Smart Autumn 2015 eng by Blue Events

SMART Autumn 2015

Construction | Development | Investment

The economic growth in the Czech Republic is accelerating Ranking of the 50 Largest European Construction Companies in 2014 The First Half of the Prague Development Race in 2015

Introductory Note

Contents Monitor Outcome Service for H1 2015....................................................................................... 4

Current Topic Czech Economy and Construction Industry in H1 2015................................................. 6

Transaction Price Map The First Half of the Prague Development Race in 2015…............................................ 7

Study Deloitte Property Index 2015........................................................................................ 8

Study Ranking of the 50 Largest European Construction Companies in 2014............. ………11

Interview Omar Koleitat: Design Plays an Increasingly More Important Role for Customers........ 12

Series: Construction Icons One World Trade Center............................................................................................. 14

Let Us Stick to Common Sense The growth of the Czech economy this year has exceeded analysts’ expectations. Moreover, the construction industry has seen more significant progress, in the past few years, than most directors of construction businesses could have imagined. At present, the supply is unable to promptly respond to the wave of demand on the residential market, which has been suppressed for several years. What does it mean? Is such growth healthy or is it already a boom which will be replaced by another hard crisis in several years (or months)? A crisis will surely come in the future because the economy goes through various cycles; this is simply a fact to be accepted and taken into account. However, there are also other factors that may have a harmful impact on growth or decline and, as a result, private sector entities will be facing issues and losses. What do we mean by this? Three years ago, the study entitled Sustainable Construction Investments in the Czech Republic was published in collaboration with the Association of Building Entrepreneurs of the Czech Republic. The study compared the Czech investment policy in the area of public investments with the neighbouring countries. The data and statistics used for the study indicated that unlike Germany and Austria, for instance, the Czech Republic has a strong pro-cyclic investment policy: recession is more profound, discontinuing investments (this also applies to the preparation of investments, which is truly unique), and, vice versa, already strong growth is boosted by record investments. The proclivity of the Czech government to a clearly pro-cyclical policy is apparent in a wide range of industries, g companies in the engineering construction segment being no exception. The demand, which was held back by the government, has burst out. The companies operating primarily in the private sector have recorded growing numbers in their results, which, however, is significantly slower and more natural. It is positive that the government has restored investments which, unfortunately, lack long-term conception and balance. Conceptual and well-balanced investments could mitigate deep recessions and rapid growth. Nevertheless, it is impossible to change the state policy which is populist at every moment. We will need to accept this as a fact to be

considered when making business decisions and in the corporate management. Especially, we should not be overwhelmed by positive news and stick to common sense. With the pro-cyclical policy, one may be sure that governmental measures will deteriorate the market situation in the private sector during another recession. When I made an interview with Omar Koleilat for this issue of SMART, he expressed an interesting idea. He feels that people around him are very positive and self-confident, which makes him a little nervous as they may overestimate the situation. On the other hand, he is convinced that most developers drew a lesson from the crisis. You can read the entire interesting interview with the director of a multi-segment developer and learn about his opinions on the current development on individual markets as well as his strategy. This issue also brings a summary of two studies, which have been recently published by Deloitte: Property Index, which compares European residential markets, and Powers of the Construction Industry, which presents the ranking of 50 major construction companies in Europe. Both studies may be downloaded directly from the website www.deloitte.com/ cz/nemovitosti, which contains other information and studies. In cooperation with the internet portal www. cenovamapa.org, we will introduce the top 10 developers by the volume of potential sales in the first half of 2015. In addition, this issue also includes current information in the tax and legal areas as well as a usual set of basic indicators of the construction and development market in the first half of 2015. I wish you pleasant reading. Good luck and may your business be SMART! Miroslav Linhart Director in the Real Estate and Construction department, Deloitte

Survey Law Co-liability for Defective Performance on Construction Projects........................ ………16

Event Association of Building Entrepreneurs of the Czech Republic has been Active for 25 years...................................................................................................... 17 Tax VAT Application upon the Sale of Immovable Assets in 2015...................................... 18

In your opinion, is strong growth in the economy and the construction industry going to continue in 2016? Ing. Václav Matyáš Director of ABE

The recovery of the construction market, which already started last year, has also continued in 2015. Despite that I am rather careful about overly optimistic future outlooks, considering the issues in construction legislation which are negatively reflected in the preparation of investors for major projects, not to mention the instability of the state budget in the area of investments.

Karel Köszegi Strategic planning director, CEMEX

I believe that next year will be even more successful for the Czech construction industry than 2015. The backlog of Czech construction companies has slightly decreased but, on the other hand, the value of completed project activities for the public sector has seen a significant increase. The efficiency and speed of selection procedures of public construction projects will now be of major importance.

Ing. Petr Pejchal General director, PKS stavby

I think that the Czech economy will continue its solid growth also in 2016. Although the construction industry will be developing, the growth rate will decelerate. The demand of public contracting authorities has decreased due to insufficient preparedness of projects and lengthy tender procedures.

SMART • Autumn 2015

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-2% The inflation level expressed by the growth of index of consumer prices compared 4 3,54the same month of the previous year -3% to 3

-3%

2011

2012

2013

2014

2015

Q1 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q2 3,5 Q2 Q22,53 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2 2,5 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 4 1,5 2 2011 2012 2013 2014 2015 3,5

4 3,5 3 2,5 2 1,5 1 0,5 0

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2012

2013

2014

2012

2013

2014

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9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 2013 2013 2014 2014 2015 7,5 6 7 8 2012 2012 2013

2014

2015

4,5

30 000 25 000 20 000 15 000 10 000 5 000 0

6,0 7,5 6,5 6,0

7,0

5,5 7,0 6,0 5,5

6,5

5,0 6,5 5,5 5,0

6,0

4,5 6,0 Q1 5,0 4,5 Q1

5,5

5,5 4,5

Q2 Q3 Q2 2011 Q3 2011

Q4 Q4

Q2 Q3 2011

Q1 Q1 Q1

Q2 Q3 Q2 2012 Q3 2012

Q4 Q4

Q2 Q3 2012

Q1 Q1 Q1

Q2 Q3 Q2 2013 Q3 2013

Q4 Q4

Q2 Q3 2013

Q1 Q1 Q1

Q2 Q3 Q2 2014 Q3 2014

Q4 Q4

Q2 Q3 2014

5,0

30 000 30000 000 25 25000 000 20 30 000 20 000 15 000

25 000 4 10 15000 000 20 000 10 000 5 000 155 000 000 0

30 000 25 000 20 000 15 000 10 000 5 000 0

2015

2012

2013

2014 2012 2015 2013

2014

2015

2012

2013

2014 2012 2015 2013

410 000 400 000

2014

2015

30 000

390 000 390 000 25 000 380 000contracts 380 000 of Existing contracts of New 20 000 370 000 370 000 360 000 360 000 15 000 15 000 construction companies construction 350 000 350companies 000 10 000 10 000 340 000 340 000 000 330 000 5at 000 the end 5 000 of the quarter in 330 CZK billion (b.c) 320 000 320 000 0 0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 in CZK Q2 Q3 Q4billion Q1 Q2 Q3 Q2 Q4 (b.c) Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q1 Q2 Q3 Q4 Q1 2012 2013 2012 2014 2013 2015 2014 2015 50,0

25 000

Q1 Q2 2015

20 000

2013

2014

86 850

200,0 180,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0

30 000 2013 25 000 2014

200,0 180,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 2Q 14 2Q2Q 15 13

410 000 400 000 390 000 380 000 370 000 39 % 360 000 350 000 340 000 330 000 320 000

2015

20 000 15 000 10 000 0

2013 2015

2012

Zdroj: ČSÚ

Companies 140 000 120 000

Order

100 000 801. 000

60 000 2Q 153.

