Conservative investment strategy has withstood crisis periods and is paying off

Although the results for 2022 have not yet been finalised, we already know that despite the worsening macroeconomic situation, we will be able to call the past year a record year. In this article, we provide a small recap related to the outlook for 2023, as well as a reflection on the factors that ultimately positively influence our investment strategy.

Looking back at 2022 

Despite the unfavourable situation on the markets, our funds did well last year, so we can say that their returns will reach an all-time high. We managed to add 15 new properties to our portfolio worth over 126 Mio euro, celebrated our five-year anniversary and launched a new fund, ZDR Industrial, which focuses on suburban logistics and manufacturing. Thanks to early investors who took advantage of the share subscription period, we bought the first property into the new fund before the end of the year.

The ambition for 2023 is to expand the portfolio for ZDR Industrial to include assets worth around half a billion CZK. Our main focus, however, remains on retail parks, which we know very well and are a proven working model for us and our investors through many crises.

A strategy that works in the world

Our strategy is based on investing in retail properties with tenants offering mainly groceries, other daily necessities or a lower-priced discount assortment. And it is the high proportion of food stores that sets us apart from the rest of the market. We can see that this approach works without major fluctuations outside the Czech Republic, where this strategy is even more widespread than here.

Among the foreign real estate funds that we follow and have a similar focus as ours, we can mention, for example, the Greenman fund. One of the largest retail investors in Germany with a portfolio worth a billion euros, which is double ours by comparison. From the available data, it is clear that this fund has an even higher percentage of food retailers in its lettable space than we do. It is as high as 63%. Their annual appreciation is consistently around 5%. 

What is particularly important about this example is that even in times of decline in traditional asset classes, investments in real estate of our type still retain value. Despite the many differences, there is one common denominator, and that is stability and conservatism.

Property price corrections - what do we need to consider?

Recently, there has been more and more talk of falling property prices. But here again, real estate funds are proving to be a reliable and long-term store of value. It is essential to distinguish what type of property is involved, what its condition is, where it is located and what tenants occupy it.

In recent years, prices of apartments and logistics halls in particular have risen sharply. These assets may therefore be more susceptible to price declines. Retail parks, which are our focus, have of course also risen in price, but gradually and at a natural pace. Taking into account the above-average length of our leases (WAULT 6.3 years), the creditworthiness of our tenants and the regular rent increases due to indexation, we expect stagnation in this segment at worst.

For comparison, we can again look abroad. Let's look at Vienna, where we have our assets and where we know the market. The difference in the price of apartments between Vienna and Prague is 17%. Given that the average income of Viennese residents is more than 60% higher than that of Prague residents, apartments in Prague are already significantly more expensive. The average gross rental yield in our capital city is 2.62%. As far as generating a return is concerned, at the current level of interest rates, and after taking into account operating costs, it does not make much sense to acquire an investment apartment.

The situation is different for retail parks. The historical development of their prices has been rather gradual but consistent compared to other types of commercial real estate. The market valuation of Czech retail parks is at the level of 6-7%. Compared to Austria, specifically again to Vienna, we are still 30% lower in terms of valuation.

The general trend is a shift in prices towards the west, i.e. upwards. Therefore, we see a much higher growth potential here than is currently offered by, for example, the above-mentioned apartments. Furthermore, we are betting on our proven defensive strategy and do not expect any negative developments in the performance of our funds in the near term.