By Anna Grybel, Property Analyst

The Financial Times' magazine, FDI awarded Brno its 2006/2007 Central Eastern European City of the Future title.

The city was highly rated for its rapid economic growth, high level of GDP per capita, its development strategy, investment incentives and friendly business environment. And the property market in Brno has also started to strongly benefit from the factors.

Brno - the heart of CEE

Location is a key to the city's success.

Brno is the second largest city in Czech Republic, and the administrative and business capital of South Moravia. The city lies in the heart of the CEE region, only 200 km from three capital cities - Prague, Vienna and Bratislava

The city is not only in an excellent location but is also extremely well-connected - an important factor for foreign investors.

The airport provides regular flights to London, Munich and Prague and is supported by Prague's and Vienna's international airports - both a two hour drive away. Brno's international terminal was only launched in 2006.

A system of highways connects Brno with Germany via Prague, southern Europe via Vienna and with Slovakia via Bratislava. The new motorway planned for 2013 will connect the city with a key Polish harbour on the Baltic coast, Gdańsk and directly with Vienna, so strengthening Brno's position as a transport hub.

Good and improving international connectivity combined with the proximity to main centres in the region (Prague, Bratislava, Vienna, Katowice) work in favour of the city, which is now becoming one of the main logistics locations in Czech and the whole CEE region.

Brno is also important trade centre - every year the city hosts the largest trade fairs in the country with 900,000 visitors.

The location is one of the biggest natural advantages of Brno, allowing the city's economy to grow rapidly in the last few years. Another advantage is its workforce base.

Brno is the second largest university centre in the Czech Republic and produces highly qualified graduates talented in high-tech sectors and fluent in foreign languages.

That translates into a steady supply of workforce, and the availability of skilled labour for potential employers.

Both factors attract significant FDI to the city, allowing Brno's economy to transform and grow rapidly.

Brno's economy grows faster than Prague's

The South Moravia region has been traditionally highly industrialised with mechanical and electrical engineering leading the way. They were great fundamentals for development of high-tech sectors, which are now growing, while the traditional sectors are declining.

This is mirrored in the changing structure of employment in Brno. Electronics, informatics, telecommunications and medical technology now account for some 13% of industrial employment.

As seen on the graph above, services are growing fast and currently employ 60% of population, while employment in agriculture, mining, manufacturing and public admin is declining - a sign that the economy is advanced.

The South Moravia generates over 10% of the country's GDP and Brno produces over 50% of the region's GDP.

As seen on the chart above, Brno's economy has been growing faster than in the capital city. That is because Brno is becoming a prime off-shoring location as the second wave of CEE off-shoring concentrates in secondary cities.

This is a phenomenon we are seeing in several CEE economies.

Brno is one of the best performers among those cities and its reputation of favourable off-shoring location is growing.

In 2006, 25 companies decided to invest €178 m in South Moravia region creating more than 3,000 jobs. Among them we can found Red Hat - Linux-based software developer, Accenture (IT sector), Infosys Technologies, Synthon (chemicals).

In fact, Brno has managed to transform itself in four years from 'a village' to modern city and technology cluster in CEE region.

Local authorities have made a lot of effort to help Brno become what it is right now. The city has been developing adequate business infrastructure such as technology incubators and the industrial zone to stimulate business environment.
The technology park is for example a home to IBM since 2001.

The success of FDI investments in Brno acts as a magnet for other investors and that is why the city's future is optimistic. Brno's economic fundamentals are strong and are getting stronger, which is reflected by the developing property market in the city.

Dynamic property market

The property market is hugely benefiting from the city's booming economy, both the rental market and the sale market.

The location of foreign regional headquarters and the fact that many companies have relocated their senior management has boosted the rentals in the city.

Corporate lets, along with a huge student population and a significant number of graduates in their first jobs, creates great stability in the rental market.

The average gross yields are high - between 6% and 10%, depending on the location and type of apartment and voids, if any, are short - usually around a month.

New, modern and smaller units with good transport links are in greater demand. Furnishing is a must.

However, Brno is not only an excellent investment location because of the buoyant rentals. The capital growth is good too.

Property prices for new builds in Brno grew by 14% in 24 months between 2005 and 2006. For secondary apartments the growth was 10%. Both markets were showing steady and increasing trend in that period - the whole market was slowly taking off on the back of transforming economy and FDI inflow.

This is confirmed by the performance of PS deals in the city, which showed average annualised growth of 9% for that period, slightly above the market's average.

However, the real boom started at the beginning of 2007, where all the FDI investments have fully materialised and become operational and the airport has started to carry international flights.

At the same time Brno emerged as a primary off shoring location, which translated into stronger creation of well-paid jobs and rapidly increasing purchasing power of locals.

It was mirrored by the capital growth, which during 2007 achieved up to 20% depending on the location and it should be expected that the market will keep this pace in the next two to three years.

Currently, where the average wage in Brno is only around 10-15% lower than in the capital city, while property prices are 75% of Prague's level, the market has a lot of room to grow.

All the factors listed above make Brno an attractive place to invest. Strong economic fundamentals secure steady, good capital growth, while dynamic rental market guarantees positive cash flow and rental income.

The low transaction cost of buying in Czech Republic (around 2%), excellent financing for foreign investors (up to 90% LTV) and low-risk are other positive aspects of investing in the city.