2013

50,0 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 2Q 14 2Q 152Q 13

2014

50,0 2014 2015 45,0 45,0 40,0 40,0 35,0 35,0 30,0 30,0 25,0 25,0 100 244 100 244 20,086 850 20,0 86 107 86 107 15,0 15,0 76 478 80 76 478 10,0 70 10,0 5,060 5,0 0,02013 2015 2014 2013 2014 2015 0,02012 50 1314 2Q2Q 1415 2Q 15 2Q 13 2Q2Q 40 30 20 contracts in the New 10 quarter – inland 0 Building construction Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2012 2013 2014 2015 Civil construction

50,0 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 2Q 14 2Q2Q 1513

The share of public and private contracts of2Qconstruction 2Q 14 15 companies in the total number of inland contracts at the end of H1 2015

60%

61 %

40%

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2Q 14

2014

The share of public and private contracts 2Q 13 of construction companies in the total value of inland contracts at the end of H1 2015

76 478

2Q 13

2012

– inland 2012 Civil construction 2013 2014 2015

86 107

2012

2013

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2015

5 000

410 000 400 410000 000 390 400000 000 380 390000 000 370 380000 000 410 000 360 000 370000 000 400 350 360000 000 390 000 340 350000 000 380 000 330 000 340000 000 370 320 330000 000 360 000 410 000 410000 000Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 320 000 350

120 000 100 000 80 000 60 000 40 000 20 000 0

Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Q3Q2Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q3

2012

100 244 Average gross wages of physical persons

94 144

Q1 Q2 Q1 2015 Q2 2015 Q1 Q2 2015

120 000 100 000 80 000 60 000 40 000 20 000 0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 6,5 Q2 Q3 Q4 Q1 Q2companies Q3 Q4 Q1 Q2 with 50 or more employees Note: 2011 2012 2013 2014 2015 2013 2014 2015

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011

30 000 25 000 20 000 15 000 10 000 5 000 0

2012

2014

80 70 80 60 70 120 000 30 Development 000 50 4,5 60 4,5 000 25 Q1 120Q3 000 Q4 30000 000 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1100 Q2 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q2 80 40 50 50,0 Q1 20 Q2 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 100 Q4000 Q1 Q2 Q3 Q4 Q1 Q2 80 000 000 25 000 Q3 2011 70 2012 2012 2013 2014 2014 2015 2015 2011 2013 30 40 45,0 2011 2012 2013Approximate 2014 of issued2015 value The number of issued 60 15 000 80000 000 20 000 The volume of mortgage loans 60 20 30 200,0 40,0 120 30 000 40 000 10 000 60000 000 15 000 50 construction permits (CZK million) 180,0 construction permits 10 20 35,0 provided (CZK billion) 100 25 000 20 000 5 000 160,0 40000 000 10 000 40 0 30,0 10 80 205000 140,0 0 0 20000 000 000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 80 30 80 25,0 0 120,0 60 0000 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 80 15 0000 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2012 2013 2014 2015 70 20,0 70 100,0 Q2 Q3 Q4 Q12013 Q2 Q3 Q4 Q12014 Q2 Q3 Q42015 Q1 Q2 70 Q2 Q3 Q4 Q1 2013 Q2 Q3 Q4 Q1 2014 Q2 Q3 Q42015 Q1 Q2 40 000 Q3 Q4 Q12012 10 000 Q3 Q4 Q1 2012 80,0 15,0 60 10 60 2011 2012 2013 2014 2015 2012 2013 2014 2015 60 2012 2013 2014 2015 20 000 5 000 120 000120 30 000 30 000 000 60,0 10,0 050 50 120 000 100 000100 000 40,0 0 0 25 000 25 000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 50 5,0 40 40 Q2 000 20,0 80 000 80 000 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 40 20 000 20 000 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 100 0,0 2011 2012 2013 2014 2015 30 0,0 30 2012 2013 2014 2015 2012 2013 2014 2015 80 000 60 000 60 000 15 000 15 000 30 2Q 13 2Q 14 2Q 15 20 20 60 000 40 000 40 000 10 000 10 000 20 10 10 40 000 20 000 20 000 5 000 5 000 10 0 0 20 000 0 0 0 0 0 Q1 Q2Q1 Q3Q2 Q4Q3 Q1Q4 Q2Q1 Q3Q2 Q4Q3Q1Q4Q2Q1 Q3Q2 Q4Q3Q1Q4Q2Q1 Q3Q2 Q4Q3Q1Q4Q2Q1 Q2 Q3 Q4 Q1Q3Q2Q4Q3Q1Q4Q2Q1Q3Q2Q4Q3Q1Q4Q2Q1Q3Q2Q4Q3Q1Q4Q2Q1Q3Q2Q4 Q1 Q2 Q3 Q4 Q1Q3Q2Q4Q3Q1Q4Q2Q1Q3Q2Q4Q3Q1Q4Q2Q1Q3Q2Q4Q3Q1Q4Q2Q1Q3Q2Q4 Q1 Q2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2011 2013 2014 2011 2012 2013 2014 2015 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 20122013 20132014 2014 2015 2015 2012 20122013 20132014 2014 2015 2015 2011 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 5,0

2011

6,5

4,5 410 000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 200,0 Q1 Q2 Q3 Q4 Q1 Q2 200,0 400 000 2011 2012 2013 180,0 140180,0 2014 2015 000 140 000 160,0 390 000 50,0 160,0 115 084 115 084 380 000 45,0 140,0 120140,0 000 120 000 120,0 120,0 370200,0 000 100 560 100 560 40,0 94 144 94 144 000 100 000 100,0 100100,0 360180,0 000 35,0 86 850 80,0 80,0 160,0 350 000 30,0 60,0 80 000 80 000 60,0 340140,0 000 40,0 25,0 40,0 120,0 330100,0 000 000 60 000 20,0 120 000 20,0 60 20,0 2010 2009 2011 2010 2012 2011 30 000 0,0 2009 320 80,0 000 0,0 15,0 1314 2Q 100Q4 000 25 000 Q2 Q3 Q1 2Q 13 2Q2Q 2Q1415 2Q 15 60,0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q110,0 80 000 20 000 40,0 5,0 2012 2013 2014 2015 20,0 60 000 15 000 0,0 Contracts in total at the end 0,0 40 13 000 10 000 2Q 2Q 14 2Q 15 of the quarter 2Q 13 2Q 14 2Q 15 20 000 5 000 Building construction – inland 0 0

2015

The Unemployment Level

2010

94 144

dustry al tion in he year, tot c u r t 9.0%. s t f on o C d lf e a s by a h e 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 t r s c r in rks100 244 wo244 In the fi tion output 5,5 2014 5,5 100 560100 560 2015 le to100 struc 94 144 94 144 ountab ction that n c o c c 100 000100 000 a ly 5,0 5,0 tru107 g 86 850 86 850 is main 86 107 ons86 build in This f civil c 4,5 4,5 hereas . Year-onreQ2a76o478 76 478 100 244 w Q1 Q2 Q3 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q4 Q1 a , e h % 80 000 t 80 000 in 2011 2011 2012 2012 2013 2013 2014 2015 2014 2015 22.1 .0% tion d by 4 sed by 86 850 86 107 increa tion increase ed construc u c s r, is e v 80stru 80 f e 60 000 o n r 76 478 60 000 co 70 70 be , how 2015ted num 60 2.3%2015 mit by2014 2009 2009 2010 2010 2011 2011 2012 2012ye2013 r ar, the2013r6050ea2014 e d 50 e p s e 40 s inc 4030 e value of th pe2030rmit 20 at 5.7%. 10 10 proxim p th0 eQ1 aQ2 Q3 Q4 Q1d0Q2roQ1Q3pQ2Q4pQ3eQ1dQ4Q2bQ1Q3yQ2Q4Q3Q1Q4Q2Q1Q3Q2Q4Q3Q1Q4Q2Q1 Q2 Q3 Q4 2012 2013 2014 2015 s g 2012 2011 2013 2012 2014 2013 2015 2014 in build2011

