Most buyers of a used car would take it to an independent or trusted mechanic to get checked or at least buy from a dealership with a six month guarantee.
Many buyers of properties worth 30 times or more than the price of a car neglect to get it checked before purchase. Especially in Czech Republic, this practice of property inspection has really not been common. It was estimated that only 1% of property transactions in 2012 were inspected.
It is even advisable to have new construction inspected as the economic crisis has resulted in building companies using sub-standard materials in order to cut costs.
There is currently no regulation governing building inspections (just like the real estate industry) so a person needs to be careful to get a qualified and experienced inspector. There is now an association of property inspectors (in Czech – Asociace inspektoru nemovitostí or AIN).
Here is a list of property inspection companies in Czech Republic with the first three being the largest:
Bytecheck (www.bytecheck.cz/en/) with offices in Prague, Brno and Ostrava. All inspectors have degrees in construction and use state-of-the-art equipment. They offer inspection reports in English.
A Buyer’s Choice Home Experts (www.home-experts.cz) with inspectors in Prague, Brno, Olomouc, Hodonin, Zbraslav, Kladno and Most. This is a franchise originating from North America and all inspectors are trained internally.
Nemopas DEK (www.nemopas.cz) with offices in Prague, Ceské Budejovice, Ostrava, Olomouc and Svitavy.
In our 2012 forecast we felt that Czech property overall would go down by 4%.
According to the HBIndex, an index of actual sale prices compiled by one of the largest mortgage banks, prices moved down 2% in the first three quarters. We will see what happens in the fourth quarter but another percentage point or two is possible.
So we were pretty close on that call but looking back what would we say we got wrong in our analysis of the major factors?
One thing that we had felt would be a big factor in 2012 was that developers would finally decide they were tired of holding out for 2007/2008 prices. Although we have seen new developments pre-selling, particularly in Prague, for astoundingly low CZK/m2, those developers selling off existing stock did not go into fire-sale mode.
We also had expected that mother companies of the Czech banks would withdraw capital from their subsidiaries. Since over 90% of Czech banks are subsidiaries of eurozone banks we had expected lending criteria to tighten considerably. In fact this did not happen and now the Czech Republic has received a ‘guarantee’ from the EU that this would not happen to the extent that it destabilized the banking system.
However, let’s not look backwards but forward at the major factors for 2013.
‘Real’ Wage Decrease (- -)
One of the strongest negative factors we see moving into 2013 is that ‘real’ wages in Czech Republic fell through the first three quarters of 2012. ‘Real’ wages are wages which are adjusted for inflation.
In fact, looking at the history of real wages we can see that they have steadily deteriorated through the last ten years.
In 2012 the average earner took home less than 2011 (CSU – 2012 Q4 estimated).
Less take-home salary means less money for housing and less confidence in households to take on a serious commitment like a mortgage.
Of course, as property prices have decreased since 2007 while ‘real’ wages have had a net increase, the affordability of housing has increased over this time period.
In an effort to stimulate economic growth the base rate was lowered through 2012 by the Czech National Bank (CNB).
Mortgage rates have, thankfully, followed step and now are at the lowest rates on record.
Average mortgage rates 2003 to 2012 (Fincentrum).
These super low rates prompted a big round of refinancing by existing mortgage holders in 2012 and we expect it will have a huge boost on the housing market in 2013.
The stated purpose of the CNB has also been to get the high amount of savings that citizens carry out of the banks and into investments such as property.
(References: Fincentrum Hypoindex, Singer: CNB is Lowering Rates to Bolster Housing Market).
Eurozone crisis (- -)
Deer in the headlights – the effect that the eurozone crisis has had on most consumers.
Until the media headlines stop plastering doom and gloom the average consumer is going to feel insecure about their financial situation. Their risk tolerance will not allow them to take big steps such as purchasing a property.
Once the tide turns we expect the effects of this drag on the housing market to be quickly reversed or even eliminated.
Overall Economic Strength (+)
Many will argue that Czech Republic’s overall economic strength cannot be given a ‘+’ since it really is not performing well.
This is true but all things need to be taken into context.
In an article in October 2011 I had bragged that Czech Republic had a better outlook going forward than many neighbors because of, among other things it’s low debt to GDP and unemployment rates.
