The Czech commercial property sector witnessed significant changes in value during 2008 with prime property values dropping year-to-year by 15-20% (depending on the particular project), and secondary commercial property value dropped even more, according to research by consultancy King Sturge.

Factors that effected valuations in 2008 in a positive way were rental growth and shorter lease contracts and new supply and higher vacancy rate had a negative effect, according to King Sturge. Growing yields mean higher investment risk, based on a potential buyer usually requiring lower price. A sharp decline in commercial property transactions in the last year by approximately 62% year-on-year was also due to different price expectation of buyers and sellers of commercial property, which unfortunately haven’t succeeded to match each other so far.

In the first half of 2009, analysts from King Sturge expect distressed sales in cases when the value of the property drops below the bank credit and the developer is not able to fill in the critical difference by private equity. In cases when banks want to bear a risk related to drop of value, property will be withdrawn and very likely sold, or a bank will make a developer sell the property. Distressed sales will put further pressure on commercial property prices and enhance the buyers’ position.

Commercial property valuation focuses on location, technical quality of the building, tenant mix, lease contract periods, rents and mainly yields. The reason for commercial property valuation usually is the impending investment transaction or a regular annual or semiannual accounting of book values required by property portfolio owners, such as property funds, financial institutions and banks. The consultancy is also counting on the stabilization of shares of developers traded on the Prague Stock Exchange (PSE) and a bigger yield difference between prime and secondary commercial properties.