5,0

Miliardy Miliardy KčMiliardy Kč Kč

5,0

2013

2009

80 70 60 50 40 30 20 10 0

Monitor

7,0

6,5

30 000

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 2012

115 0841156,0084 6,0 120 000120 000

5,5 Average number of persons employed in the construction industry

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2015

6,0

Miliardy Kč

5,5

2012

1 2 3 4 5 2012 6 7 8 9 10 11 12 1 2 3 4 5 2013 6 7 8 9 10 11 12 1 2 3 4 5 2014 6 7 8 9 10 11 12 1 2 2015 3 4 5 6

Miliardy Kč

6,0

Q3 Q4 Q1 Q2 Q3 Q4

5 000

Miliardy Kč

6,5

60 000 7,0

10 000

6,5 7,0 6,5

7,0

80 000 7,5

15 000

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6

2012

7,5

120 000 100 000 80 000 60 000 40 000 20 000 0

20 000

7,0 7,5 7,0

7,5

000 000 000 000 000 alf h000 0

Miliardy Kč

100 000 30 25 20 15 10 5

2% 0% -1% 5% 1% -1% -2% 4% 0% -2% -3% 3% -1% -3% Q1 2% Q1 -2% 1% -3% 0% Q1

115 084

120 000

5% 5% 4%

-3% Q4 Q1Q1 Q2Q2 Q3Q3 Q4Q4 Q1Q1 Q2Q2 Q3Q3 Q4Q4 Q1Q1 Q2Q2 Q3Q3 Q4Q4 Q1Q1 Q2Q2 Q3

Miliardy Kč

Macroeconomic data

2 7,0 Construction output in Q1-Q4 2009 – 20154 (CZK 140 million) 000140 000 1,5

5,0

Miliardy Kč

6,0

Q2 Q3 2011

410 000 410 000 400 000 400 000 Q2 000 390 000 390 2015 380 000 380 000 370 000 370 000 360 000 360 000 350 000 350 000 340 000 340 000 330 000 330 000 320 000 320 000 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q4 Q3 Q1 Q4 Q2 Q1 Q3 Q2 Q3 Q4 3 4 5 6 2015 2012 2012 2013 2013

-2%

Miliardy Kč

6,5

0% -1%

2011 2011 2012 2012 2013 2013 2014 20152014 20 000 20 000 410 000 400 000 15 000 15 000 390 000 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 4 380 0003,54 10 000 10 000 3,5 20 000 3 3 370 0002,52014 2,5 2011 2012 2013 2015 5 000 2 2 5 000 1,5 360 0001,51 15 000 1 0,50 0,5 350 000 0 0 0 10 000 3340 4 5Q3 6 7 8 9 1102Q1 113124 1Q2 5 2 6 3 7Q3 4 8 5 9 610 7118129Q1 1102113Q2 124 1 5 2Q3 6 3 74 8 5 9 610711 8129 110Q2 2113124Q3 1 5 2 6 3 Q4 7 4 8 5 9 6Q1 10 11 12 1 2 Q2 Q4 Q4 Q4 Q1 000 Q2 Q31 2 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2012 2012 2013 2013 2014 2014 2015 330 000 5 000 2012 2013 2013 2014 2014 2015 2012 2015 320 000 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Data4 0byQ2 individual areas – Construction Industry Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 3,5 2012 2013 2014 2015 3 7,5 7,5 2012 2013 2014 2015 2,5

7,0

4,5

0% -1%

000 30 000 30-2% -3% 25 000 25 000Q1

Public

2015

2012

Private

2013 Public

2014 Private

2015

with the largest share in public contracts received in 2015

Separately

115 084

Company

100 560

Number

94 144

86 850

EUROVIA CS, a.s. STRABAG a.s. 2009 2010 Metrostav a.s.

2011

In cooperatives

Value in CZK Number thousand 86 107

100 244 Number

of participants

Value in CZK thousand*

76 478 1 778 433

175

5 637 163

107

1 827 841

2 956 961

2012 39

2013 920 075

119

3 327 425

2014

392015

* Stated as the total value of contracts in the cooperative, not as the company’s share Source: ÚRS Praha, Czech Statistical Office

Authors: Zdeněk Kunc, kunc@urspraha.cz, Ondřej Zabloudil, ozabloudil@deloittece.com

SMART • Autumn 2015

Transaction Price Map

Current Topic

Czech Economy and Construction Industry in H1 2015 David Marek, Deloitte’s Chief Economist dmarek@deloittece.com Economic growth is gaining momentum … At the beginning of 2015, the Czech economy was very robust. In the first half of 2015, the gross domestic product increased by 4.2% year-on-year. In terms of individual industries, it is apparent that the growth has been boosted by the manufacturing industry. With respect to the components of demand, the growth has been equally driven by household consumption and corporate investments, followed by an increase in inventory. What is the cause of the current rapid economic growth? It’s a combination of many factors. The higher household consumption is based on a decrease in the unemployment rate to 4.9%, which is the lowest figure in the last six years. The investment activity is driven by lower interest rates and the use of the remaining resources from the structural funds of the EU as well as by very low prices of oil, which reduced the fuel expenses of households. It is also necessary to mention two extraordinary one-time factors which accelerated the economic growth. First, it is the impact of the increased consumption tax on tobacco products. At the end of 2014, this had a negative influence on GDP but, contrarily, the impact has been positive this year. The growth has also been largely influenced by utilizing the remaining portion of funding from the EU structural funds from the 2007-2013 programme period. In H1 2015, CZK 45 billion were drawn from EU funds, compared to CZK 30 billion in H1 2014. The economic growth is driven by both of the components of the economic policy. Fiscal policy brings a slightly positive impulse by increasing the deficit; therefore, it has a pro-cyclical nature, although it should be the other way round (in other words, we waste the money which could be used in hard times). With interest rates nearly at zero and the commitment that the exchange rate cannot drop below CZK 27 to the euro, the currency policy is reflected in the investment activity of companies as well as in the competiveness of export.

cant revival of activity this year. Total construction production increased by 9.0 percent in the first half of 2015. This result is mainly driven by the activity in building construction, which increased by 22.1 percent, while civil construction has experienced a growth of 4.0 percent. Building construction significantly reflects the increased utilisation of the EU funds, as it was discussed above. The estimates of the development in the coming months are based on the data regarding published building permits. Year-on-year, their number increased by 2.3 percent in the first half of 2015; nevertheless, the approximate value of permitted construction dropped by 5.7 percent. In real terms, the gross added value in the construction sector saw an increase of 1.8 percent in the first half of 2015. It is anticipated that the fast economic growth will also continue in the second half of 2015, as indicated by short-term economic statistics and advanced indicators. Due to the continuing higher utilisation of the EU funds, construction production, especially building construction, should retain its fast pace.

The First Half of the Prague Development Race in 2015 info@cenovamapa.org www.cenovamapa.org The first half of 2015 was extraordinary, having broken several records. The weaprodejních cen ther had a record number of tropical days and it seems that the development market in Prague drew inspiration from such record breaking. Enormous sales are expected on the market. The plans of development companies are accelerating to create weekly records in sale and apartments are sold in a jiffy. The residential market in Prague as a whole seems to be well-balanced with a positive future outlook. No signs of wear and tear have been apparent so far.

CENOVÁ MAPA

Using sports terminology, the start (as of 1 January 2015) saw 152 development companies offering approximately 6,900 apartments with the aggregate value of CZK 33.5 billion. Half-way through the race, the number of contestants expanded to 158 development companies that offered approximately 6,820 apartments totaling CZK 34.2 billion. A total of 65 new projects with 3,528 apartments participated in the race. Concurrently, 3,609 apartments were sold in the first half. Due to sellout, 45 projects with 2,836 apartments left the market and the offer of some current projects was extended.