On these basic criteria Czech Republic has deteriorated slightly but it still looks good in comparison to it’s neighbors, even the ‘wealthier’ ones.
Unemployment in 09/2012 still looks good compared to the EU and neighboring countries (Eurostat).
Debt to GDP in 2011 rose slightly but is still excellent in comparison (Eurostat – Click to enlarge).
Long-term we still feel that Czech Republic’s economy is in a good position for above average growth.
References: Eurostat – Government Debt vs GDP, Eurostat – EU’s Unemployment Rates, OECD’s Forecast for Czech Republic GDP/Person in 2060.
Real estate transfer tax change from seller to buyer (+)
As of the date of this writing there is a plan for the real estate transfer tax (going up to 4% in 2013) to change from being the responsibility of the seller to that of the buyer in 01/2014.
If this does become law I personally expect this to have a bit of a positive impact on real estate prices in the final half of 2013.
Sellers may begin pulling their property from the market in the summer thinking that they’d rather list their properties again in 2014.
Conversely buyers might be in a bit of a rush to buy in 2013 not knowing what the real estate transfer tax will do to prices.
Some will argue against this prediction pointing to previous VAT changes which seemed to have no impact on the market. However, I would counter that these VAT changes affected only those purchasing newly built properties which are a fraction of the overall market, while the transfer tax will affect all transactions.
More buyers and less sellers could mean an increase in actual sales prices in the second half of the year. Perhaps listed prices will not change but sellers may be less willing to negotiate on their price.
Decreasing supply of new developments (+)
With the financial and eurozone crisis came reduced credit being extended to developers. This, together with falling property prices, has caused a gradual decrease in the number of dwelling units being built.
2012 (projected) looks to be the lowest year for building starts on record (CSU).
Conversely net population has grown strongly from 2005 to 2011. 2012 seems to show a slowing of this trend.
However, population growth is only one part of the demand for new dwelling units.
A big trend in Czech Republic and most of Europe for that matter, is increasingly smaller household sizes. This is due to people living longer and more often without a partner (think of 20 to 30 year olds, divorcees, single parent families, etc.) increasing the demand for living units beyond mere population growth.
We are still waiting for the data from the 2011 census but the data from the 1991 census vs the 2001 census showed an increase of single person households at about 17% over this period. This will probably greatly accelerate for the period from 2001 to 2011.
Finally there is the need to replace housing stock which becomes unusable due to aging or other factors.
All of these stats together point to a tightening housing supply which will certainly positively affect housing prices in the near future.
(References: Czech Statistical Office – Housing Construction, Czech Statistical Office – Population Changes, Trends in Census Households – 1991 to 2001)
End Conclusion – Short Term (2013)
In view of all the above statistics we feel that 2013 will see stagnation to a very slight growth in property prices.
The first part of the year will most likely record declines as the eurozone crisis continues to dominate the headlines. As soon as this is cleared we expect to see a rush of buyers taking advantage of the historically low interest rates.
Because of this we feel we will see growth in the second half of the year which negate the declines in the earlier part of the year.
End Conclusion – Longer Term (2014/15)
Over the longer term we expect the declining number of constructed dwelling units to play more and more into the equation.
Add into this the comparative health of the economy and over the long term we are positive on the prospects of the real estate market.
A Prague real estate market update with what has been happening with sale prices for flats, apartments and houses in 2012. What effect is the euro zone crisis having and has there been any sign of a recovery yet?
Nathan (Interviewer): Khuppi, what's been happening with Prague property prices in 2012?
Khuppi: Property price is still going down in some area which actually brings the buyer better opportunies.
Nathan: And what do you think is influencing the market that way?
Khuppi: I think the major causes are the oversupply on the market, the rising inflation, and European debt crisis.
Nathan: Okay, big factors.
Khuppi: Yeah, of course, and it is why it used to be more carefully choosing the location for buyers today.
Nathan: And you mentioned before that even some areas the best locations that the prices even look like they're strengthening a little bit.
Khuppi: Yeah, it started strengthening in those attractive area.
Nathan: Excellent. Thanks, Khuppi.
Khuppi: Thank you.
Prague Rent Prices 2012
A Prague real estate market update with what has been happening with rents for flats, apartments and houses in 2012 as well as what effect the euro zone crisis is having.
Nathan: The rental prices could be in Prague, what's been happening so far in 2012.
