Property in Prague

The Summary Report - November 2008
By Eva Kavkova

Prague has seen turbo-charged growth in property prices in the three years before joining the EU in 2004. Since then growth has been around 15% per annum.
2006 saw a resurgence of the property price growth at around 20%. Due to a number of stimuli (including the VAT rate increase and mortgage market advances) 2007 had seen the market wake up in Prague, with prices increased by 17%.

This is a classic case of the second phase market growth, which is often characterised by a more prolonged and reliable price growth, of which every investor should take advantage.

Key factors for the Czech Republic to point out:

Prague continues to attract a huge amount of FDI; consequently unemployment is very low and falling, and wages are rising steadily.
The unemployment for the Czech Republic is now under 5%, which is one of the best in Europe, historically the best in 11 years for the CR.
The capital, Prague, is seen as one of the top three cities doing most to improve as a business location, according to the Euro Cities Monitor Report. It came in eighth place as a well-established major business centre in Western Europe – with 30 companies planning to relocate there up to 2011.
Complete Deregulation of rents in 2010 is also likely to strengthen the rental market, which already belongs among the strongest in the Eastern Europe. Currently there are still 17% of the regulated tenancies of the rental market. We also predict that part of that group will become a potential buyer of the apartment.
There is another fundamental change to point out that is due to take place in 2010, fuelling strong price growth in the market. New VAT rates for new property are to be introduced from 2010. VAT on new build properties will rise from 9% to 19%. This is a big factor driving domestic buyers and developers, and is creating frenzy among buyers and developers, eager to get into the market before the rise, thereby fuelling price growth.

About the current state of the mortgage market:

The mortgage market has matured rapidly. However the current world wide situation is indirectly affecting it. The head quarters of the majority of the banks are located in the Western Europe and the new lending regulations are measured the same internationally, regardless the real economic situation within the Czech Republic [that had seen no defaulted mortgages].

Despite the financial crisis we see 90% LTV mortgages [versus 100% LTV back in the summer], with competitive rates of interest, are now available to foreign investors as well. However 50% LTV is only achieved for the company loans [which used to be up to 85%].

The new regulations when applying for the mortgage are:

To pay up more equity [sometimes double] and for the developers it means on the top of the extra equity, to achieve more presales too. That makes the developers pick the best sites and sell those that are less attractive. This will indirectly slow down the supply of the apartments onto the market and naturally catch up with us within 1-2 years. In other words “the strong Czech market will get even stronger”.Why?

Slowing supply of the apartments to the market at this moment will cause a demand in the future Complete Deregulation of the rents in 2010 will fuel the market demand Increased VAT on newly build properties by the end 2010 will create more demand in 2009 and within 2010 Strong FDI into the Czech Republic [net migration and cash supply]

As another upcoming benefit for the investors is - The Czech Republic will drop the regulation of EU card in May 2009 for EU members. They will be able to buy as Czechs. The Final summary 2007 was a very exciting year in the Czech property market and, as such, we did achieve the growth rates of 17% in Prague [some parts e.g. P4 grew up to 25% due to the lower base lines]. By July 2008 Prague was up by 16%, however the current situation will shadow the beginning of the year and we will probably see over all 8% for this year. On the other hand areas like Zizkov are currently – October 2008 up by 13%. The quote from the Realit October 2008– Czech real estate magazine According to the most economists, the current crisis is rather the “trust crisis” than a reflection of the real economical problems. Czech flexibility is admirable, the economists say and the truth is that most of the developers do not rely on any help from the outside, but their trust in their own potential at any time.

This leads us to predict that the current situation is temporary and we shall see the growth in double digits by this time of the next year.