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Real Estate Boom Hindered by Infrastructure and Law

Real Estate Boom Hindered by Infrastructure and Law

Czech Republic
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The Czech Republic has – due to its strategic location in the heart of Europe – always been an important transportation and business hub. It has one of the highest densities of railway networks in Europe, with almost 1,200 km of track for every 10,000 square kilometers in the country, and it is also an important road transportation hub.

It is therefore no surprise that the Czech warehousing and logistics market is growing at a record pace, as it is across most of Europe. Partly this trend is influenced by issues such as Brexit, with British companies increasing their logistics and transportation capacities in anticipation of the changes Brexit will bring. Another important factor is the steady rise of e-commerce as a source of business for warehousing and logistics companies. The Czech Republic is an interesting market for traditional as well as new companies. In any case, and for whatever reasons, the total warehouse area in the Czech Republic has more than doubled in the last decade, to eight million square meters. 

There is also a huge demand for office space, especially in Prague. The Czech Association for Real Estate Market Development puts the office vacancy rate in the Czech Republic at less than 5%. The total area of newly-constructed offices in Prague alone will reach 75,000 square meters in 2019, and we expect this rate of construction to accelerate in coming years. Demand for office space is created both by local companies as well as by international companies drawn to Prague because of its lower living costs, talented workforce, and strategic location in the center of Europe. This also increases the pressure on the residential real estate market, where we see a substantial increase in purchase prices and rents. Since 2010, the price of a newly-built flat has risen by an average of 35% -- much quicker than household income.   

The growth of co-working centers is a new phenomenon, not limited to the Czech Republic. We expect the total area occupied by co-working operators to increase from less than 5% to over 20% in coming years. We have seen almost a two-fold increase of co-working office space created in the last two years alone – from less than 50,000 to almost 90,000 square meters. The demand for co-working centers is created both by SMEs as well as corporations, which usually use co-working centres for smaller teams focused on innovation or new product development. Many international companies and start-ups have also started sending teams to the Czech Republic to scout for and make use of local talent (especially software developers) and finding homes for them in co-working space. 

In logistics the factor that is the biggest obstacle to even more robust growth is the very slow rate of development of highways and roads in the country. This problem has plagued the Czech Republic for many years. In 2018 only four kilometers of new highways were opened. Only once in the last decade has the country created more than 20 kilometers of new highways in a year. Equally frustrating is the slow pace of renewal, reflected in the apparently interminable reconstruction of the main connection between the two biggest Czech cities – Prague and Brno.

Indeed, construction of many parts of the highway system has not even begun. Many Czech highways do not reach the border, making connections to some neighbouring countries inconvenient. This is most striking in the south, where there is no main connection to Austria – even though on the Austrian side the highway to the border was just recently finished. 

Couple that with the fact that the process of acquiring a building permit is generally extremely time-consuming, and you end up with a very challenging business. 

However, currently Czech construction laws are being changed to substantially streamline and simplify the permitting process. This is expected to allow for rapid growth of construction across all sectors and further stimulate the Czech economy so that we can make the most of of the current real estate boom.

By Miroslav Dubovsky, Country Managing Partner, DLA Piper Prague

This Article was originally published in Issue 6.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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