Developer

Potential sales*

Number of sold apartments

Average transaction price per apartment

Central Group

1 538 948 568

450

3 091 676

Ekospol

1 301 666 833

560

2 418 873

Daramis Group

1 195 803 224

210

4 751 439

Finep

873 793 207

266

3 093 137

Skanska

639 876 245

184

3 388 412

Trigema

482 755 776

119

3 574 152

YIT

450 027 506

105

4 118 057

Vivus

388 106 359

122

3 469 642

CTR Group

345 402 371

4 164 302

JRD

314 210 979

5 193 398

* by price lists of developers

Structure of the number of offered units as of 1 July 2015

Sell-out rate of the currently-offered projects on the market of 1 July 2015

5+ = 1.3 % 6+ = 0.2 % 4+

Work productivity increased by 3.0 percent year-on-year. Owing to the slower growth of salaries, itemised payroll costs decreased by 1.1 percent. This key parameter of the economy’s price competitiveness has improved, at the international level, for the third consecutive year. Nevertheless, accelerating the growth of wages seems to be a matter of time.

… with a contribution of the construction industry The construction industry was largely impacted by the previous two recessions in the Czech economy; however, it has experienced a signifi-

TOP 10 development companies by potential sales from 1 January 2015 to 30 June 2015

Apartments Sell-out Rate in Prague There was a decline in the supply of available apartments in 2014 and at the beginning of 2015. The current growth of supply of apartments is only running the tens and our data indicate that the supply has not yet reached, the commonly stated, 7,000 apartments. Further market developments thus could be influenced by the gradual sell out of less expensive apartments. The current sell-out rate on the market is approximately 66.5%, which is an increase of 12%, compared to the beginning of the year. Considering the number of apartments, one-bedroom apartments are the most frequent (71.3%) and the largest increase since the beginning of 2015 has been seen by two-bedroom apartments (from

12.4 %

Owing to its fast growth, the Czech Republic achieved 85.7 percent of the EU average in Q2 2015 with respect to GDP per capita based on purchasing power parity.

61.4% to 70.2%). With respect to new projects, one- and two bedroom apartments achieved the highest average sell-out rate in the past four months: 48% and 36.4% of one-bedroom and two-bedroom apartments, respectively, were sold.

80 % 70 %

19.6 %

60 % 50 % 40 %

30 %

29.8 % 20 %

36.7 %

10 % 0% 1+

CELKEM

SMART • Autumn 2015

450% 400% 350%

Study

300% 250% 200% 150%

Deloitte Property Index 2015 – Overview of European Residential Markets

100% 0%

Budapest Győr Székesfehérvár Warsaw Krakow Gdańsk Katowice Łódź Poznań Wrocław Moscow Saint-Petersburg Ekaterinburg Prague Brno Ostrava Berlin Hamburg Munich Frankfurt Dublin Cork Galway Vienna Graz Linz Madrid Barcelona Valencia Copenhagen Odense Aarhus Amsterdam Den Haag Rotterdam Brussels Antwerp Ghent Milan Rome Turin Inner London*** Outer London Tel- Aviv Jerusalem Haifa Lisbon Porto Stockholm Göteborg Malmö Paris (inside) Lyon Marseille Lille Ile de France

50%

Residential property prices show increase

DE*

DK*** NL**

PT** SW**

6 000

Deloitte’s Property Index, an overview of European residential markets, reveals that residential market is 5 000 gaining momentum in Europe. Prices have grown in 12 markets in 2014, compared to only 5 in 2013.

Dublin

London and Paris are the most expensive cities in Europe At a city level, Inner London was the most expensive city with a price tag reaching an astonishing 14,089 EUR / sq m. Living outside Inner London is much cheaper. In comparison, new dwellings in Outer London cost on average 7,879 EUR / sq m. The second most expensive city after London was inner Paris, with a price at 10,266 EUR / sq m.

4 000

As usual, the development of real estate prices in individual countries significantly varied in the year-on-year comparison. The highest growth was recorded in Ireland, where new building prices rose by an astounding 31.7%, followed by the United Kingdom (21.6%). Prices in Germany and Austria have continued their growth from the last year with (+12.7%) and (+5.3%), respectively. Meanwhile, prices in Italy and Russia continued their downward trend. Belgium saw residential property prices rise by approximately 0.5%. The spread between the offered and final transac¬tion price serves as an important indicator indicating the equilibrium between dwelling demand and supply. The highest discount was detected in Spain where buyers receive on average, when buying an apartment or house, a (-20%) discount. However, the discount is lower than the last year, which indicates improving conditions on the housing market. Other markets show a typical discount of under (-10%). 8

6 000 1 000 5 000 0

NL** DE* DK*** BE

IE SW** FR

4 000

2 000



40%

2 000

14 000 12 000

10 000 8 000

2013

DE*

DK*** NL**

PT** SW**

2014

6 000 4 000 2 000 0

Source: National Statistical Authorities, Deloitte calculations * bid price, ** older dwellings, *** all dwellings (older and new), average of apartments and houses 

Double digit growth was in Copenhagen, Berlin, Amsterdam, Jerusalem, Madrid, Inner London and Dublin. The best performing market in 2014 was Dublin with astonishing growth of (+34%). Inner London came second with (+32%). However, the prices in the UK were influenced by the strengthening pound. Madrid was third with (+24%). Fourth place was taken by Jerusalem with (+18%). The worst performing market was Lisbon with a price decrease of (-14%). Belgium has the most affordable housing Our study measures the affordability of housing in each country in terms of number of gross annual salaries needed to buy a standard new dwelling (70 sq m). The most affordable housing can be found in Belgium, where a person needs to on average save only 3.2 years to buy a new dwelling. Belgium is closely followed by Germany with a ratio of 3.3. Relatively affordable housing can be found in the Netherlands (4.2), Spain (4.4), Ireland (5.2), Sweden (5.3), and Austria (5.8). The least affordable housing is found in France (8.0), Russia (8.8), the United Kingdom (10.0), and Israel (12.7).

20%

The lowest level of indebtedness of households can be 14 found in Russia with 6.5% of residential debt to household disposable income. Countries with a low level of indebted12 ness are the Czech Republic, Hungary, Poland, Italy, Israel and 10 Austria, with residential debt to household disposable income of under 50%. Consequently, these countries have 8 the highest potential of house price increase as a result of overall better financing conditions and following increases 6 in mortgage lending. The highest level of indebtedness can be4 found in Sweden, Denmark and the Netherlands with residen¬tial debt to household disposable income of above 150%. 2

Property prices were growing on most of the markets in 2014. Out of the 15 shown cities, only 5 have seen a decrease in price compared to 2013.

4 000

16 000

debt to household disposable income) is one of the deter-20% -10% 0% 10% minants of house price growth.

Cities situated in Eastern Europe were generally the least expensive from the survey. An exception to the rule is Moscow, which with 3,840 EUR / sq m is at a similar price level as Vienna or Milan.



It is often the case that the capital is the most expensive city in a country. However, this is not correct for some countries. Namely, Munich, Milan and the Tel-Aviv are more expensive than Berlin, Rome, and Jerusalem. If you are looking for a good value, Porto might be exactly the place for you. With a price tag of only 860 EUR / sq m, it is the least expensive city in the survey. The second least expensive city in 2014 was Székesfehérvár in Hungary. With 1,026 EUR / sq m, it is (+20%) more expensive than Porto.

3 000 IE UK DE* 1 000 IL ES AT 0 HU RU HU PT PL CZ ES NL** DE* DK*** BE IT AT IE SW** FR IL NL** DK*** 2013 2014 FR CZ Source: National Statistical Authorities, Deloitte calculations PL * bid price, ** older dwellings, *** all dwellings (older and new), BE IE PTaverage of apartments and houses UK IT DE* RU IL -10% 0% 10% 20% 30% ES -20% AT Average Transaction Price of the New Dwelling HU EUR/sq m NL** DK*** 16 000 FR CZ 14 000 PL 12 000 BE PT 10 000 IT 8 000 RU 6 000 -20% -10% 0% 10% 20% 30%

Warsaw Brussels Prague The indebtedness of households rises Rome Zadluženost domácností (tj. poměr dluhu k disponibilIndeMoscow btedness of households (i.e. the proportion of residential Lisbon

Complete version 30% 40% of Property Index is available here.