Khuppi: It started in 2012 we are getting more busy for the renting. It means there is more demands and we have a lot of inquiries for the rent. So it's getting improving.
Nathan: Excellent. And, again, what factors moving it that way?
Khuppi: One of the factor is Prague still stands proudly as one of the biggest circuit for ex-pats and local alike. And another factor is the students who are working abroad are coming back to the town. And employments, security employments are more stable.
Nathan: Excellent. Good. Thanks, Khuppi, for that.
Our Czech Real Estate Service team Czech Point 101 have some fantastic options right now for Property Management / Letting Services, Accounting Services, Mortgage Sourcing & Refinancing Services and Real Estate Service amongst others.
With Gold, Silver & Platinum options available, the team can offer the service to suit which your level requires whether it's buying or selling a property, letting one out, financing it or just simply managing it.
With full services available - click here for a full list of options.
Property Management / Letting Services
*Platinum incloudes full service inc rental income guarantee & consultations provided with tax or investment advisor, mortgage broker.
Platinum Service: 16% of gross rent
Gold Service: 12%
Silver Service: 7%
Real Estate Services
*Gold service includes local due-diligence, power of attorney signing, submissioon of real estate transfer tax docs, full handover & more.
Gold Service: 85,000czk
Silver Service: 35,000czk
Selling Services
*Platinum service includes exclusivity of search criteria, retrieval of additional property details, co-ordination with real estate agencies for buyers visits, accompaniment and translation on buyers visits.
A new Czech Civil Code that has been 10 years in the making is due to be passed in Czech parliament later this year. If it is passed it could come into effect as soon as January 2013.
Present Laws
Under the present laws registration in the Land Registry does not necessarily mean that a person is the actual owner. It could be that the person has not actually acquired the property in a legal way and the actual contracts and steps making him owner have precedent over what is registered in the Land Registry.
Under the current Civil Code that someone is registered in the Land Registry does not guarantee they are the actual owner.
It means a buyer could think they were purchasing a property from a valid seller but in the end not actually be the owner even after paying the purchase price, signing a purchase contract and being registered in the Land Registry.
Currently a top-notch legal team checks how the seller acquired the property (ie. purchase contracts, inheritance, restitution, etc.) and does not rely solely on the Land Registry. If there are questions regarding the ownership they need to go back even further.
Real Life Experience
One foreign owner we are in contact with in Brno owned a property with cash and had an unscrupulous Czech individual forge his signatures, etc. to actually move the ownership to themselves. This change was registered in the Land Registry totally without knowledge of the foreign owner. Only by chance his attorney noticed the change in the Land Registry before this Czech individual was able to resell the property and they were able to have him convicted by the police.
Supposedly this person had done this with a number of other property owners and targeted those who owned their property with cash meaning there were no bank liens to deal with.
New Czech Civil Code
Under the new Czech Civil Code the registrations in the Land Registry would become reliable meaning that ‘good faith’ buyers would become owners of the property. This law is due to be passed by parliament later this year and could come into effect in 01/2013.
Would you like a tried and proven legal team to represent you in your Czech property purchase? Contact us at info@czechpoint101.com or +420 774 440 999 for a free consultation.
Two Areas Where Investing in Property Wallops Alternatives
The recent downturn in property prices has caused even many property aficionados to question whether real estate is the best investment choice.
In a following article we will discuss the disadvantages of investing in real estate because, yes, there are some, but for this article let’s look at the top two reasons where it beats alternatives.
Click here for the full article on PragueConnect.cz
Czech Statistical Office (CSU) – Property Prices 2005 to 2011
Information from the Czech Statistical Office (in Czech: Český statistický úřad or ČSÚ) showed that the list prices fell through 2011.
In the graph below the blue ‘ČR -nabídkové ceny’ line shows the listed prices and the yellow ‘ČR -realizované ceny’ shows the actual sale prices.
According to this information the actual sale price decline started in Q3 2008 which puts us, most likely, in the 4th year of price declines (if the actual sale data for 2011 will also show a price decline).
Czech property prices from 2005 to 2011 - list vs sale prices.
Reaping Rewards by Comprehending the Czech Property Cycle
Over 200+ years of documenting real estate has shown that real estate prices go in cycles. Knowing how the cycles work can help property investors not to work in tandem with the masses who get the timing wrong.
