1. Real Estate Market in the Czech Republic “Buy land, they don’t make it any more” (Mark Twain 1935-1910) Summer School Lecture 2014 by Petr Prochazka, PhD Summer School Lecture 2013 by Petr Prochazka, PhD

2. Lecture Outline 1) Real Estate Characteristics 2) Types of Real Estate 3) Real Estate Market Analysis 4) Specifics of the Czech Real Estate Market Summer School Lecture 2013 by Petr Prochazka, PhD

3. RE Characteristics Definition: Land and improvement to land What is the opposite of real estate? Characteristics: Unique Immovable Indestructible Summer School Lecture 2013 by Petr Prochazka, PhD

4. RE Market Market = a collection of sellers and buyers which conduct transactions for the rights to use land and buildings Demand side = firms and households are willing to pay for this use for consumption or production purposes Summer School Lecture 2011 by Petr Prochazka, PhD

5. RE Market Supply side= property owners who are willing to sell/rent such a space to users Users have specific requirements Families = comfortable, attractive living near shopping and education Manufacturer = functionality and proximity to suppliers/customers Farmers = fertile land, climate, good transportation Suppliers have buildings designed for specific use and are fixed in their locations Summer School Lecture 2011 by Petr Prochazka, PhD

6. RE Market Both S&D are highly specific Therefore, the markets are highly segmented. Office space market in L.A. is distinct from Condominiums market in Prague. Agricultural land market in Romania is different from logistic property market in Germany Differences exist even within a small market! Prague 1 vs. Prague 14 Summer School Lecture 2011 by Petr Prochazka, PhD

7. Types of Real Estate Types of real estate by purpose 1) Vacant Land 2) Residential properties 3) Commercial 4) Industrial 5) Agricultural 6) Special purpose (school, church,…) Summer School Lecture 2011 by Petr Prochazka, PhD

8. Types of Real Estate Types of real estate by purpose 1) Vacant land Summer School Lecture 2011 by Petr Prochazka, PhD

9. Types of real estate by purpose 2) Residential properties a) urban b) suburban c) rural areas Types of Real Estate Summer School Lecture 2011 by Petr Prochazka, PhD

10. Types of real estate by purpose 3) Commercial properties (business property) a) office space b) shopping centers c) stores d) theaters e) hotels f) parking facilities Types of Real Estate Summer School Lecture 2011 by Petr Prochazka, PhD

11. Types of real estate by purpose 4) Industrial properties a) warehouses b) factories c) land in industrial zones d) power plants Types of Real Estate Summer School Lecture 2011 by Petr Prochazka, PhD

12. Types of Real Estate Types of real estate by purpose 5) Agricultural properties a) farms b) timberland c) ranches d) orchards Summer School Lecture 2011 by Petr Prochazka, PhD

13. Types of Real Estate Types of real estate by purpose 6) Special purpose a) hospitals b) schools c) cemeteries d) universities Summer School Lecture 2011 by Petr Prochazka, PhD

14. Market Analysis 1)Space Market Definition 2)Space Market Analysis Summer School Lecture 2011 by Petr Prochazka, PhD

15. Types defined – space market Describing RE space market by the microeconomic theory. Demand looks the same… Supply is different… 1) In the S-R quantity cannot be increased or decreased (longlived), 2) In the L-R, MC of constructing the new home is usually the same as the neighbouring house demand S-R supply L-R supply Price Quantity Summer School Lecture 2011 by Petr Prochazka, PhD

16. Space market example Changes in demand (a case of large suburban centers – increase in demand leads to more developed land with little price effect, decline in demand leads to large decrease of price) D1 S-R supply L-R supply Price Quantity D2 D3 Summer School Lecture 2011 by Petr Prochazka, PhD

17. Space market example Changes in demand (a case of luxurious homes in downtowns– increase in demand leads to tearing down of old houses – price increases, decline in demand leads to large decrease of price) Do you know of any prestigious location in the US? D1 S-R supply L-R supply Price Quantity D2 D3 Summer School Lecture 2011 by Petr Prochazka, PhD

18. Why RE market analysis? Where to locate a branch office? What size or type of building to develop on a specific site? What type of tenants to look for in marketing a particular building? What the rent and expiration term should be on a given lease? When to begin construction on a development project? How many units to build this year? Which cities and property types to invest in so as to allocate capital where rents are more likely to grow? Where to locate new retail outlets and/or which stores should be closed? Summer School Lecture 2011 by Petr Prochazka, PhD

19. Why RE market analysis? Real estate market analysis usually requires quantitative or qualitative understanding (& prediction) of both the demand side and supply side of the space usage market relevant to some real estate decision. 1) The focus might be micro-level, such as a feasibility analysis for a specific site or property 2) Or, the focus might be more general, such as a general characterization of the supply/demand conditions in a particular space submarket. Summer School Lecture 2011 by Petr Prochazka, PhD