Property Index Overview of European Residential Markets Financing of Residential 4th edition, June 2015

Real Estate Projects

Property Index Overview of European Residential Markets

0 BE

DE* DK*** NL** ES

PT SW** AT

Affordability of Own housing and the Economic Level HDP na obyvatele v paritě kupní síly (EU-27=100)

The average transaction price of a new dwelling rose in most countries The highest prices per sq m can be observed in the United Kingdom, Israel, France and Sweden. The cluster of post-Soviet economies falls on the other side of the price spectrum. Russia has the lowest dwelling prices among the surveyed coun-tries with a price slightly below EUR 1,000 / sq m. Even despite the recent price growth, Hungary is the only country, besides Russia, with a price mark below EUR 1,000 / sq m. The Czech Republic has the highest prices among the Post-Soviet states reaching EUR 1,200 / sq m. However, the prices are still significantly below Western Europe. Prices in Spain and Portugal are due to their slump in the recent years on a similar level as in the CEE countries.

2 000

Budapest Győr Székesfehérvár Warsaw Krakow Gdańsk Katowice Łódź Poznań Wrocław Moscow Saint-Petersburg Ekaterinburg Prague Brno Ostrava Berlin Hamburg Munich Frankfurt Dublin Cork Galway Wien Graz Linz Madrid Barcelona Valencia Cobenhaven Odense Aarhus Amsterdam Den Haag Rotterdam Brussels Antwerp Ghent Milan Rome Turin Inner London*** Outer London Tel- Aviv Jerusalem Haifa Lisbon Porto Stockholm Göteborg Malmö Paris Lyon Marseille

Newly issued publication is the fourth edition of the annual Property Index, a comparative report regarding residential markets and housing across Europe. It analyses factors influencing the development of residential markets and compares residential property prices in selected European countries and cities.

3 000

Average Transaction Price of the New Dwelling EUR/sq m

Budapest Győr zékesfehérvár Warsaw Krakow Gdańsk Katowice Łódź Poznań Wrocław Moscow nt-Petersburg Ekaterinburg Prague Brno Ostrava Berlin Hamburg Munich Frankfurt Dublin Cork Galway Wien Graz Linz Madrid Barcelona Valencia Cobenhaven Odense Aarhus Amsterdam Den Haag Rotterdam Brussels Antwerp Ghent Milan Rome Turin er London*** uter London Tel- Aviv Jerusalem Haifa Lisbon Porto Stockholm Göteborg Malmö Paris Lyon Marseille

Petr Hana, Manager Deloitte phana@deloittece.com

Inner London*** Accessibility of own dwelling generally depends on Madridadvancement of countries. The higher the economic Jerusalem the country’s economic level is, the more accessible own Amsterdam dwelling isBerlin found there. The United Kingdom is rather Cobenhavenwhich proves the rule. High prices of real an exception, Wien estate in the United Kingdom result from the great interest Budapest of foreign investors in this market.

140 120 100 80 60 40 20 0

Počet průměrnýchhrubých ročních platů potřebných pro koupi nového bytu (70 m2) HU

DE*

SW** RU

PT IL

NL**

DK***

Source: National Statistical Authorities, Eurostat, Deloitte calculations * bid price, ** older dwellings, *** all dwellings (older and new), 10% average of apartments and houses 

SMART • Autumn 2015

Study

REAL ESTATE

Ranking of the 50 Largest European Construction Companies in 2014

ADVISORY SERVICES

After five years of continuous decrease, the European construction industry reported a moderate increase in 2014 and the upward trend will also continue in the coming years, according to the Deloitte’s study European Powers of Construction.

Ondřej Zabloudil, Senior consultant ozabloudil@deloittece.com

REAL ESTATE ADVISORY SERVICES ADVISORY SERVICES

TAXES

LEGAL SERVICES

AUDIT

• One contact point for clients with the widest spectrum of needs in the area of real estate • Tailored client solutions integrating advisory services, audit, taxes and legal services • Global know-how and a network of contacts combined with local knowledge and experience

The aggregate sales of the 50 major European construction companies in the ranking grew by 1% in comparison with 2013. The end of recession was also reflected in the market capitalisation of large companies, which increased by 6%. As in previous years, the ranking by the volume of sales is dominated by Vinci, ACS and Bouygues. These companies account for 37% of total sales in the ranking. Total sales of companies in the ranking remained the same as in previous years, amounting to EUR 293.4 billion. In the top 20, the sales of Vinci, ACS and Balfour Beatty each dropped by more than EUR 1 billion. On the other hand, the most significant increase in sales was reported by Salini Impregilo (81%) and Interserve (35%).

Real Estate Valuation

Optimisation of commercial areas

Commercial due-diligence

Portfolio structuring

Transactional consulting

Creating concepts of added value

Deloitte’s team of experts oﬀers complex solutions in the area of real estate, based on the knowledge of the real estate market in Central and Eastern Europe and experience in managing real estate portfolios. Thanks to the integration of advisory services focussing on the real estate sector and related legal, tax, audit and information services, we are able to fully meet our clients’ individual needs and to interconnect all aspects of portfolio management into a single comprehensive solution.

EPoC 2014 European Powers of Construction June 2015

The study also includes other insights into the European construction industry and analyses the strategies and profiles of the top 20 companies .

Name

Country

VINCI SA

France

38 703

(4%)

26 851

2 ACTIV. DE CONSTR. Y SERV. SA (ACS)

Spain

34 881

(9%)

9 116

BOUYGUES SA

France

33 138

(1%)

10 070

SKANSKA AB

Sweden

15 753

7 505

5 EIFFAGE SA

France

13 948

(2%)

3 886

Austria

12 476

2 072

7 BALFOUR BEATTY PLC

10 907

(8%)

1 877

FERROVIAL SA

Spain

8 802

12 029

1

BILFINGER BERGER AG

Germany

7 697

(9%)

2 133

1

KONINKLIJKE BAM GROEP NV

Netherlands

7 314

698

11 ACCIONA SA

Spain

6 499

(2%)

3 218

2

FOMENTO DE CONSTR. Y CONTRATAS SA (FCC)

Spain

6 334

(6%)

3 070

1

NCC AB

Sweden

6 250

(6%)

2 845

1

CARILLION PLC

5 051

1 855

2

PEAB AB

Sweden

4 795

(4%)

1 732

1

ENKA INSAAT VE SANAYI AS

Turkey

4 382

(11%)

6 712

1

SALINI IMPREGILO SPA

Italy

4 194

81%

1 501

12

INTERSERVE PLC

4 099

35%

1 030

2

BARRATT DEVELOPMENTS PLC

3 782

20%

5 998

1

OBRASCON HUARTE LAIN SA (OHL)

Spain

3 731

1 850

3

OUR SERVICES:

Complete version of the European Powers of Construction is available here

STRABAG SE

Total sales in 2014 (€m)

Change 2014 vs. 2013

Market capitalisation (€m)

Ranking 2014 vs. 2013

SMART • Autumn 2015

Interview

Design Plays an Increasingly More Important Role for Customers Said Omar Koleilat, director of the development company Crestyl, for the SMART magazine. Miroslav Linhart, mlinhart@deloitteCE.com Do you feel any shift in customer needs? Definitely, there has been a shift. Increasingly-more often, our clients perceive design as a very important part of their life and housing and are able to appreciate it. It is often the case that a client bought an apartment in the past and had to completely rebuild it to feel comfortable there. They asked an architect or a designer and could see that it is hard work to achieve the “wow effect” when entering a new apartment. Economy is growing and the residential market has seen an increased activity. How do you feel about that? In terms of residential market, I can see that people’s appetite is growing while perceiving a lower degree of risk. In the areas where our advantages related to the fact that we were simply building there, we are currently competing with those who do not even build. Again, people are more willing to buy things “on the paper”. The quality of projects has significantly improved in the past five years. It may happen that it will decline once again because a massive pre-sale may decrease the motivation of developers to focus on details.

