Inflation and price growth
As with every year, 2022 is full of uncertainties. This year, though, is more different for our generation in that we are seeing the return of inflation*, something that most of us have not known during our careers. Dealing with this uncertainty will be the biggest challenge for everyone this year.
Real estate prices will continue to rise, but I do not think that this will be at the same rate as in 2021, which was quite exceptional in terms of investment appreciation. As long as costs continue to skyrocket, property prices will continue to be impacted by this. Therefore, this year we can expect a very attractive appreciation. Personally, I hope that inflation will slow down a lot in the second half of the year, and that appreciation will certainly be more attractive than inflation.
The behaviour on our markets is evolving somewhat differently. In Prague, we have a problem with mortgages, these having already reached 5%, which is a problem for people who are planning to buy real estate. Housing, which for many has already been difficult to afford, is slowly becoming unaffordable. In the Czech Republic, therefore, private individuals will buy less for their own housing needs. Real estate will be bought more by investors, who have cash available. At the same time, they will also buy funds having the strategy of investing in real estate for long-term lease. My guess is that not much will change in Slovakia in 2022. New projects are coming to the market slowly, mortgages are not changing and if they do change, the ECB is unlikely to raise interest rates as significantly as we have seen in the Czech Republic.
Project development and new projects
The situation is more challenging today. Building firms do not want to guarantee the prices of supplies, making it more complicated for banks providing finance. It will be essential to find some way of taking the risk out of the whole process, because banks will have a problem financing these sorts of projects. There is not yet any clear way how to deal with this. The situation will not be too favourable for completely new projects this year. Our business is capital intensive, so until the investment environment becomes more conducive, new projects will not get off the ground. Rather, there will be projects that already have a contract signed with a building firm, or on which construction has already begun, or a further stage of an existing project.
In this regard, we are pleased that with our ongoing projects, such as Metropolis in Bratislava and Alfa Residence in Prague, we are keeping to the planned time schedule. We also have one project in Prague, Vysočanský mlýn, where on the contrary, it is better that the project is not yet ready for starting construction, and we are certainly not planning to hurry ahead with it until we have a solution that will bring greater certainty. At the same time, I am pleased that our SICAV investment open fund has significantly strengthened, and is bearing fruit right now – in 2021, the fund achieved an appreciation of 9.17%. Thanks to the fund’s strategy, we can buy projects and thus help developers hedge their risks.
Residential project Metropolis, Bratislava
Residential project Alfa Residence, Prague
Development project Vysočanský mlýn, Prague
Suppliers and the impact on quality and prices
Supplier relations and what has been going on in the supply chain for a long time, such as lack of materials, slower deliveries, rising prices of materials, have all been affecting real estate since the beginning of the pandemic, and 2022 will be no different in this. It will be important for all firms to find a way how to deal with this. Our philosophy in this regard is not to lower the standard of projects, on the contrary, our efforts are focused on finding a viable path forward with suppliers. We will certainly not skimp on the quality of projects just because things are more expensive now.
Affordability of housing
For several years now, the rise in housing prices has been accelerating, and so for this and other reasons, we will see a trend towards rental housing, similarly as is the case in the West in cities, where owning real estate is a great luxury. The same situation will come to the Czech Republic and Slovakia. This is where we see the future, and so we have set up a sub-fund of SICAV, aimed at developing rental housing in the Czech Republic, particularly in Prague and Brno, but we are also interested in the metropolises of neighbouring Central European countries. The fund will enable investors to benefit from price rises and will make housing affordable for people in the form of rentals.
The issue of sustainability will be even more pressing this year
For all companies operating in the real estate business, if they want to operate financially in the long run, they will have to implement ESG strategies. Index ESG encompass environmental impact, energy-saving, respect for fundamental human rights, and also protection of health and worker safety. These are important values for us as well at Mint Investments. Those who do not prepare for this by 2030 will no longer be viable in their business. There will be huge penalties for breaches, as is the case today in the automotive industry, where the carmakers underestimated this, but the legislation is relentless. It is actually a new challenge and an opportunity to be successful. Many investors and companies manage real estate from an Excel spreadsheet and have no idea what is inside those buildings, or how they actually work. So for developers or asset managers who are used to reconstructing buildings and understanding their entire technical operation, ESG presents a new opportunity to differentiate themselves and improve their market position.
For us, ESG commitments mean that when we buy office buildings, we are interested in how to equip them so that those buildings meet the required standards in the long run. In order to operate in a more technically efficient way, with efficient consumption of water, electricity, and heating. If we buy a building and renovate it according to the ESG standard, we can offer it at a better selling price. And most importantly, we will increase the attractiveness of the building, and thereby also demand. Once you have more investors in these buildings, they will automatically have a higher price.
At Mint Investments, we focus on modern office buildings with an age of at maximum 15 – 20 years, knowing that if we want to make them sufficiently attractive for institutional investors, we must first understand how their internal organism functions, so that we can improve their technological standard. Many times we have reconstructed buildings also from the inside, even during full operation. Nevertheless, you need your own team of experts and consultants for this; you need to understand the technologies, because each technology has its own possibilities, difficulties, and price. We devote a lot of time to this area at Mint, we have extensive experience and we are constantly learning and improving in this area. It’s like in nature – improve or perish.
Ongoing pandemic – a challenge is to get people back to the office
I, personally, do not believe that homeworking has long term potential for firms. My experience is that the work ethic declines; people feel that they are more efficient, but it’s not true. They lack and miss interaction. People fear illness, and rightly so, and so they work from home. But the coming years will show that this has not been good for firms, and it will be essential to gradually resume office work, even if it is in a different form. Because things will never simply return to what they were before. Offices will have to change into spaces where young people and older colleagues enjoy spending some time. At Mint, we always try to be one step ahead when it comes to the safety of people at the workplace. Our goal this year will be for our people to return to their desks fully and without fear. Therefore, we are taking all possible steps to reduce the risk of covid transmission. We like to see each other at work and meet in person.
Opportunities in cities – brownfields
Cities do not have endless vacant land, and taking land around the town is not efficient, or good for the environment. So, it makes sense to revitalise existing brownfields, which helps transport and life in the city. The Chalupkova zone, where we are developing Metropolis, is a former industrial area that was bombed, but is in an attractive location, and so it certainly makes sense for us to focus on this type of central location. We are now negotiating about other projects in Prague, Bratislava, Brno and other Czech cities.
The right plans at the right time
It is important to do your job honestly and well. And at the same time to be lucky with the timing. New projects are always a huge challenge, but I am glad that we are not launching anything new this year and that we can continue the well-started projects that we launched at the right time.
In any case, we at Mint Investments really enjoy development, and we certainly have an appetite for further acquisitions, something we will focus on in 2022.
*Note: according to NBS data, it is climbing to 6%, source: Komentáre NBS 14.1.2022