Relocating business to the Czech Republic?
(News - Detail)
Date : 28.07.2010The financial crisis has had widespread consequences on the markets of Central and Eastern Europe (CEE). For companies thinking of relocating business to the Czech Republic, though, the result has been some of the best business conditions available in years. From lower labor costs to attractive incentives offered by office developers, occupiers might decide that the time is now to set up shop in the region.
To highlight this aspect of the industry, property consultants Jones Lang LaSalle (JLL) released its latest series of reports called “Onshore, Near-shore, Offshore: Unsure?” at the MIPIM (Marché International des Professionnels de l’Immobilier) property fair in Cannes, with reports focusing on the four regional markets of the Czech Republic, Poland, Romania and Hungary. The central point of the reports is that while the previous boom was highly favorable to real estate developers and investors, current conditions weigh heavily toward the businesses planning to occupy the office and logistics space in relocating or expanding operations in the region.
Bringing in tenants
According to Kevin Turpin, head of research for Central and Eastern Europe (CEE) at Jones Lang LaSalle in Prague, falling rents plays a role in this phenomenon, yet particularly in Prague, where rents have historically been far more stable than in places like Poland, the drop was relatively small.
“What also changed was the incentives. Occupiers realized it was very difficult for tenants to make financial commitments in this environment. They were proactive in looking for solutions. Rentalizing the investment required for a fit out and relocation costs. And that was on top of incentives that they would normally get, like rent-free periods, so they could spread the cost,” Turpin said.
Turpin says that the offshoring activity in the initial installation of the reports last year turned out to be less than originally expected. This was partially due to the still unknown severity of the economic downturn, but there were other factors involved as well. One was a general paralysis among companies unsure what the economic fallout would be and opting to stay put. “What we saw was that most occupiers whose leases were expiring were still looking, but preferred to stay where they were. The overall cost of staying is considerably less than having to move somewhere,” Turpin said. Another factor was the lengthening of the deal process on the market.
“It’s no secret that these days deals take a lot longer. They can take around 12 months to push through. There are a lot more people involved with the decision making, whether it’s a German, U.K.-based or American company; a lot of the decisions are being crosschecked with headquarters,” Turpin added.
Green for go
Partially because of this delay, along with the current supply condition on Prague’s office market the report indicates that 2010 is the optimal time for companies to begin negotiating for space here. The report provides a traffic light-like color code for entering the market and after the green year of tenant-favorable conditions this year, predicts two years of yellow, when the balance between tenant and landlord will be reset, followed by the red light of a return to balance in favor of landlords in 2013. It isn’t only a question of current price and available incentives, but of the effect of the development freeze on future supply.
“If it’s green for go, it means do it now, not only because the prices are good but because you should start negotiating now in case you run out of choice. As I said, most decisions will take about 12 months and once you’ve made that decision you have to put it into practice, so it could take another six months or so to get it implemented, get everyone in place, trained and ready to go. So you’ve got anywhere up to a two-year horizon,” Turpin said.
Staying power
While the reports focus on offshoring and its relation to the office market, another real estate sector highly relevant to offshoring is logistics. Many of the same factors have affected the sector at the same time that the market’s advantages have remained in place.
“Only a few clients have decided to close operations in the Czech Republic for strategic reasons last year. … Most of our clients, more than 90 percent, have decided to continue with their Czech operation and not to move to other countries. They are of the opinion that the Czech Republic is a business smart location, which is important especially now,” said Remon Vos, CEO of CTP Invest. “Many of our clients own factories in other countries within Europe or elsewhere. Often these other factories are older and not always located in the right region. Many of our clients have brought additional business to the Czech Republic recently. In particular labor incentive work, design center, research and development activities as well as test centers and shared service centers,” he added. According to Vos, CTP’s clients are generally trying to fit any additional activities in their existing buildings, a situation CTP’s development is adapting to by planning and carrying out extensions in its CTP parks.
The most recent signpost for the effect of international companies providing a spur to the Czech logistics market is the announcement of construction completion for a plant for Berendsen Textil Servis, Czech subsidiary of Danish textile service company in the newly opened industrial zone of Velké Pavlovice, South Moravia, at an investment of Kč 100 million (€3.93 million). The contract for the 11,000 square meter space was signed after a 12 month location search and negotiation, with construction taking about eight months.
Price control
Not only do multinational companies appreciate the improved business conditions in the Czech Republic, but the crisis has led to a lowering of wages that in some sectors was pricing the Czech Republic out of the market and causing the labor pool to dry up. “Our clients also see benefits from the financial crisis, there is currently more labor available than a few years ago,” Vos said.
“The crisis has rationalized certain aspects of the market, one of which is labor,” Turpin said, adding that rising unemployment has also led to greater stability for employers on a market that previously was difficult to negotiate. “This job market has companies less nervous that they’ll lose key people and have higher turnover employee,” he added. The IT sector in particular was becoming known for pricing itself out of the outsourcing market with fast-growing salaries, considerable employee movement and a shortage of specialists able to choose between well-paid jobs at home and abroad.
The former image of the Czech market as a cheap Eastern European market indistinguishable from markets further east is no longer be valid, yet the price savings is something that company’s today are keeping an eye on. The former four times wage differential with advanced western markets has been cut in half. “The gap in labor costs is not as big as it used to be, and just because it’s cheap doesn’t mean it is poor quality. That probably comes from the industrial past of the country,” Turpin said.
Measured growth
The way the market will develop could provide a win-win situation for occupiers and developers. Companies can get their foot in with a staff of, for example, 50 to 60 people in a space of 500 sqm and then double it as they expand in a reviving economy.
“In some ways that’s good for developers because they can phase their projects and spread their risk over a longer time. And similarly the occupiers, who might eventually need 2,000 sqm, don’t have to pay the rent on that much space from the get go,” Turpin said.
“What that also enables is that even if we start to go into an undersupply situation, which is potentially possible in Prague, there is a very good argument in Prague for pre-leases. Especially if there’s a big requirement, due to the big lead time of up to two years it is almost sufficient time to agree to a turnkey solution with a developer. There are many projects ready to go but of course financing isn’t available, but if they have a tenant who can take the majority or at least 50 percent of the space then they can get financing,” he added.
This article was originally published by Czech Business Weekly journal, author: Michael Stein.
Contacts :
Aleš Červinka
Consulate General of the Czech Republic
CzechTrade Office
Room 405
Dynasty Business Center
Wu Lu Mu Qi (N) Road 457
200040 Shanghai
China
WWW: http://www.czechtrade-china.cn
Phone: +862162490917
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