Crestyl is not a developer in a single segment. What is your strategy on the markets in which you operate? Crestyl operates in the retail, office and apartment segments. Although it seems that we have a wide scope on the market, we have a rather narrow specialisation within this scope. We do urban retail with a focus on city centres, no boxes. We call it “lifestyle retail” which interconnects the meeting of people, components of entertainment and restaurants. It should be the heart of the city which must beat and function. Therefore, we have acquired Savarin which represents our ideal of what we would like to do. We aim at medium and top management in the residential segment and do not focus solely on high-end customers. In the housing sector, our target group is the upper middle class. We perceive the needs of this group as unified. We search and offer various locations but always top-quality style. Everything that we do is focused on quality, design and comfort. It is a very broad definition but design matters in all situations we have to solve. If we look at switches, we will always think: What colour should the switch have? Where should it be situated? We look at details. We are not simply satisfied with any switch. We like people who seek a solution to specific interiors, common premises and the areas adjacent to entrances or courtyards. Design and style are simply a part of our projects. 12

In your opinion, is there a bubble growing on the market? Undoubtedly, the market is growing, there is no extraordinary price inflation; thus I am not afraid of any bubble because developers do not increase prices all of a sudden. If you have a look at the prices from 2006 to 2008, the increase during the lifetime of one project was unbelievable. The pricelist has changed four to five times during that period. This is not happening yet. So far, developers have only granted minor or no discounts. I would say that even developers are not greedy. We are glad to achieve a reasonable margin and try to successfully complete our projects. Construction companies have not yet developed any pressure on increasing our cost base. There is some pressure but it is not that it would make us re-evaluate our pricing policy. And I must admit that we are not yet ready to re-evaluate it. We are still worried about stable demand. Concurrently, we are not yet in such a position that our projects would be completely sold out before completion. We have not yet reached that point. We are about half way through. When everything goes well, the price is good, then 60% may be sold. But I do not think that we can repeatedly see projects that are completely sold out before completion. I do not think that this will be the case; therefore, I believe that the market has been healthy so far. There is a good residential atmosphere. Do you also think that higher demand is mainly driven by investment apartments? What is your experience? Once again, real estate is perceived as an alternative investment but I do not think that this is the main market driver. It is often the case that owners of a house would like to buy an apartment in a town, in order to live there when they grow older. Or they have a child. This means that the apartments are bought as an investment, but also for their own use in the future. Then there is also the category of purely investment

apartments, ie for rent. Nevertheless, at least in our projects, the majority of apartments are intended for personal use. We have not yet mentioned the office market. If I wanted to bet on something, it would now be the office segment. Not because the office segment has become so bad that I would not think it could not get any worse; the reason why it has been so bad is not insufficient demand. Contrarily, there has been robust demand, especially with the current economic growth. Offices are highly correlated with GDP and, for a long time, the Czech Republic had a low GDP in comparison with the neighbouring countries and companies were careful. However, the poor situation on the office market resulted from an extremely high supply which was mainly driven by very cheap funding. Nevertheless, absorbance will be very high this year and with the lowering supply of new premises, the market situation will improve. Not within six months but slowly, in the next two years, the amount of rented out offices premise will rise again. How about retail? Retail has been and will be strong. I think that current rents are not exaggerated. In general, the Czech Republic has a healthy environment and a very good increase in consumption expenses. The new supply is not so extensive – our Central Kladno is the only new shopping centre opened this year. In retail, there is still some room for quality products, but not everywhere. Exit yields will be very interesting for developers again and I suppose that they will be retained at least two years along with low interest rates. You have already mentioned the relationship between developers and construction companies at present. In my opinion, the relationships between developers and construction companies are good. Everyone seeks to earn a little. In terms of quality, construction businesses are good so far, in comparison with the situation in 2002-2008. They do not want to produce low-quality product. At least this is our experience. Is it possible to say that the crisis increased the quality? Definitely. Detail is the most important aspect. We operate in a business segment with lower margins. We must constantly pay attention to what we do and how to deliver a high-quality product. In the residential segment, only the latest apartments have generated some profit. In the commercial segment, similarly, profit has only been generated by the latest offices and premises. Let us get back to acquisitions and current projects. Why did you purchase Savarín? This is a significant moment for us, only considering the profile of this project. It is a great opportunity. We always perceived the Dock project as a wonderful opportunity and we are very proud of the standard we have set through this project. I think that we enhanced the entire area between Dock and the centre. We also improved the perception of this area because we launched on the market something with a truly good design and quality. Savarin gives us such opportunity. We can participate in the restoration of Václavské náměstí in order to enhance this area in Prague. Under this project, we have a beautiful palace which we would like to restore to the original condition, including the garden. Your company has an interesting company structure and your management includes people from all over the world. What is your corporate culture? That is right. I am half Lebanese and half Czech, our chairman is Indian, there are people from the UK and of course Czechs. Our approach to

the corporate culture is a bit American, I would say. We are principally very open with a transparent and exceptionally democratic management method. In our company, all employees have access to virtually all data. We all operate using one budget, with a common budget target. Nobody is hidden in a group of employees. Our work is very open, we have clear processes and control mechanisms. I think that we have typical corporate culture with a democratic spirit. Our objective is to have strong people who are encouraged to be innovative and to do a good job. Personally, I am on first-name terms with everyone in the company. To be honest I do not really understand the conception of using the polite or informal form of address. On the other hand, despite having people from the entire world, we are a Czech company and our documents are all in Czech. The new generation of Millennials is often discussed, especially their different needs and working habits. How do you like working with young people nowadays? Yes, you are right. I am trying to get to know them. Recently, I have approached 10 youngest employees from various departments. For a month, we worked as a think tank focusing on how the young generation perceives housing. When I was young, I grew up playing football in front of our house. I do not see this very often nowadays. When we designed apartments, the entire apartment was centred around the TV which was at the centre of everything. However, there is no TV in many households. It is incredible how computers can substitute the TV. We have been trying hard to find solutions to many things. Everyone came up with their own ideal components of housing. For me, it was a very interesting process. We talked a lot about integrating sports into exteriors but also into interiors. What we used to consider storage space is no longer so today. Nowadays, storage place means, for instance, hanging a bike on the wall on the balcony where it is not in the way. It was interesting to hear these ideas and we need to learn how to work with such needs. What do you think about the issues regarding legislation and the building regulations in Prague? Communication with the state administration is not easy anywhere in the world. As developers, we are able to work with any regulations that we have to observe. Crestyl pays attention to our architecture and the quality of our products. The problem is that public administration wants to regulate everything for various reasons. Consequently, there is a tendency to get around regulations. I do not mean a failure to apply them but efforts to change them, such as trying to get an exception etc. This was and will be common practice and the question is whether due to insufficient regulations or because developers will ask for more. It may be a combination of both. Sometimes, regulations were and are not logical and, sometimes, developers want to benefit more. Another thing is that public administration perceives that, let us say, “visual massacres” happened, these things did not give a good impression. This is very difficult to regulate because it is a very subjective matter. We are curious when this process comes to an end. Unfortunately, it is not clearly defined for the public sector where its influence on development should start and finish. Do you think that it is different than in Germany or the UK? Well, I think that it is different. We are still missing a comprehensive conception and vision for the development in Prague. Preparing a framework is much more important than setting detailed specific rules in order to know what we can and cannot do. We will take this approach. As there are several illogical rules and factors that postpone project delivery and that the developer often needs to overcome, in the end, it will be the developer that will gain the negative image. We live in a very bureaucratic country. We need to solve many obstacles that result in significant project delays. The obstacles, which arise in every project, have an enormous impact in terms of time and economy. And this is also reflected in prices.