20. How do we do it? To evaluate a real estate space submarket, analysts tend to focus on a few primary indicators that characterize both the supply and demand sides of the submarket and the balance (equilibrium) between them. 1) Vacancy rate 2) Market Rent 3) Quantity of new construction starts 4) Quantity of new construction completions 5) Absorption of new space Summer School Lecture 2011 by Petr Prochazka, PhD

21. Vacancy rate By definition, the vacancy rate refers to the percentage of the stock of space in the market that is not currently occupied. 1) Vacancy Rate = Vacant Space/Total Space 2) The vacancy rate reflects the balance between supply and demand. 3) In most markets, it is normal for some vacancy to exist (the natural vacancy rate) even when supply and demand are in balance. When actual vacancy rises above the natural vacancy rate, rents tend to fall. When actual vacancy falls below the natural vacancy rate, rents tend to increase. Natural vacancy rate can be 6-12% Summer School Lecture 2011 by Petr Prochazka, PhD

22. Market rent By definition, market rent is the level of rents being charged on typical new leases currently being signed in the market. 1) asking rents may differ from effective rents 2) Market rent is another indicator of the balance between supply and demand in a market. 3) Can be tricky to measure because it is private information and lease terms may differ dramatically from tenant to tenant Result: Sometimes hard to get accurate “rent measures” – usually collected via surveys. Summer School Lecture 2011 by Petr Prochazka, PhD

23. Construction starts and completions Construction is an important “supply side” indicator. 1) “Starts” indicate the amount of space currently in the “pipeline” and likely to be added to the supply in the near future 2) “Completes” indicate the amount of space just arriving in the market. 3) Of course, we need to consider the net addition to supply (after taking demolition and renovations into account). Summer School Lecture 2011 by Petr Prochazka, PhD

24. Absorption of space 1) By definition, absorption refers to the amount of additional space that becomes occupied during a year. 2) Absorption is a “demand side” indicator (i.e., does not account for amount of supply available). a) Gross absorption – total amount of space leased, regardless of where tenants come from b) Net absorption – net change in the amount of space occupied in a market. Positive net absorption rates: Demand increasing in market Negative net absorption rates:Demand falling in market Summer School Lecture 2011 by Petr Prochazka, PhD

25. Months supply 1) The variables we just reviewed are commonly used indicators of supply/demand conditions in space submarkets. 2) The concept of “months supply” combines several of these variables to help us understand a market even better. 3) By definition, months supply is the sum of current vacant space in the market and new construction started but not completed, divided by 1/12 th of the annual net absorption in the market. 4) This measure tells how long it will take (in months) for all of the vacant space in the market to be absorbed, driving the vacancy rate to zero. – Analysts compare the months supply to the length of time it takes to complete new construction to see if the market can support a new project. If the months supply is much greater than the average construction period, the market is “oversupplied.” Otherwise, it might be time to start a new project in this market. – Meaningless measure if net absorption is negative Summer School Lecture 2011 by Petr Prochazka, PhD

26. Tips for market analysts 1) Define the market carefully along geographic and usage dimensions, recognizing that most metropolitan areas form markets that can be usefully divided into smaller submarkets. 2) Carefully consider the time period to be covered in the analysis – 5 – 10 years into the future is desirable – 3 years is more feasible in most cases 3) Recognize the differences between and the benefits of a simple trend extrapolation and a structural analysis – Trend extrapolation predicts the future purely based on historical trends and patterns – Structural analysis attempts to predict the future by identifying and quantifying the underlying determinants of market trends. Summer School Lecture 2011 by Petr Prochazka, PhD

27. Agricultural Land Market Global Overview Demand Drivers 1) Population 2) Dietary shifts 3) Policy changes 4) Bioenergy 5) Prices of food commodities Supply Constraints 1) Scarcity of Land 2) Water and climate change 3) Technology Summer School Lecture 2011 by Petr Prochazka, PhD

28. Land Market Global Overview Summer School Lecture 2011 by Petr Prochazka, PhD

29. Land Market Global Overview Summer School Lecture 2011 by Petr Prochazka, PhD

30. Czech Republic Land Market Market Price of Land 1993-2007 CZK/sq.m Summer School Lecture 2011 by Petr Prochazka, PhD

31. Czech Republic Land Market Better suited to arable production Full landownership rights for foreigners (albeit with some complications) Legal and economic stability of EU membership Recent development, in 2011 agricultural land prices go up… Why? Summer School Lecture 2011 by Petr Prochazka, PhD