International Property News

Czech developers expanding despite economic downturn

5th March 2009

In grim times�with property developers postponing the start of construction work on sites, offer projects for sale and look for joint venture partners�announcements by domestic real estate firms over their commitments to expand in foreign markets raise eyebrows.

Expanding despite economic downturn

Czech builder and developer Stavby in February signed a deal with Ukrainian developer Prombud regarding the completion of a mixed-use project in Kyiv. Stavby will act as a co-investor in the project and will operate the complex after it is completed in two stages. The project, which does not have an official name yet, aims to offer luxury offices, shops and apartments in a location close to the city center in the neighborhood of metro station Palats Ukraina.

The first building, currently under construction, is expected to receive a final building permit by August; still the proportion of office and residential space has been subject to constant changes. The developer said it is in talks with potential tenants, but no lease agreement has been signed thus far. But Stavby�s board member and strategy director Martin Kouril remains optimistic. He said he believes that upon completion of the project�s second stage in spring 2010, the facility will be 90 percent pre-leased.

�We believe that the financial crisis will have eased by then, and the interest to do business in Ukraine will be back at the level from last year,� Kouril said, adding that the company is looking to offer Czech firms doing business in Ukraine modern offices and apartments.

Total investment costs of the complex are expected to exceed Kc 2 billion (�70.14 million) partly because the project will be furbished according to the latest trends, Kouril said. This will be valid for furniture, the interior as well as high-tech equipment. Stavby is to invest Kc 1.3 billion in the complex; the remaining part of the investment will be covered by its partner. The project�s financing is expected to be secured mainly by bank loans.

Stavby has stated it plans to realize orders in the value of �180 million over the next three years in the country, mainly through its local subsidiary Stavby Ukraine. The company has further projects in the pipeline in Ukraine. Stavby owns through Ukrainian real estate firm Vaskaran land near the new Kyiv Boryspil International Airport terminal, where it plans to build an office building. The company initially planned to start construction of the planned A-class office building on the site this spring but postponed the construction launch as it decided to focus on the mixed-use project near the center of Kyiv, Kouril told CBW.

Projects, expansion plans on hold

But while Stavby is going against the stream with the building in Ukraine, other established players who rely on bank loans had to pick priorities, and some of their projects are behind schedule.

Property developer Real Estate Karl�n Group (REKG) has put its planned office project in Minsk, Belarus, on hold, REKG�s director and co-founder Serge Borenstein told CBW. �We won�t start building [on the site] until the market recovers,� Borenstein said.

REKG last year received building permits for the mixed-use project and set up an office in Minsk to coordinate development of the planned 12,000 square meter building. But if the office market weakened in the Czech Republic, in Belarus it is a �catastrophe,� Borenstein said. Nevertheless, the company decided to keep its team in Minsk for another year and to wait for the market to recuperate. �I am concentrating on Prague and the Czech Republic now,� Borenstein said.

About a year ago, REKG was close to signing an office rental agreement with a key tenant in the planned office building, but this client from a banking sector eventually postponed the lease signing in view of the ongoing economic concerns, Borenstein said.

REKG is active in property development mainly in Prague�s district of Karl�n, and its planned project in Minsk is a rare exception outside the Czech Republic.

Lack of financing has made Sekyra Group halt its expansion plans in Russia and other foreign markets. In Slovakia, Sekyra Group had decided to team up with Austrian property company CA Immo International on its multipurpose project in Bratislava. Investment costs in Starohorsk� are projected at Kc 3 billion, but conditions of the joint venture were not disclosed, Sekyra Group�s spokesman Radek Pol�k said.

The current environment is not favorable for the planned expansion to new regions of German engineering consulting group Obermeyer Planen + Beraten. While the group has been present on the Czech market since 1993, Obermeyer International East is an entity active since October 2008, which is responsible for the group�s expansion to the CEE region from its seat in Prague.

�It is not the ideal time for our intentions, but on the other hand we will have plenty of time to come up with some strategy,� said Milan Licehamr, chairman of Obermeyer International East.

Obermeyer decided its Czech office would handle expansion in the CEE region because of its good financial results and personal experience with transformation including privatizations on the Czech market, Licehamr said. While the Czech market is becoming saturated, Obermeyer sees opportunities particularly in Poland, Romania, Bulgaria and Russia. �The potential that there will be construction activity once financing is available is relatively large,� Licehamr said.

In the CEE region, Obermeyer has a team of some 10 people in its Romanian subsidiary, and it participates in some major infrastructure projects of national importance such as the railway corridor from the Black Sea up north. Obermeyer considers expanding in some of the CEE markets via acquisitions.

�The time for acquisitions could be ripe if you managed to identify the culminating point when companies will feel they�ve hit rock bottom and will be willing to merge with someone stronger.�

In 2007 Obermeyer acquired some 75 percent in the Czech architecture, design and engineering firm Helika, expanding its workforce in the Czech Republic to 160 people and boosting its annual revenues to about Kc 400 million for Obermeyer�s Czech operations.

Russia represents big opportunities, but investors should be cautious. The country is privatizing large engineering companies that employ thousands of people each, but not all acquisitions would pay off and organic growth, although a slower way of expansion, might be a better option in some cases. �You are buying a spirit, mainly the experience and skills of the people,� Licehamr said, adding that if these people don�t follow your philosophy and run away, you remain with just an empty shell of a company.

�You have to consider whether it is more advantageous to buy four to six people and build up the business on them or buy a firm facing a risk that it will not identify with your philosophy,� Licehamr said.

Source: CBW