SMART • Autumn 2015

Series

ONE World Trade Center Series: Building Icons

Ondřej Zabloudil, Senior consultant ozabloudil@deloittece.com One World Trade Center (abbreviated as 1 WTC) refers to an office building in Manhattan, New York City (USA). This skyscraper was built in the vicinity of the original World Trade Center, which was destroyed in the terrorist attacks of 11 September 2001. There were proposals for the reconstruction of the destroyed buildings almost immediately. In 2002, an architectonic competition was organised in which a design by the Polish architect Daniel Libeskind was selected as the winner. He designed a group of five buildings with the tallest one called the “Freedom Tower.” The name was subsequently changed to One World Trade Center, in remembrance of the name of the original destroyed building. The winning design of Daniel Libeskind went through a number of significant revisions, mainly because of disagreements with the owner and developer Larry Silverstein, who held the lease to the land for 99 years, with the rent of USD 1 million per month. After years of prolonged disputes, Larry Silverstein was paid out from the “One” project, which was completed as a public private partnership project. The project was completed in collaboration with the Port Authority of New York and New Jersey, a public sector organisation, and the Durst Organization, a private development company, which won the competition for the project’s developer in 2008, after Chris Ward became the new director of the Port Authority. Chis Ward concluded that it was impossible for the Port Authority to deliver the project on its own and announced a tender for a developer and co-investor. Of the five proposals submitted, the Durst Organization was selected as the winner. The Port Authority of New York and New Jersey is a joint venture between New York and New Jersey approved by the Congress of the USA and established in 1921. It focuses on supervising the construction of regional transportation infrastructure, such as bridges, tunnels, airports and ports. David Childs from Skidmore, Owings & Merrill was invited to participate in the design the building. He became the author and coordinator of the design of the current look of the building. Most features of the original design were rejected, except for the height of the building: 1,776 ft (541 m) which refers to the date of the Declaration of Independence of the USA. Symbolically, the construction of 1 WTC was commenced by laying down the foundation stone as part of the Independence Day celebrations on 4 July 2004. As such, the construction 14

was only commenced on 27 April 2006, due to the above-mentioned obstacles. The American construction company Tishman Realty & Construction was selected as the main supplier. The skyscraper is based on three steel pillars which were erected on 19 December 2006. One pillar is covered with thousands of handwritten messages in memory of the victims of the terrorist attacks on 11 September 2001. The building was completed and opened in October 2014. In November 2014, moving trucks started moving items for the tower‘s first tenant, the Condé Nast publisher, which has rented 24 floors. 1 WTC has entrances on all four sides of the tower to facilitate the smooth integration of visitors and office tenants. The ferroconcrete cubical base has the same layout as the original Twin Towers. A tower with 69 floors is erected from the base and its sides are increasingly-more sloped as they rise so that the tower has an octagonal layout in the middle to change to a square again in the upper part. On the top, there is an antenna, which is 124 meter high. The lighthouse on the top of this antenna also transmits a horizontal light beam which is visible miles away.

One WTC in Numbers

541 meters – the height of the building including the antenna, which makes it the tallest building in the world and the tallest building in the Western Hemisphere

104 the number of floors in the building

54 the number of lifts in the building

280,000 sq metres is the area for lease

63% is currently rented (September 2015). Tenants: Condé Nast, China Center, GSA, Servcorp etc.

3,9 billion dollars are the total estimated construction costs (CZK 79 billion, translated by the exchange rate in 2010), which represents almost USD 14,000 per 1 sq m of the leasable area (CZK 283,000). One WTC is thus the most expensive building in the world of its time.

60 USD is the rent of the major tenant (Condé Nast) per sq foot per month, which corresponds to USD 646 per sq meter a month, which is below the average market price in the location 40,000 tons of steel were used to build One WTC

SMART • Autumn 2015

Law

Co-liability for Defective Performance on Construction Projects Tomasz Heczko, theczko@deloittece.com Advokátní kancelář Ambruz & Dark Deloitte Legal With effect from January 2014, Section 2630 of the New Civil Code (‘NCC’) introduced a brand new institute of statutory co-liability for defective performance that will be applied on all construction projects (ie always when a contract between the client and the contractor represents a contract for modifying an immovable asset or for completing, adjusting or repairing a structure). This new institute radically expands the number of persons potentially liable to the client for defective performance. The entities potentially liable to the client for defective performance newly include, in addition to the contractor, the author of construction documentation (or its part), construction supervisor (technical, author or other) and the contractor’s sub-suppliers. The entities referred to above will thus be co-liable by law for defects and the liability will originate ipso facto even if there is no contractual arrangement in place between the client and the liable entity. Even though the wording of the act is not entirely clear, we opine that the ‘sub-supplier’ term needs to be construed only as a ‘sub-contractor’, ie a person/entity directly involved in the construction project. Solidary liability should thus not be attributable to, for example, suppliers of the contractor that supplied only construction components or material (without being aware of what construction project they relate to). We also believe that statutory co-liability will not accrue to the sub-supplier of the contractor in further stages (supplier to the sub-supplier). Each of the potentially co-liable entities will be liable only “in terms of what they themselves supplied”, with the scope of the supply of each entity (architect, construction supervisor or sub-supplier) being primarily defined in the contract for the supply of their work (concluded with

Client “statutory co-liability for defective performance”

Supervisor

Contractor

Sub-supplier 1 (subcontractor)

Supplier of Sub-supplier 1

Designer

Sub-supplier 2 (only components /material not intended for specific construction)

Supplier of Sub-supplier 1

Událost

Association of the Building Entrepreneurs of the Czech Republic has been active for 25 years

the client or the contractor). This is one of the reasons why appropriately defining work in individual contracts will have very serious implications for potential legal disputes. The law does not expressly state what claims the client will have from the entities co-liable with the contractor in terms of Section 2630 of the NCC; the beneficiary should principally pursue claims for removing defects or a price discount. However, it is not entirely clear whether the entities may also be held co-liable for damage arising as a result of defects.

Co-liability per Section 2630 of the NCC is outlined as objective with the possibility of vindication. The burden of proof as to the circumstances eliminating liability is transferred to co-liable entities. The quoted section of the NCC also notably strengthens the client’s position in a dispute by making his onus of proof easier. Co-liability per Section 2630 of the NCC is outlined as objective with the possibility of vindication. The burden of proof as to the circumstances eliminating liability is transferred to co-liable entities and this co-liability holds until the existence of circumstances eliminating the liability is proven. It will be of key importance for potentially co-liable entities (designer, supervisory, sub-supplier) to maintain sufficient evidence providing circumstances eliminating their liability for a specific defect in case of a dispute. While the law does not prohibit contractually departing from the provision of Section 2630 of the NCC (default rule), in practice there will often be no contract in which the application of Section 2630 of the NCC could be eliminated (eg there is typically no contractual arrangement in place between the client and the sub-supplier). However, such a contract could be formed for such purposes.

Ing. Václav Matyáš, President of the Association of the Building Entrepreneurs of the Czech Republic The Association of the Building Entrepreneurs of the Czech Republic was founded in 1990 as a significant part of the newly structured Czech society. The period after November 1989 was marked not only by the restoration of democracy in our country but also by the initiation of a market economy, liberalization and competition. From the very beginning, the aim of the Association was to outline and promote the construction industry’s needs and interests, as a response to the fact that, at that time, the construction industry was not properly managed and organised. The Association continued in an almost hundred- year- old tradition, the beginning of which date shortly after the establishment of independent Czechoslovakia. Already at that time, professional construction guilds and associations were formed, as they felt the need for mutual exchange of relevant information and experience. However, their efforts were thwarted during the totalitarian period in the twentieth century. As soon as political and social changes were introduced, the tradition of the association was promptly renewed. Since then, it has become a respected and acknowledged representative of entrepreneurs in an area that represents a significant part of the national economy.

