How is Karlin Port Real Estate doing in these difficult times?

As shareholders, we are now involved in a total of 12 projects in Prague. We hold different roles there – we either act as an active shareholder as well as a developer or as a passive shareholder and not a developer. Now we find ourselves in a situation where we hold an active, let’s say management role, in 10 projects, which needs to be pointed out. This is, of course, due to the fact that Karlin  Port Real Estate is an investment and development bou-
tique company. We only have a relatively small number of people for this many projects but we combine it well with investment partners whereby we have 21 of these for our 12 projects in Prague and two projects in Belgrade – and if necessary, we can swap certain roles. What I mean is that if our partner has a top quality employee (it can even be a passive investor), who can be beneficial for a particular project that we participate in, within their team, we have no problem bringing him/her into the project to give it added value. These combinations take place a lot with regards to labour force. After the crisis in 2008, we learnt how to outsource most of the services, so we have our own small yet very effective team – and the remining part is mostly outsourced. There are six or eight such as us
within Prague’s market.

Where do you see the assets of this model?

It emerges that the small flexible platforms which outsource a lot and co-operate a lot with the other investment partners, are doing better in any type of crisis – whether it is financial or the current one, which is rather of a psychological nature. We don’t need to lay off people, don’t need to worry what is to happen in six months or half a year, what impact it is to have on the real estate business. We have an optimal number of employees or more precisely a number of our team members so, even if some crisis elicited as a result of the coronavirus hysteria occurring, we are prepared for it.

How do you see real estate in the Czech Republic?

From my point of view, the real estate market is doing very well, this mainly being due to the fact that, from an historical point of view, there is a lack of residential units. Together with our partners, we have a well compiled analysis. The current deficit – I am talking about newly constructed buildings – is approximately 110,000 residential units in Prague. When you take into consideration the fact that all developers in Prague – approximately 500 of us – small, large and medium size – which is quite a lot for the almost 1.5 million residents – supplying on average 5,000 to 7,000 apartments a year, it is evident that even if there is a revolution in the approval processes, then supply and demand won’t be met until sometime in 2030, if at all. From a general developer’s point of view it means that those having a larger number of projects in preparations are in a good situation. Those with enough money – and the number is increasing – don’t have projects and they will find complicated to get them.

What impact does the current situation have on real estate market?

I call it a post-coronavirus syndrome. We see at least two phenomena that are even evident to a laic. Most affected has so far been the hotel market and Airbnb. The hotel market will not pick up that quickly and Airbnb will be faster and more flexible. What can happen with hotels is that some of the most luxurious ones
won’t reopen, not even in a year’s time. This needs to be pointed out as it connects directly to tourism, which is not going to recover that quickly. It will take a few years before we get to a situation when we have 18.4 million visitors. It is clear that the hotel market will have a lot of problems.

The number of hotels and accommodation establishments is considerable. What will happen with the buildings?

Aggressive investors from abroad are already inquiring as to whether hotels are available and they are prepared to start purchasing – upon certain conditions and with a considerably discount. Money is always here and always will be – and they will await such opportunities. Then there is the second phenomenon: Private investors in the Czech Republic – I mean those Czech investors whose main field of business is completely different – have started investing in real estate even more. They don’t want to leave their money lying round in their accounts for they don’t know whether to expect deflation, inflation or perhaps some other economic phenomenon, which will be of a Europe-wide or global nature. Those with a surplus of money go straight for real estate. A completely new phenomenon is emerging: Private investors in Prague approach development companies with a purchase demand for 100, 200, 300 apartments in new projects prior to their completion.
No such demand has been here in the 25 years I have been in this business. Yes, there was a demand for 20 or 30 apartments but not all of them some two or four years prior to project completion, just to release money, or possibly pay deposits to developers. I assume that it is a Europe-wide phenomenon as investors more or less behave the same.

Apartment prices in Prague are the current issue...

As I have already said, we can see a historically accumulated apartment deficit, which can become even deeper in years to come due to the slow approval process. The number of plots is also smaller as the metropolitan plan hasn’t been approved. It is a sort of a hotchpotch where at the end of it is an average price of newly built constructions, 108,000 CZK/sq m. Five years ago we would have probably considered such cost a joke. The price probably won’t go down, at least not for the next 12 months. But the world is changing quickly and we have no idea what can actually happen...

... and what future is predicted for the administrative market?

As for offices, we expect a lot of changes. But it is strange. On the one hand, there is still a healthy demand for the  new A-class offices and on the other hand, there are concerns. The question is whether the concerns are well-founded. But the developers who mainly attend to administrative buildings, or their development, are concerned with their tenants’ behaviour. One of the post-coronavirus phenomenon is that people were working from home for several months, didn’t go to work and some companies have thus found themselves in an entirely new situation. However, they said OK, let’s adjust to it. That means that the ratio between those who are to work from home and those in A-class offices is to change. What has emerged is that banks, for instance, have an excess of staff as they pay more and more attention to various IT solutions, brick-and-mortar shops are losing sex appeal, banks don’t need to be visited anymore... Yes, one or two out of the five most significant banks will reduce the square metres of their offices rapidly. I believe that has already occurred in IT and can also happen in other segments. Nevertheless, I don’t think it mean that the market with A-class offices is set to tumble. With regards to the lack of land and the lengthy approval process, no sufficient
number of new administrative premises is to get into the market. That means that in five years’ time, the situation will be plus minus the same as it was in the past five years. I must point out once more that the approval process and vacant plots do not allow us to build as fast as we would like and as we did in the past 20 years.

