Interview with Petr Škoch about the Czech real estate market

The situation on the real estate market became a hot topic last year and the year before. However, from an investor’s point of view, there was no great drama, and the last few years have brought relatively positive results. “The Czech market has proved to be very stable and resilient, which has surprised me a bit in the last two years. While real estate in Germany, Poland, France and other European countries was depreciating, there being a noticeable decline, I did not observe any drastic fall in the Czech Republic," says Petr Škoch, a member of the board of CREDITAS investiční společnost and also head of the fond CREDITAS Nemovitostní.

You had a strong 2022. What was the reason?
We made some good acquisitions that helped the fund to outperform. It was close to twelve percent, which is a great result. The year was excellent overall and all funds did well. In 2023, this was not repeated to that extent.

Did you expect 2023 to not be as strong?
Yes, I wasn’t that surprised because interest rates were extremely high and the market cooled. Not that there was any significant drop – or at least we didn’t feel it – but there was definitely a cooling. Even so, our fund’s performance last year exceeded the seven percent mark. Let’s see what this year brings. We expected that things would break down at the beginning and that the situation would improve as far as financial instruments are concerned. Now we think that it will be more towards the end of the year, but there will definitely be a release.

So what kind of returns do you expect this year?
This is of course very difficult to predict, but we aim to be similar or even better than last year. We would like to be somewhere around eight percent. We’ve now completed one major transaction, and we have another one looming, so that could certainly help to improve performance. In addition, we are now preparing a new fund, Creditas Rezidenční, which will have rental apartments in its portfolio. It is a brand new product, only a few weeks ago it was added to the CNB list. We think it will especially appeal to smaller and more conservative investors.

At this point, interest rates are already being gradually lowered. What exactly does this mean for investors?
I see huge potential in this for funds because interest on current and savings accounts are falling along with interest rates. They will certainly continue to fall, so it will no longer be profitable to keep the money there. Last year, rates were high and you could almost say that these products had an edge over funds. But now the tide is turning back in favour of the funds. I can’t estimate the exact numbers, but I think it will be around four percent on savings accounts and around eight percent on good real estate funds. However, I see a bit of a problem in the fact that many Czechs often don't even want to invest, they just let their money sit in an account with a 2% interest rate and don’t worry about it so much. Especially if they don’t have higher amounts. But of course, the decline is not just a question of savings accounts. We see it in building savings accounts as well. And this is what creates the opportunity for investment funds. We think that this year will be very interesting and a turning point in this respect.

And what about the outlook for the next few years? Do you have any idea what that will look like?
It is difficult to estimate, but it is still true that real estate is a long-term store of value. If we look at the last crisis, for example, there was a downturn, of course, but in the long term, real estate is actually continuously generating returns for us. Over the last ten years, residential property values have increased by 126 percent. When we are talking about a longer timeframe, the investor will definitely earn an attractive return. We think that the Czechs will get there gradually, because property – whether you own it personally or the fund owns it – is something tangible.

 In general, I think that unless there is some kind of pandemic or war, the development will be rather positive and we can look forward to an interesting and constant appreciation. There won’t be extreme increases, but there won’t be extreme decreases either. A stable investment environment is, of course, conditional on a stable market situation.

 However, I believe we have beaten inflation. I think we’ve also gotten used to the new normal of interest rates on mortgages. They no longer hover around two percent, but around five percent. It should be noted that some ten years ago this was quite standard. Non-standard rates were, on the other hand, around two or three percent. I don’t think that will happen again.

 So are real estate investments a good way to diversify a portfolio?
I'll speak mostly for myself now. I have a real estate background, which is why I like the tangibility mentioned. You can always go and look at your investment and know that it exists. Real estate is stable over the long term. Each fall is offset and overcome many times over. On the other hand, each one needs to be well cared for to ensure a good return. At the same time, not everyone can afford to buy an entire property purely for investment. From this perspective, investing in a real estate fund is an ideal way to expand your portfolio with a safe investment that is also easy and work-free, as the fund takes care of the management of the property you buy.

