Property Czech mates
Once upon a time in the 1980s the idea of owning property outside your home country was seen as something exotic and pioneering. Then before you could say ‘buy to let mortgage’ everyone seemed to be doing it. Apartment developments marched down the Costa Del Sol, everyone had a chic bed and breakfast French gite and you couldn’t move in Tuscany for lovingly restored farmhouses.
By Andy Round
It was not enough. Suddenly, at the slightest whiff of EU accession, this new generation of overseas home-owners were on the first budget flight to Latvia, Bulgaria, Poland or Croatia to snap up a city centre bargain.
At the heart of this race into the Wild East property gold rush was seductive Prague with its gothic buildings, dreamy Brothers Grimm spires and medieval cobbled streets. As the world celebrated a new millennium, the Czech Republic’s capital invited the developers, builders, plasterers and electricians to the party.
And everyone did very well, thank you very much. Prices soared, stag nights roared and Prague property talk bored dinner parties the world over. So where are we now? Is Prague still the jewel of the Eastern overseas property market?
Well, yes and no. Dreams of snapping up 17th century homes, restoring them and selling on for double your investment are long gone. However, new build property development has gone into overdrive in the city. The Prague-based real estate marketing company INCOMA says that there are presently 200 new residential projects now being built in Prague. “Fifty-four of these have more than 150 apartments and eight have more than 500,” says the company’s Tomas Drtina. “The market has also changed. How much people are willing to spend per square metre on a new apartment is now closer to reality than in previous years.”
Fuelling this growth is continuing investment by foreigners. Milorad Miskovic is the marketing chief for the Karlin Group, the company behind Prague’s River Diamond development, a complex of 230 luxury waterside apartments, 1,500 square metres of retail space and 350 underground parking spaces. “Last year only 2.8 per cent of new build residences were luxury,” says Miskovic. “It’s a small market but we believe we can take it up to 10 per cent in 10 years. At present we have 70 per cent foreign investment with a lot sold off plan to Irish, English and Spanish speculators.”
Miskovic believes investing in high quality build, luxury fittings and a good location are the winning elements of a solid property purchase in Prague. River Diamond apartments range in price from US$204,000 to US$1.3 million and he believes an anticipated annual capital growth of between seven and 15 per cent is possible.
The property market in Prague is still maturing but Drtina claims as more developers set up home in the city more choice will inevitably become available. But will supply begin to outstrip demand? “In previous years, development of supply wasn’t as fast,” he says. “Some projects sell quickly, but the market is going to be tough.” The Czech National Bank has already forecast a shortage of residential property until 2008 when it expects the market to stabilise.
Economist Marcus Fuchs of company Property in Prague says over the past five years the average market growth for the city has grown by roughly 145 per cent but slowed to a more sustainable level of eight per cent between 2003 and 2005. Between 2001 and 2002 the curve was a staggering 50 per cent.
“Between these years we purchased and managed US$76 million worth of property assets,” Fuchs says. “Many of the investments are still undergoing construction however all of our investors have enjoyed capital appreciation returns of 15 to 30 per cent year on year.”
Fuchs says the largest demand by foreigners is for 16th to 19th century apartments or off-plan developments that can be bought and sold even before they are completed. The most popular areas are the Mala Strana close to the castle, the district known as Vinohrady and the old Prague town quarter of Stare Mestro where property retails at about US$3,600 a square metre. If you move to districts adjacent to these in-demand areas and the price can drop to US$1,440 a square metre.
“In terms of sales the greatest demand is in the size range of 65 to 100 square metres,” Fuchs says. “With rising house prices, smaller less expensive apartments are in the greatest demand as they are virtually impossible to find as local Czech buyers are eating them up. For something in the size of 50 to 80 square metres you would be looking at a rental of about US$775.”
Clearly, as with any investment, you have to watch out for taxation and bureaucracy. In Prague deposits are between 10 and 30 per cent of the property value; a seller must pay a property transfer tax of three per cent of the sale price; estate agent fees are paid by the seller and to buy as a non-resident you must set up a Czech limited liability company.
There are other aspects to consider. “The property management service sector is still developing and the current level of service is poor to moderate,” says Fuchs. “Laws are strongly in favour of the tenant and can pose problems for owners wanting to quickly move tenants through a property.”
Furthermore interest rates are rising. At the time of going to press, rates were in the five per cent range for 15 to 20 years and for Czech residents about 3.6 per cent on a 30-year loan. However many developers agree that the local mortgage and credit markets are ‘pretty untapped’ in the Czech Republic and that as the market develops they will become a core driver of the Czech Republic’s growth. Naturally as mortgage finance becomes more widely available to locals – INCOMA says 37 per cent do not have a mortgage at present – property prices will continue to increase.
New levels of local affluence could become a major factor. “There are now 15,000 euro millionaires in the Czech Republic and the numbers are increasing,” says Miskovic. “More and more Czech people are starting to replace expatriates and the majority of these new rich are now working in Prague. They are not all as well travelled as a lot of expatriates and they want to live in a good location in a good quality home in the city. Renting or selling to this new wave of affluent people will really pay dividends.”
But the big question is if you can’t exactly get a super property bargain in Prague now, why bother when there are other Eastern European countries to explore? Well, the developers argue that Czech Republic’s big advantage over other Eastern European countries is that two years of EU membership have made financial regulatory controls more stringent and the euro, scheduled for introduction in about two years, is likely to also drive up prices.
The other positive factor is that of course you can snap up a bargain in Romania or Bulgaria, but would you (or others) want to live there? Alan Burdett of UK firm Prague Property Investments isn’t convinced. “Prague is completely charming. There are your classic cobbled streets, a vibrant medieval centre, old courtyards, ancient passageways and beautiful churches,” he says. “But the city is anything but a museum pieces. It has a very lively and young social scene and trendy bars and restaurants are now next to old-fashioned pubs.” As sales pitches go, you’ve got to admit it’s pretty seductive.