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16. 11. 2022

How will the proposed amendment to the Building Act affect commercial real estate?

Construction is an inherently slow business; although, it should be added, a very stable one. However, this seemingly unshakable stability has been greatly tested of late by another of life’s many uncertainties: regulatory changes. The latest of these is the new Building Act, or rather its proposed substantive amendment. I am not a lawyer or a developer here to assess the quality of legal clauses or their specific impact on construction proceedings. I want to reflect instead on what a "foot on the brake" in real estate development means for the market, and why commercial real estate is important.

The housing crisis (not only) in Prague is a well-known fact. There are tens of thousands of apartments needed. Plus, we would be naive to think that we have enough offices or warehouses at present. A building, like everything we use on a regular basis, has a finite lifespan. The lifetime of a commercial building is determined in various ways. However, depending on the point of view we choose, it can be anywhere between fifty and a hundred years. This varies based on on whether it is a hall, an office building, or something else. It is precisely because of this relatively long lifetime that there should always be the possibility, and more importantly the will, to change the functional purpose of buildings and the direction in which the area where the building is located is developing. There should also be no restrictions on opportunities to replace the old with something new that fits current trends and, above all, meets society’s needs. A sad example of the fact that this is not the case in the Czech Republic is the many brownfield sites or vacant lots in Prague and other cities. These are venues which have been waiting for decades for any kind of use or which have been used in a completely inappropriate and uneconomical way for a long time. These places are often a burden on the surrounding area and the subject of investor speculation. However, there is generally no pressure exerted to promote their change or adaptation: apart from the efforts of some owners-developers.

New property as part of commercial activities

New commercial property, on the other hand, acts as a multiplier of the funds invested. It creates jobs during construction, people subsequently work in it and generate economic activity through it, and services then develop in the surrounding area. Commercial real estate is thus essentially part of every economic activity on the planet. It cannot be avoided if societies and economies ever want to grow. And that is what we should want at the moment. However, because it takes much longer than it should to deliver project permits, the market is unable to respond to changes or to society’s needs. To avoid misunderstanding, I have nothing against historic preservation and meaningful regulations, and I do not support thoughtless development. However, we often see an oppositional approach applied against new development using vague arguments that serve only as obstruction. That is the problem.

It's not just real estate that is lacking but infrastructure as well

But it's not just building development that is being held back. We are in a unique geographical position in Europe, and due to the current trend of near-shoring we are one of the most interesting countries for investors. However, through historical development, we have created an infrastructure problem: local resources are currently at capacity and sometimes at the end of their lifespan. As early as the 1990s, there were extensive plans to connect the Czech Republic with neighbouring countries through an extensive motorway network or high-speed railways. However, to this day, i.e., 30 years later, there are few similar plans and only a fraction of what was promised has been built.

Why should more be built? And why should the Building Act speed up approval processes?

So why should more be built? Why do we even need more roads, warehouses, offices, and residences? Simply because we, the Czech Republic, are missing out on opportunities for growth and better quality of life: we are not keeping pace with neighbouring countries. Large companies looking for a location for their new manufacturing plants or offices, for their new business services centre, and who are interested in Central Europe, often reach out to bordering countries in the region as owners and developers there are able to promise them clearer timing and often better conditions. The same is true for investors who buy projects. One could argue that an influx of new buildings would create instability in the market. Perhaps. However, personally, I think that what is needed is to take steps to improve the conditions for construction in general, because the market can often cope with an oversupply on its own.

This should be kept in mind when amending the new Building Act. The new legal norm promises a fundamental change, but we will only see the real impact in a few years' time. We can only keep our fingers crossed for the real estate market.


Josef Stanko
Colliers Czech Republic