Slovaks setting sights on Prague

Slovak developer HB Reavis is gaining a foothold in their Czech neighbor's office market with the acquisition of their first Prague project, the 19,000 sqm River Garden Office West building, which they purchased from Real Estate Karlín Group in August.

What's even more remarkable than the move to add to their international portfolio in a still languid market is the fact that, like a handful of office projects scheduled to go up in Prague in the next few years, they are building entirely on speculation - not a crown borrowed from the banks and not a single pre-lease signed. We sat down with Ladislav Szabo, project manager for River Garden with HB Reavis to talk about their Prague debut and the speculative strategy behind it.

The Prague Post: The acquisition of River Gardens represents your first project in Prague. What inspired the expansion?

Ladislav Szabo: In Slovakia, we already have several projects and quite a long pipeline yet to develop, so there is basically no more room to expand and invest equity efficiently, but the logical step is to expand in the CEE region somehow, and the Czech Republic is culturally the closest country. We already had two retail projects in the Czech Republic, Aupark Hradec and Aupark Brno, and we were looking for quite some time for an office development here in order to get our footprint in Prague.

TPP: And you're building completely on speculation? No pre-leases?

LS: No pre-leases. It has to be from our own capital, because the banks won't give you any money if you build on speculation. It's 100 percent our own capital.  

TPP: Isn't it a bit risky to build on speculation in an area like Karlín, which has something like 17 percent vacancy?

LS: It's true that the vacancy there is above-average for Prague, but at the same time I think there is nobody else building, so in the next one or two years this vacancy will be filled in some way. When you're building an office building, you have to think about the location and the timing compared to the market. Right now, there are buildings being built in the area, but they are pre-leased, so there are no buildings under construction that would add more vacancy to the sub-market.

TPP: Why Prague 8?

LS: We knew we wanted to get our project in one of these core markets: Prague 1, Prague 4, Karlín or Pankrác. Especially these days, when times are tougher on the market, it's already risky to construct at all, so we wanted to stick with the core markets. Everybody wants to start building buildings, but right now you have to build equity, and very few people can do that.  

Karlín is the most natural extension of the city center in Prague; it's almost walking distance from the center in an area that faces a very limited pipeline, both in the mid- and long term. It's a really unique location near the Vltava River and in a green area with a riverfront, something none of the other core office markets can provide. And I think the quality of the office environment will only continue to grow in importance for occupiers, and they will increasingly value these factors, like being situated in the city center, but at the same time having a quiet, green environment with riverfront surrounding their building.

TPP: Everybody seems to be trying to add some value to their projects with green certificates and features. Do you have anything like this planned?

LS: Our plan is to get a BREEAM certificate for the building. We want to make a good first impression on the market, with good and flexible layouts and everything up to international standards.  

TPP: Is speculative building something that will be limited to these core Prague markets, or could we see it elsewhere?

LS: I don't think there will be any speculative building in Prague's secondary locations, because, first of all, there is a higher vacancy rate, and these locations wouldn't be able to compete with the core markets, apart from rental pricing, so developers' motivations to build will be very limited due to high lease up risk combined with the outlook of rents under pressure, which results in limited profit margins. And even if these numbers work, building right now is equity-intensive, and this makes the difference.

Emily Thompson can be reached at
ethompson@praguepost.com