BRICKS & MORTAR: Office space in Prague

By bne IntelliNews September 15, 2010

Jiri Kominek in Prague -

Despite some economists gloomily predicting a double-dip recession in Europe and beyond, a growing list of speculative developers in Prague have opted to throw caution to the wind and are building office space with an eye on better times ahead.

Some are so confident that they have begun breaking ground on projects without key anchor tenants in place to pay the rent once construction is complete. At a time when some 370,000 square metres (sqm) of office space currently lie empty, amazingly there are plans to launch 25 separate commercial building projects by 2014 totalling 500,000 sqm. "There is no better time than now to start building," insists Milan Jendrusak, a partner in Austrian developer Karimpol Group, which is currently constructing the Rohan Business Centre in the Prague 8 district of Karlin.

Karimpol plans to complete the €10m project comprising 8,300 sqm of office space by March 2012. "If you wait for demand for office space to resume, then it's already too late, so you have to start before the competition gets into the game," says the upbeat Jendrusak, who believes that by no later than 2013 the country's economic growth will have returned to near what it was before the crisis and tenants will be clamouring for new office space.

Karlin has also been selected by HB Reavis Group as the site for its €38.4m River Garden Office West, although Slovakia's largest developer is still weighing up when to proceed.

What a site

What most speculative developers have in common is the ability to finance projects on their own or the ability to access capital by convincing banks that participating in such ventures is well worth the risk. Another common thread seems to be the time-tested foundation of many successful a business venture: location, location, location. "As a result of the economic crisis, banks today require developers to demonstrate they will have 50-60% occupancy before they provide financing. Another change is that banks today require developers to provide at least 50% of their own equity before approving projects," Eduard Forejt, head of property rentals at Jones Lang LaSalle, tells bne.

According to Forejt, the developers that select successful Prague locations such as Pankrac, Karlin or Smichov, and commit to projects no larger than 10,000 sqm shouldn't have any problem finding tenants down the road once the economy improves. "The reason why larger tenants are attracted to projects offering 10,000 sqm is that they want to be the anchor tenant in the given building occupying 6,500-7000 sqm and still have the peace of mind knowing they have the option of leasing the remaining 30% of the space once growth resumes," says Forejt.

The developer Pankrac, owned by the Czech entrepreneur and former tennis pro Milan Srejber, who was once jailed for fraud, in February launched another 10,000-sqm phase to its already existing 15,000-sqm Budejovicka 3 office complex in the Pankrac area of the Prague 4the district, which together with Karlin and Smichov has become one of the leading locations for office space in the Czech capital. "We are still in the process of searching for tenants. In essence, we are pursuing the project in a speculative manner," Vit Ulmann, Pankrac marketing director, recently told the local press. The developer has invested some of the €12m of its own cash with the rest borrowed from banks, and hopes to complete the project by the end of 2011.

Austrian developer Immorent is currently constructing its 6,900 sqm Lyra Office building project, which it hopes to complete by autumn of 2011. Immorent secured €40m in financing from its parent, Austria's Erste Bank Group, to back the deal. "We are confident that Smichov is an attractive location and we should have no trouble in filling the space," Rudolf Kargl, marketing director of Immorent, tells bne.

Despite Prague's overall vacancy rate of 14%, Smichov in the city's 5th district continues to prove attractive with currently less than 3% of office space lying empty. The area is expected to boom once city officials sign off on plans to develop lands around the Smichov rail station across the road, itself a major transportation hub, which includes the Smichovske nadrazi metro station and surface public transportation.

In 2009, Immorent sold its Gemeni office complex located at Pankrac for €110m to German Deka real estate fund. The developer plans to launch the adjacent Pankrac administrative centre comprising of three buildings that range from eight to 15 stories and total 35,000 sqm of office space. A starting date has yet to be announced, however. Other locations selected by Immorent for similar projects include Karlin and Nove Butovice in Prague's 13th district.

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