The Association guarantees the representation of the construction industry at the highest level, while stabilising construction market. It negotiates with the government, the parliament and political representatives about funds from the state budget as well as European funds. The association also assists in commenting fundamental documents for housing policy as well as transport infrastructure; through active participation of its members and professionals in the law drafting process, it helps create new acts, and it also represents a chance to comment new proposals of legislative changes in the construction business as well as in the social area. Seen in the context of other events and activities, 25 years of existence is not such a big issue. Nevertheless, for builders, it represents a significant day when we would like to meet with friends, reminisce a bit and think back to all the good things we have been through in our building jobs and days spent on construction sites. We have therefore decided to remember the anniversary in a special meeting with the representatives of our member organizations and special guests. The event will be held as part of the Days of Architecture and Construction in the Senate of the Czech Republic under the auspices of the Chairman of the Senate on 8th October 2015. The official celebration will include the announcement of the results of competitions organized by the Association, recognition of loyal employees, presentation of the award for the Most Respected Personality in the Construction Area and the Most Respected Personality in the Association. The event will be accompanied by a cultural programme. In addition to the invited guests, representatives of the awarded companies and individuals, the members of the Association’s board of directors and supervisory board will be present, as well as representatives of member firms from the whole of the Czech Republic. We hope that the event will offer plenty of opportunities for an informal meeting with friends and business partners.

Akce se uskuteční v Senátu parlamentu ČR dne 8. října 2015 jako součást letošních Dnů stavitelství a architektury.

All participants in construction projects that act as potentially liable entities (general contractors, architects, supervisors, sub-suppliers) are encouraged to be more vigilant, put greater emphasis on asserting their own rights, perform obligations during the realisation on a timely basis, caution against incorrect instructions of other construction participants and, in the first place, secure sufficient evidence. We also recommend regularly consulting a legal specialist with regard to the procedure in realising a construction project; legal specialists should be an inseparable part of the project team, mainly when conducting large-scale construction projects.

SMART • Autumn 2015

The amendment introduced the hitherto-unknown term “functional unit,” the intention clearly being to use the “functional unit” concept in determining VAT rates as well as in exempting transfers of immovable assets from VAT. This concept is outlined in the General Financial Directorate’s Information on the Application of the VAT Act to Immovable Assets Subsequent to 1 January 2015 which was issued in July 2015.

VAT Application upon the Sale of Immovable Assets in 2015 Martin Krapinec, mkrapinec@deloittece.com Petr Tusakovsky, ptusakovsky@deloittece.com As we already informed you, an amendment to the Value Added Tax Act became effective as of 1 January 2015. This amendment had a very notable impact on VAT rates and exemptions, if any, on the sale of immovable assets. The amendment introduced the hitherto-unknown term “functional unit,” the intention clearly being to use the “functional unit” concept in determining VAT rates as well as in exempting transfers of immovable assets from VAT. However, the effectiveness of the provision relating to VAT exemption was postponed, at the last moment, to 1 January 2016. As a result, with the exception of the meaning of the “functional unit” expression, it was not absolutely clear until very recently as to what areas the “functional unit’ concept should apply. The application of VAT upon the sale of immovable assets was expected to be clarified by the General Financial Directorate’s Information on the Application of the VAT Act to Immovable Assets Subsequent to 1 January 2015 (the “Information”) in early 2015, but the Information was issued as late as July 2015. According to the Information, the “functional unit” represents a relation between individual immovable assets. An example of the functional unit may include a structure built on a plot of land, which serves to operate it or to fulfil its function or is used jointly with the structure. The Information indicates that the plot of land and the structure form a functional unit, if they jointly form one economic unit, ie they serve the same economic purpose (for example, a functional unit thus does not involve a family house and land on which the owner of the house operates a car repair shop).

the sale does not concern multiple main structures. The functional unit may comprise plots of land that are spatially separate from the main structure, if they serve to operate it and are sold jointly with the structure. From an economic perspective, it is even possible that the principal (determining) element of the transaction is the plot of land rather than the structure. The burden of proof involving the existence of the functional unit (and the principal element of the transaction) always rests with the payer. The functional unit may also consist of buildings that are not owned by the same owner and are only leased. An example of applying the functional unit principle involves the repair of a leased garage owned by a neighbour and located on the neighbour’s land. In repairing this garage, the first reduced rate will be applied since the garage forms a functional unit with the family house. The relevant VAT Act guidance on the VAT exemption of delivery of selected immovable assets has remained largely unchanged in 2015. With regard to structures and other immovable assets, with the exception of land, the VAT exemption treatment can be applied after a lapse of five years after the issuing of the first construction clearance approval or from the first use of the structure, whichever occurs earlier.

In view of the implementation of the functional unit, the previously-applied ‘plot’ approach, under which the exemption/taxation of immovable assets was assessed in relation to individual plots of land, has been abandoned. The ‘plot’ approach did not reflect the general principle of main and auxiliary supplies but only dealt with individual plots of land and their attributes.

The VAT exemption on land is only possible, if it is not land on which a structure can be made according to a construction permit or a consent to proceed with an announced structure. In addition, the land must not be land which carries a structure fixed to the ground or a utility network owned by the land owner. In assessing the transaction it is of vital importance to examine, namely, the goal for which the land is being purchased. If, for example, a plot of land was being sold, on which a utility network is located and the goal of the transaction would be to transfer the utility network rather than the plot of land itself on which the utility network is located, the VAT treatment would follow the treatment of the relevant utility network. This means that a transfer of such plot of land with the utility network would be VAT-exempt if the utility network were older than five years.

If we want to assess the VAT treatment, the principal determining element of the transaction, in practice, typically involves the structure placed on the plot of land (eg a department store or family house). Upon a sale, the whole functional unit follows the VAT treatment of the structure. In this respect, it should also be noted that a number of other plots of land and structures can be sold jointly with the structure and thus it may not be clearly determinable which of the structures is the main one (and what other components form a functional unit with the structure), or whether

The Information does not give any guidance on the application of VAT exemption subsequent to 1 January 2016. Nevertheless, we already know the wording of the relevant provisions of the VAT Act that are most likely to be valid, starting next year. The key changes include another extension of the ‘construction land’ definition. The lack of clarity, if any, relating to VAT exemption should be addressed by also voluntarily applying VAT to a land transfer. If the transfer takes place between VAT payers, the reverse charge treatment should apply.

SMART • Autumn 2015

Event Calendar

Model FIDIC Contracts 13. 10., ICC ČR, Freyova 27, Prague http://www.komora.cz/ aktualni-zpravodajstvi/kalendar-akci

EXPO REAL , Muenchen 5. - 7. 10., Messe l.net/ rea po http://www.ex

COREN ET GLO BAL NORT H AME RICA SUMM IT 18. - 2 0. 10., Los An http://w geles ww.co renetg lobal.o rg/

ENERGY SAVING IN RUNNING SPA AND WELLNESS HOTELS 15. a 22. 10., Hotel Monti Františkovy Lázně http://www.komora.cz/aktualni-zpravodajstvi/kalendar-akci

Real Estate Cong ress 2015 9. 11., Clarion Co ngress Hotel Prague http://www.realit nikongres.cz/

Construction Ce ntre Eden 3000

2. - 30.12., BVV, Brno http://www.bvv.c z/

COMMERCIAL REAL ESTATE CONFERENCE 13. - 14. 10., Toronto http://www.naiop.org/

MIPIM UK

21. a 23. 10., Olympia, London http://www.mipimuk.co.uk/

MIPIM Asia

MAPIC 18. - 20. 11., Palais des Festivals, Cannes http://www.mapic.com/

ICSC National De

al Making

8. - 9. 12., New York City http://www.icsc.o rg/

1. - 2. 12., Hong Kong http://www.mipim-asia.com/

Vánoce 24. 12.

@ Please, do contact us. We will highly appreciate any topics or questions sent to us. Ing. Václav Matyáš, SPS v ČR matyas@sps.cz, www.sps.cz Ing. Miroslav Linhart, Deloitte mlinhart@deloittece.com, www.deloitte.com Ing. František Glazar, ÚRS Praha glazar@urspraha.cz, www.urspraha.cz Antonín Parma, Blue Events Antonin.Parma@BlueEvents.eu, www.blueevents.eu

Archiv SMART You can find all past issues of SMART at www.sps.cz or at www.deloitte.com/cz/ nemovitosti This link is where you can also find the English version of SMART. © 2015 Deloitte Czech Republic, The Association of Building Entrepreneurs in the Czech Republic