Domus housing portfolio focuses on industrial growth area in Czech Republic

The portfolio of Domus, the soon-to-be-floated Czech housing operator, focuses on a region that is undergoing an economic revival, according to the company's joint CEOs.

Originally named RPG Real Estate, the Domus portfolio was created in 2006 as a spin-off from Czech mining group OKD. Martin Ráž and Pavel Klimeš, joint CEOs of Domus, began a refurbishment and optimisation process, involving €280 mln of capital expenditure, to bring the portfolio up to the level of an institutional-grade investment and drive rent increases. The restructuring phase, Klimeš noted, was completed last year and acknowledged by investors who subscribed to Domus' first bond issue.

Domus has a net asset value of about €500 mln. The assets are in Ostrava and in cities located within 15-20 minutes drive from Ostrava, in the traditional coal and steel region of Moravia. Following the restructuring, the portfolio has a diverse range of tenants. Klimeš: 'In all, about 90,000 people - about 8% of the local population, are living in our apartments and the tenant base is pretty much an average cross-section of the population. We don't depend heavily on any particular class or demographic group. More than 30% of tenants are employed by multinationals and small-to-medium enterprises. 'Miners count for only 8% and we have a significant chunk of pensioners of about 20% - a very stable group,' he added. Students form another important group as some of the Domus assets are located close to seven universities in the region. In addition, about 7% to 7.5% of the tenants are out of work, reflecting the 9% unemployment rate in the region. 'They are good tenants, because just like in Germany they get housing subsidy,' Klimeš noted.

ECONOMIC REVIVAL
The concentration of heavy industry left Ostrava with a legacy as one of the most polluted areas in Europe. But the reliance on mining and steel began to ease in the post-communist era thanks to a strong influx of foreign direct investment. 'The economy is changing and shifting from industrial (mining and steel) to a more service and light industry-orientated economy,' Klimeš said. The automotive sector is very important, with Hyundai and its suppliers employing 11,000 people. Information technology is another growth area, Ráž added, with examples including Finnish IT company Tieto which created 2,000 jobs. 'The GDP in the region has been growing at the same pace as Prague, mainly as a direct consequence of at least €5 bn of FDI in the last 10 years.'

The Czech Republic - and the Ostrava region - have formulated good strategies to attract investors by employing methods such as industrial zones. So much so that Ostrava is actually among the top-10 mid-sized cities in Europe in terms of FDI strategy, and number four among CEE cities in attracting foreign direct investment. As a result, the local economy has proven to be robust enough to absorb the changes. While there were 40,000 miners in 1994 the number has shrunk to 12,000 people. Klimeš: 'Despite this almost nothing happened in terms of occupancy in our portfolio or unemployment.'

THE NEXT STEPS
Klimeš and Ráž feel this makes the case for the IPO as a more attractive option to German residential as Domus is a strong company in a recovering market that expects household growth of 5% between 2010-2020. Both acknowledge that there is potential for expansion in other areas in the Czech Republic and in other countries, but they are cautious of differences in language and legal frameworks. But they are interested in expanding to industrial agglomerations in Poland that could be explored in a 'very disciplined manner' at the right time. Klimeš: 'International expansion is not going to happen in the short term. We can do it when it makes sense. It is not something the business plan is built on - it would be an addition to the business plan.'

For now, the focus is on listing the existing portfolio. Ráž: 'We are quite excited: this is an amazing opportunity for the company to go to the next phase.'

For more on the IPO, see Domus IPO: revenue growth 'outperforms German peers'