The situation when apartments were turned into offices and vice versa has already been experienced in Prague...

Prague is developing – and I think that it is not a bad thing. I am talking about B-class offices. Competitors, investors and banks have asked me what I think the price of residential areas in Prague 1, or possibly Prague 2 and parts of Karlín, Holešovice and Smíchov, should be. Nevertheless, there is no land for new development, apart from Holešovice, Karlín and Smíchov and two large projects that we participate in – Rohanský ostrov and Smíchov Station. But developers will continue seeking ways to get to new projects. One of these ways is not to look for land that is available but to also seek B and C-class offices, hotels and
others. That means that the city centre might improve and a few unsightly buildings would disappear... Interest rates are very low in comparison with April or May. Banks are forced to lend more and more. I think that the real estate market will be cleansed within the next five years and that someone will purchase the B and C-class offices, demolish them and build new residential projects, hotels, hostels and others instead.

You have recently celebrated your big 50 th birthday. You attended an essential part of your life to real estate. One can see that you still enjoy it.

The big 50th birthday doesn’t mean any more than any of the others to me. It only made me realize that I have operated 25 years in the real estate market in Prague and that all those 25 years I grew alongside Prague’s real estate market. Even though it was not the path I chose, I have been through everything that one who wants to gain experience and success in a particular field should experience. I started in real estate consultancy companies and then became an employee of a large and significant developer. It was a significant privilege to participate for 11 years in the revitalization of Karlín and Libeň together with Serge Borenstein and Mark Ritch, or let’s say with the team from Karlín Group. Subsequently, I myself, became a developer but in between was still helping in Daramis so that they could gain publicity and I advised Mr. Sekyra with regards to certain strategic solutions. Based on that, I founded an investment fund in 2013. Why am I saying
this? Because I came from the post as a small consultant in a German ‘no name’ consultancy company through JLL, Karlin Group, Daramis and Sekyra Group or via a fund I had with Mr. Topolánek. Well, why wouldn’t I mention it when I have also been through two fundamental medical issues. Myself, I call them obstacles and not medical issues.

It’s a long list. What experience have you gained?

On the one hand, I learnt a lot, had the privilege to be present at the revitalisation of Karlín and before to spend four years in JLL. It was the time when I met some 70% from development investment top representatives, especially from abroad, as they were set up here, in the Czech Republic, through JLL. Many of these  investors and developers are my direct competitors now. So, yes, I do know the competition but I am really glad that there are people like Radim Passer. Within my position in JLL, I had the privilege to be at the origin of the BB Centre and Myslbek and many other significant buildings. All summed up, I was developing alongside the real estate market in Prague, and in the Czech Republic. Alongside Mr. Borenstein I learnt a lot about urban planning, architecture, design and others.

Let’s say that was looking back. What about the present?

With Karlin Port Real Estate, we are currently working on several projects from construction as well as a preparation point of view. We have projects that are prior to completion, for instance 78 Mánesova in Prague 2 – our swallow with regards to a block of flats. The final building approval is still to be carried out this autumn. It was proposed to show how a block of flats should be reconstructed in Prague. I must boast that the heritage department complimented us on doing a conscientious and comprehensive reconstruction that hardly any other buildings in Vinohrady underwent.

It is rumoured that the material chosen for the Mánesova project was not based on price...

I think we did more than that. Someone might say it is probably our mistake, that we might have overdone it. I must say that we were selecting material as if we wanted to live in the new building ourselves. It is not a typical development case, especially with regards to newly constructed buildings, but we really let off steam here. Apart from earnings, we wanted to turn it into our let’s say flagship, that we can always refer to in future. Probably as I refer to that which we realized in Karlín with Mr. Borenstein, or with the Karlin Group team.

What are you preparing apart from the Mánesova project with 31 apartments and two commercial premises?

We have a project with several partners in Karlín – Kay River Lofts with 55 residential units. It is very successful from a commercial point of view, being situated in an exceptional area directly by the Vltava River, between Rohanské nábřeží and Vltava. The aim is to complete the construction in April 2021. It is an exceptional property from architectural as well as size point of view – there are only 55 apartments. The more intimate the more luxurious it is to be. In the third project we participated in the project of Smíchov Station, that is Smíchov City, where we launched the first stage from marketing as well as a development point of view. There will be 460 apartments that we decided to build in a one and only stage. Our aim is for this part of Prague 5 to be commenced slowly but to be improved, changed, consolidated and regenerated, as it was in Karlín.

– Arnošt Wagner, Development News