Article published in Development News, 04-05/20

Charles Bridge, which previously you could not walk over in peace, now looks perfect for a bike ride. In terms of tourism, Prague has returned to the level before 1989. The price of this new situation has definitely been paid the most by the providers of short-term rentals, followed by hoteliers and landlords of retail space. The severe impact of Covid-19 on these sensitive real estate sectors are discussed below by Peter Višňovský, CEO of real estate agency LEXXUS, and Jan Jurčíček, Head of Building and Project Consulting at Savills, an international real estate consulting.

At the height of the pandemic it is not possible to predict the long-term effects of this health crisis. However, from the damage so far caused by Covid-19 and the first market reactions to it, a fairly accurate estimate can be drawn up for what will occur during the next phase. “It was the Airbnb short-term residential rental market that took the most severe hit from the pandemic. The owners had become accustomed to decent and stable incomes from these short-term rentals. Now, they're watching the news and expect their fully equipped apartments to remain empty for at least the medium term. These owners are not usually under much financial pressure, but of course they are looking for ways to reduce their losses,” says Višňovský.

Višňovský predicts that some Airbnb apartments will disappear from the market for good. “Some owners have already turned their apartments into medium- and long-term rentals. I estimate that up to a third of them will opt for the lower but more stable income from this. No one can predict whether the epidemic will see repeated waves and longer-term rentals can dilute the risk of this.”

However, Jurčíček believes there remains uncertainty over the extent to which the number of Airbnb apartments in the metropolis will decline over the longer term. “Tourists will eventually return to Prague and there are already a number of investors on the market who, regardless of the current situation, plan to change the use of apartment buildings to short-term rental accommodation. A bigger drag than the current tourist outage is the attitude of individual town halls,” says Jurčíček.

Jurčíček explains that current technical legislation does not specifically deal with short-term accommodation such as Airbnb, though investors need to consider the risks related to operations of such a business in buildings that are permitted for long-term housing. There are, he says, significant implications and investments related to the re-permitting of the asset to accommodation from housing: most of the building would have to be fitted with evacuation elevators, special ventilation systems and even improved fire detection – improvements which are not only costly, but sometimes difficult to implement and would make the building inoperable for a period of time.

There are also differing opinions over whether the decline of tourists will reduce rental prices in the capital over the long term. Višňovský, for one, rejects that. “In Prague, we are struggling with a long-term shortage of apartments in the whole territory of the metropolis. Airbnb apartments focus mostly on the city centre, which will always be more expensive. The short-term release of these apartments will not solve the long-term problem of apartment shortages. New apartments have been under construction in Prague for a long time and one of the consequences of that has been a rise in prices in significant parts of the Central Bohemian Region.”

Hotels and retail suffer

The sudden interruption of the tourist season has also hit hotels hard. This will be especially felt by those investors who poured a record amount of money into the Czech hotel sector in 2019, with investment that year almost doubling to €539 million. "Hotels in the centre of Prague are now offering their services for half, and this aggressive pricing policy, together with services that short-term accommodation does not offer, will attract a number of clients after the release of existing measures,” predicts Višňovský.

According to Jurčíček, the change has been extremely hard on hotels, many of which were already in trouble even before the pandemic broke out. "Many hotel chains are already facing serious difficulties that have significantly reduced traffic and resulted in job losses of key workers. But even the successful ones will have to rethink their approach. Any new investment will be considered more carefully, while some investments will be postponed or completely cancelled. It is not yet clear what will happen in the long run, whether we will travel less in general or whether everything will quickly return to normal.”

The retail sector will also have to recover from this severe shock. “Retail rentals have completely frozen and there is no reason for new demand. The short-term freeze is understandable, the key will be to restart the economy quickly. Even with a deeper downturn, retail space in Prague will remain attractive. But far bleaker times await both sellers and landlords in smaller towns: with the decrease in purchasing power, sellers and indirectly real estate owners themselves will get into trouble,” Jurčíček predicts.

Offices hit the least

Better is the situation in the area of long-term office rentals. "The vast majority of office space is contracted for a long time and the market does not expect a sudden impact. Some companies that had planned to move are now reconsidering their plans. Some of them will postpone the move, as a section of the employees will leave as the economy worsens. We would expect more of an impact only by 2021, when the effect of reduced demand for new offices will be felt. We also have to count on the fact that both tenants and sellers will examine the counterparty in more detail,” says Jan Jurčíček.

At the same time, Jurčíček rejects the need for an immediate renegotiation of rental prices. "A significant reduction in rents would put investors themselves in trouble, and I do not assume too much willingness to negotiate contracts right now,” he says.