CZECH REPUBLIC

REAL ESTATE INVESTMENT & ECONOMIC OUTLOOK By Lilia Tome Spring 2011

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AGENDA CZECH REPUBLIC

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•  Introduction – Investment Climate

•  History & Economic Transition and Privatization

•  Country General Information

•  Economic Outlook

•  Commercial Real Estate Analysis

•  Investment Recommendations

INTRODUCTION CZECH REPUBLIC

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•  One of the most developed transitional economies

•  European Union Member

•  First country in Central and Eastern Europe accepted into the OECD (Organization for Economic Co-operation and Development)

•  The country is a NATO member fully integrated in other major

international organizations such as the IMF, WTO, and EBRD

•  The Czech National Bank has maintained

exceptional monetary stability since 1991

•  The Czech Crown is fully convertible

INVESTMENT CLIMATE

GENERAL INFORMATION CZECH REPUBLIC

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•  Size area: 78,866 km2

•  Population: 10.527m (Sep 2010 est.)

•  Population growth: 0.62% (average, 2006-2009)

•  Land boundaries: Austria, Germany, Poland, Slovakia

•  Language: Czech

•  Government type: Parliamentary democracy

•  EU entry date: 1st May 2004

•  Education: Literacy 99.8%

 Labor Force is considered highly educated

HISTORY OF THE COUNTRY CZECH REPUBLIC

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• After World War I, The Bohemian Kingdom became Czechoslovakia (was among the 10 most Industrialized

nations in the World)

•  After World War II Czechoslovakia:

  Was more or less physically intact

(avoided air bombardments and invasions)

  With help of Soviet Union, Germans and

Hungarians were expelled

•  For 41years (1948-1989) was a Communist State

•  Between 1989 - 1993 the pacific Velvet Revolution

ended the Communist government

ECONOMIC TRANSITION & PRIVATIZATION CZECH REPUBLIC

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•  TRANSITIONAL ECONOMY is an economy which is changing from a centrally planned economy to a free market

•  PRIVATIZATION is the transfer of property or enterprises from the state to private ownership, and the creation of a financial sector

•  RESTITUTION involved the return of private property to original owner, or their heirs

•  The Velvet Revolution in 1989 ended Communist control in the Czech Republic •  Economic reform and privatization were priorities for the new government •  One of the first goals was the extensive restitution of property that had been seized from its original owners during the Communist takeover. •  Real estate made up the largest segment of assets to be restituted.

 Farmers, businesses, and religious orders were the main recipients

MORE THAN EIGHTY PERCENT OF THE CZECH ECONOMY IS NOW IN PRIVATE HANDS

A RESTITUTION CASE CZECH REPUBLIC

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•  In Prague 6 •  Neighbors :  President Vaclav Havel’s  Turkish Ambassador  Spanish Ambassador  Swiss Ambassador  Japanese Ambassador

Market Price: $5,000,000 (sale) $25,000 (lease)

Aprox 4,500 Sq Ft +3 floors 2 car garage, basement, double lot

ECONOMIC OUTLOOK CZECH REPUBLIC

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•  The Czech economy grew 2.3% in 2010 German economic recovery

•  For a small, open, export-driven Czech economy is very sensitive to changes in the economic performance of its main export markets (80% exports go to Western Europe, 1/3 to Germany)

•  Czech financial system has remained relative healthy

•  Economy has not been directly affected by the debt crises

•  Czech crown (CZK) has been on a general appreciation trend since 2001

•  The budget deficit was 5.2% of GDP (Goal to be 3% 2013)

•  Government debt was expected to reach nearly 40% of GDP

•  Inflation rate increased to 1.5% in 2010 (from 1.0% in 2009)

•  Unemployment rate by Nov. 2010 7.1% (according to Eurostat)

ECONOMY OUTLOOK CZECH REPUBLIC

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General Data

TRANSPARENCY AND CORRUPTION CZECH REPUBLIC

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CORRUPTION IN THE PUBLIC SECTOR

“Transparency and accountability are critical to restoring trust and turning back the tide of corruption”