 It has often been said that Czechs generally like real estate best. Does that still apply?
Sure, Czechs like bricks. When we talk about residential housing, about 80 percent of Czechs live in their own home. It’s still ingrained here. But we will see what comes after the generation of “Husák’s children”. It is possible that the situation will change. I feel that the younger generation is more progressive. They prefer flexibility. Perhaps the fact that young people, especially in larger cities, often cannot afford their own housing plays a role in this. This is, of course, the second thing that is very topical right now. It is still true, however, that Czechs prefer owning their own housing to a degree that is not at all in line with the Western European trend. In Germany or Austria, for example, up to 50% of the population live in rented accommodation, while here the figure is around 20%.

Let’s go back to portfolio diversification. So you diversify yours mainly by investing in different types of real estate?
That’s right. Today there are many funds. We have residential funds, then commercial funds that manage warehouses, manufacturing and logistics complexes, retail parks, shopping centres and so on. Diversification in commercial real estate alone is often enough. We saw its importance during the pandemic, when hotels, for example, were not doing so well, but industrial real estate was growing.

What types are the most interesting for your fund at the moment?
We focus on industrial, i.e. warehouse, production and logistics premises, which are the alpha and omega for us. In March, we completed the acquisition of the Stanley Black & Decker manufacturing plant in Trmice near Ústí nad Labem. This acquisition brings the fund’s portfolio to nine properties with a total leasable area of 85,000 sqm. The purchase of Trmice Business Park is our first transaction this year, but certainly not our last. We are currently preparing another acquisition which we will complete during the summer.

How do you choose the specific properties you invest in?
The most important thing is of course the location, but there are also other factors on which we base our decision. We are interested in the technical condition or development potential. A huge plus is when there are other plots of land next to the property that can be developed. The tenant is also important. We want to know who he/she is, what his/her focus is and how he/she is doing. Of course, we also look at the length of the lease agreement, calculating the return on investment. There are many things we focus on. We have to look at the property from all angles. We must not neglect anything at the beginning, because it will come back to us later like a boomerang.

 Recently, you lowered the minimum one-time investment in the fund to five thousand crowns, while it regularly starts at five hundred crowns. Why did you choose these values?
This is to make the fund more accessible to an even wider public. As I have already mentioned, we see great potential in lowering interest rates. Real estate funds can be an interesting investment tool, so we decided to support it even more and open it up to a wider range of investors. That’s a big plus. Moreover, after three years, the client does not have to tax the proceeds.

Have you seen more interest in investing in recent years?
We can say that the number of clients has been growing continuously since the fund was established in 2019. It grew by 60 percent during 2022, up from just over 30 percent last year. Overall, we are nearly 30 percent in the black since the fund, which invests in commercial real estate, was established, which is a great result. We expect a further increase during this year.

Are you noticing any trends in real estate investing today? Is there a role for ESG criteria or other investor requirements?
So far, we see that Czech tenants do not look at sustainability and ESG criteria as much as multinational companies. However, we have a majority of multinational tenants, so we try to accommodate them in these matters. ESG requirements are already emerging in acquisitions or when leases are updated or extended, and there is also pressure from banks. We need “greener buildings” because of funding. Photovoltaics are already commonplace. We are also trying to work with heat pumps. We are dealing with water management and so on. We are in the process of having decarbonisation plans made so that we can monitor our carbon footprint. It’s a hot topic, so we’re actively addressing it.

How is the Czech real estate and investment market doing compared to the rest of Europe?
A specific feature of the Czech market is that Czech investors currently dominate the market, while foreign investors left with the start of the war in Ukraine. On the one hand, there is a lack of foreign investors. On the other hand, Czech investors have saved the situation. The Czech market has proven to be very stable and resilient, which has surprised me a bit in the last two years. While real estate in Germany, Poland, France and other European countries was depreciating, there being a noticeable decline, I did not observe any drastic fall in the Czech Republic. On the other hand, industrial properties still hold their value. Vacancy rates for this type of property are very low in the long term.