do the funds work, and where the yield of the investor comes from?
Investing in real estate investment funds allows you to invest in real estate conservatively without owning it. Investing through a fund is less problematic, there is no need to look for tenants and take care of apartment maintenance, and as a rule, it is also more profitable. Especially in times of economic decline. As the risk that the tenant will not pay or leave the property is divided into more properties. Through a fund share certificate the investor acquires a share in the yield from property appreciation. For example, in case of retail commercial real estate, the investor earns money due to a good consumer mood of Czech people, and thanks to the fact that the shopping centres and shopping malls are occupied by tenants and various retail chains. The investing person is actually betting on the fact that the Czech Republic will continue to catch up with the richer countries of the European Union, which is a relatively conservative assumption with a high chance of fulfilment. As the standard of living will grow faster in our country than in the “old” EU countries, the opportunities for the Czechs to buy and spend will grow accordingly. The entire retail segment will continue to thrive, resulting in a steady appreciation of the revenue share from the appreciation of retail commercial real estate.
This is also the case of the Czech Real Estate Investment Fund, in which you are the chief economist. Will it also thrive this year?
Since its foundation in 2016, the CZECH FUND has achieved a relatively stable annual yield in the range of four to six percent. So, when most of the share funds crashed last year, so dropped most of the bonds, along with gold and bitcoin; on the contrary the commercial real estate fund appreciated by more than four percent. Investors earned exclusively on real estate in the Czech Republic, most often on shopping centres and retail parks. Their occupancy is very high, almost 100 %. Contracts with tenants are concluded on average for the period of four to five years, in case of food chains even for more than ten years. For the years to come it guarantees with a great deal of certainty, including the years when the economy may thrive less, a stable cash inflow, which is crucial for the fund's own appreciation.
Can everyone invest in the Czech Fund?
Yes, almost everyone can invest because the minimum investment is 500 crowns. However, the investment should be made especially by people having an investment horizon of seven or more years. The fund is not intended for speculative investors who want to get rich in a shorter period of time. In addition, it is necessary to take into account a potential temporary cooling of the market, and it is only at the seven-year horizon that the unfavourable effect of such a potential cooling completely disappears.