Cushman & Wakefield Czech Republic is for the first time issuing its new index of value of commercial real estate assets – the C&W Commercial Real Estate Capital Value Index – C&W CRECVI. Our aim is to contribute to improvements in the transparency of the commercial real estate market and to provide investors with benchmark value for performance of commercial real estate assets. C&W will publish the updated values of the index on quarterly basis.
The C&W CRECVI index relates to the Czech Republic only and shows year-on-year change in capital value of a commercial real estate portfolio, composed of prime Prague offices, prime shopping centres in Prague and Czech prime logistics stock. The weights of different sectors in the portfolio are fixed.
“The international comparison shows that the Czech commercial real estate market is mature. It participated in the pre-crisis rally, but to a lesser extent than markets in other CE countries, it’s downturn during the crisis was the lowest, together with Poland and post-2010 it showed the highest growth among the CE countries,” says Jaroslav Kaizr, partner at Cushman & Wakefield.
Please see the Graph 1 for comparison of CE countries and Western Europe. The Czech market (red line) is the closest to the Western European one (brown line) and smoothest of all CE countries). The index was produced for all these geographies using the same methodology).
“The rate of fluctuations of the Czech commercial real estate market, as measured by our index, is the lowest in CE, albeit it is still much higher than in Western Europe. Compared to the Czech stock exchange, the rate of fluctuations is lower by half,” says Michal Soták, head of research at Cushman & Wakefield Czech Republic and Slovakia.
To illustrate the returns in the 2005-2013 period, someone investing 1 euro into commercial real estate portfolio similar to our index in Q2 2005 would have 1.27 euro in Q2 2013. In comparison someone investing 1 euro into PX index in Q2 2005 would have 0.73 euro in Q2 2013.
The C&W CRECVI index is showing a slight positive growth in the last two quarters. This is caused mainly by an exceptionally good performance of leading Prague’s shopping centres, included in the index, which are trading very well in spite of generally weak retail environment.
“The index also reveals several other facts. The commercial real estate index shows strong correlation with the GDP growth but only a mild correlation with the stock exchange. This makes a commercial real estate component a welcome part of a diversified investment portfolio, as it brings in a stabilizing component into it,” says Michal Soták.
Please see the Graph 2 for comparison of the index and PX Prague stock exchange index.
“C&W will continue to monitor the index, one of our aims being to determine long term cycles in the commercial real estate market. Based on experience from the mature Western markets, the property market moves in 7-9 year cycles. Based on that, the Czech market could recover from the slump we have seen in 2009 and return to normal sometime between 2016 and 2018. However, we will continue to analyze the data to see whether this experience from the mature markets is applicable for the Czech Republic,” adds Jaroslav Kaizr.
The changes in the index stem only from changes in rents and yields. The index also disregards the effects of leverage, i.e. it shows the value of the assets rather than equity stakes in them. This methodology is used in order to show a transparent measure of capital value of commercial real estate assets. The data used in the calculations are collected each quarter through an internal survey of C&W’s sector experts.