Investment predictions of real estate in Czech Republic for 2010

September 28, 2009
As yields on commercial investment property in Prague fell further and further, it appeared that there was an increasing gap between prices that would have made sense in terms of underlying value, and the prices that were actually being achieved. I was one of those who did not believe that yields would fall below 6% because I could not see a rational case to justify such prices. Yet prices continued to rise. With hindsight, it is easy to say that 5.5% initial yields were a reflection of an overheated market. After all, despite all the undoubted progress made by Prague´s investment property market in the last decade, it is still not London of New York. Apart from any other considerations, there is the question of covenant strength which should underpin investor´s perceptions. The significant differences in legal framework and standard lease terms between markets mean that the all risks yield is not a reliable means of comparing one national market with another - we are simply not comparing like with like. Add to this the fact that many "international" tenants are local subsidiaries, and the security of income can again be questioned. What drove prices to these levels was largely a matter of too much equity and easily available debt chasing too little quality product, rather than a considered reflection of the worth of an investment.

The result has been a dislocate between price and worth. In a competitive market, market values (a measure of prices achieved, or value in exchange) should track measures of investment worth (the value of a property to a particular user or class of users). Observations at the height of the market that falling initial yields were in a sense "over-valuing" properties were effectively saying that prices were rising at a faster rate than worth which would reflect the "fundamental", "underlying" or "long term" value of a particular property.

This gives rise to a particular issue for valuers whose task is to interpret market data and provide an opinion of price, rather than to come to a judgement about whether the prices being achieved accurately reflect the worth of the properties being traded. When prices were rising rapidly there was, quite rightly, pressure for valuations to keep pace with movements in the market. Now, we are in a quite different world, where many clients are reluctant to accept that the market value of their property has fallen to the extent that it has.

We should perhaps not be too quick to criticise those clients who still insist that the value of their property is accurately reflected by a 6% all risks yield when the only evidence available suggests that a level around of slightly above 7% is closer to the truth. What is worth considering in this context is that in illiquid and fast changing markets such as we are currently experiencing, price and worth can part company to a significant degree. When clients talk of sub 6% yield expectations, this clearly does not reflect current market value which is after all an opinion of price or value in exchange, but it may well reflect their estimation of investment worth. We are all aware of numerous examples of properties which are technically  "for sale" but at prices which are simply not achievable in this market. Rather than complaining that vendors are unrealistic or, worse, ignorant, perhaps we should be paying closer attention to what these "prices" are telling us, which is that the worth to vendors is higher than the price which could be achieved on the open market. The lack of deals and hence of transaction based evidence serves to highlight the mismatch between the expectations of vendors and purchasers. Vendors remain generally unwilling to dispose of property at figures reflecting current market value, whilst purchasers are only prepared to buy at a price below their calculations of long term worth, partly in the expectation that in a falling market prices may yet have further to go.

Aside from other considerations, the task of valuers preparing market valuations in such times is much more difficult. Whilst there is some concensus that we are experiencing a fast changing market, there is at the same time precious little transactional evidence as so few deals are closing. Even with respect to those transactions which have been closed and reported, data remains far from clear with a knock-on effect on reliability. This lack of transparency is nothing new in the Czech market, and those who have been valuing properties here for a decade or more will recall the times in the early days of Prague´s investment property market when one transaction (almost irrespective of the details of the deal, accuracy of reporting, lease terms, rental levels, building location etc.) was taken as a benchmark for the entire market - at least until the next deal came along. Think, for example of the Mediatel and Unilever buildings - the first time around, that is - when these sales were taken as representing "market yields" of around 10.5%...

Under current conditions, those of us who have been active on this market since the late 1990s are experiencing something close to déjà vu, trying to value properties based on little and questionable comparable data. Of course, in a way this only serves to support the argument that valuation is (and, for that matter, has always been) more of an art than a science, but I would argue that the provision of opinions of investment worth in this market would, at least in part, help and accordingly would, if not expect then at least hope that such calculations are requested and undertaken more frequently in the coming year.

It is the task of professional advisers in general and valuers in particular to highlight the difference between value and worth and to advise clients accordingly. In such a market there is arguably a substantial benefit for clients to understand these concepts and to be provided with an opinion of investment worth in addition to market value. Such advice would certainly help clients to gain a better understanding of their property in the context of the current market and the provision of this type of advice is something which should become an increasingly important indicator in a market such as that we are currently faced with.

Jonathan Kilby BSc (Hons) MRICS


This article has been also published on