Czech Republic is:  Global ranked 54/178  Regional ranked 24/30

Source: Transparency International Corruption Perceptions Index 2010

FOREIGN INVESTMENT CZECH REPUBLIC

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•  Advantageous location in the center of Europe •  Relatively low cost structure •  Well-qualified labor force •  Foreign and domestic investors are treated identically. Both are subject to the same tax codes and laws •  A 15% withholding tax is charged on repatriation of profits •  This tax is reduced when double taxation applies For U.S companies with more than 10% of shares on Czech company the rate is rate is 5%

Maintaining an open trade and investment climate has been a key element of the Czech Republic's efforts to strengthen its market economy

FOREIGN INVESTMENT CZECH REPUBLIC

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Foreign Direct Investment (FDI)

26%

15%

11% 6% 5% 5%

32%

Leading Foreign Investors 2009

Germany Netherlands Austria France U.S Swiss Others

43%

21%

19%

9% 7% 1%

Foreign Investment by Sector 1998-2010

Manufacturing

Financial Servc

Real Estate

Utility Services

Transp & Telecom

Source: CzechInvest

INVESTMENT MARKET UPDATE Q4 2010 CZECH REPUBLIC

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 Investment activity with €384 million  Small to medium sized office and retail  Activity was in Prague & Metro Area  2011 will have similar total transaction volume with sustained appetite from domestic based investors.

Assets acquired manly by Czech investors

Total investment volume in 2010 €664 M 48% more than in 2009 but still 37% lower than in 2008;

INVESTMENT MARKET UPDATE Q4 2010 CZECH REPUBLIC

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COMMERCIAL REAL ESTATE CZECH REPUBLIC

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OFFICE SECTOR

•  Q4 had investment deals for just below €100 million

• Q4 showed highest level of absorption in 2010 in Prague (71,500 sq.m)

•  Vacancy level over Q4 at 13.15%

• Prime yields in Q4 held firm in Prague

•  Tenants still have the power lease renegotiation, upgrades & consolidation

(9,800 sq.m Oracle renewal)

COMMERCIAL REAL ESTATE CZECH REPUBLIC

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RETAIL SECTOR

•  Stable inflation and unemployment rates decreasing stronger retail environment.

•  Adjusted retail sales rose by 3% Q3 2010

•  Good occupier demand for prime retail in Prague which have out-performed the market during the downturn

•  Retail rents have remained stable over the fourth quarter

•  No plans for new development

COMMERCIAL REAL ESTATE CZECH REPUBLIC

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INDUSTRIAL SECTOR

•  The continued economic growth driven by the accelerating industrial output

•  Levels of demand for modern industrial space in the country

•  Strong activity IN Q4 was evident in Prague, and the regional cities of Ostrava and Pilsen

• Strong occupier activity + low development activity, vacancy rate fell 10.6% by the end of Q4

INVESTMENT RECOMENDATION CZECH REPUBLIC

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CONCLUSIONS

Economic recovery will continue in 2011 and the industrial sector will expand by another 6.2%

New Industrial (logistic) development of well located prime assets offering secure and long term

Increase in demand for core office space could be seen by the rising employment levels and economic growth but its positive effect on rents will be affected by speculative development pipeline

EFFICIENT CAPITAL MARKETS CZECH REPUBLIC

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•  Domestic banks belong to major European banking groups Very conservative

 Czech banks were healthy throughout the financial crisis.

 CR had no need of capital injection into the banking system

•  Foreign investors have access to loans in local markets at market terms

•  Prague Stock Exchange small, only 15 companies listed

•  2010 trade volume USD 20.4 billion of stocks

•  2009 trade volume USD 24.5 billion

•  Average daily trading volume approximately USD 81 million

•  The PSE index increased by 9.62 percent in 2010.

•  The secondary market has Limited Transparency

•  Prices on the Prague exchange are unreliable, with large differences between bid and ask prices

THANK YOU CZECH REPUBLIC

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VISIT THE CZECH REPUBLIC

Fantastic Beer

Magnificent Castles

Romantic Cities