For existing property owners it can help them to forecast what to expect in terms of their rents and timing an exit from a property.
The funny thing is that what we generally read in the media conveys the general opinion of the masses but can mislead an investor as to what point in the cycle that the market actually is.
To illustrate this here is a fantastic depiction of how to tell where a market is in the real estate cycle (credit to Michael A. Kupritz) according to the headlines from the New York Times.
The media can counter-intuitively help a person pinpoint the real estate cycle.
Real estate a cause rather than victim of a recession?
Henry George (1839 to 1897) was one of the earliest to propose that land prices and a drive up in prices based on speculation were the causes of economic recessions. In fact he asserted that land speculation was always the cause of economic downturns.
Largely ignored in today's discussions it has gained recognition as the most recent economic contraction has involved a huge speculative real estate bubble.
There is an excellent well-researched paper from 1991 that examines Henry George's theory (view it here). It was published and printed by Fred Foldvary (born 1946).
Fred Foldvary is a lecturer in economics at Santa Clara University in California and is credited with predicting in 1998 that there would be a real estate-related recession in 2008. He even published a booklet in 2007 entitled The Depression of 2008.
The key parts of the above paper which caught my attention specifically regarding a real estate cycle were the following:
"During the downswing, the net income of real estate falls due to falling rents and increased vacancies, while mortgages and other operating costs remain rigid in the short term. There are widespread defaults on mortgages and other loans. The foreclosure rate increases. Unemployment and lower real wages further reduces demand for real estate. Some residents 'double up.' To secure occupants, rents decrease. Many banks fail, having loaned large amounts to illiquid and fallen real estate."
"The low point of the cycle is characterized by high vacancies, low building rates, foreclosures, and an absence of speculation."
"After the old obligations such as mortgages and contracts are gone and the wreckage of the collapse is cleared away, shrewd investors pick up real estate bargains. With debt reduced and prices, including interest rates down, lower costs induce a renewed rise in business and the recovery phase of the cycle."
The US 18 Year Real Estate Cycle
Fred Foldvary makes an interesting observation in his analysis that bears all serious investors investigating closer:
"A distinctive feature of fluctuations of both construction and real estate prices over the last 100 years in the U.S., Great Britain, and other countries is their regularity in long cycles of roughly 20 years (Matthews, 1967, p. 98). Clarence Long (1940, p. 155) observed that a decline in building precedes general business declines in major downturns, and also that the long building cycles have different durations in different countries (p. 159)."
He went on to identify the typical cycle in the United States being roughly 18 years as shown in the following chart. The one exception being the 1943 which would have been the peak of a real estate cycle had building not been dampened by war measures.
The 18-year cycle is well documented in the US.
Regarding the stages of this 18 year cycle there was an excellent real estate 'clock' that was put together by Phil Anderson from Economic Indicator Services. It is chockfull of little indicators which help a person to pinpoint where they would be in the cycle.
Interestingly their research showed that typically there was 14 years of growth followed by 4 years of price decreases.
This analysis proposes 14 years up then 4 years down
Where is the Czech real estate market currently in the cycle?
The million dollar question is to take this knowledge and apply it to our current situation in Czech Republic.
So, based on the above information where would you assess we currently are in the real estate cycle?
Using only the proposal of 4 years of property prices going down we could conclude that the end of 2012 would be the last full year since the price decreases started in late 2008/early 2009.
In early 2009 banks strongly restricted their lending criteria (hour 19). We have also had the economic activity stall (hour 20) with a major contraction in 2009, 2010, 2011 and now going into 2012.
Looking at the descriptive steps on the clock I would personally say that we are in the 21st or 22nd hour since it seems that many Czech banks still have an amount of bad loans on their books although a recent KPMG report proved to me that it is much less severe in Czech Republic than I had originally thought. It is, in fact, 50% better off than the regional averages.
Another extrapolation from the cycle is that existing owners should be able to expect gross rents to be increasing over the next part of the cycle.
What are your thoughts? Where do you think we are right now in the Czech real estate cycle? Weigh in by commenting below or sending me an email at: nathan@czechpoint101.com
In our 2011 forecast we predicted a 3% overall increase in property prices and the market met our expectations. 2012 looks like a very different situation than we had envisioned at the end of 2010 and different in a bad way.
In almost all areas of Czech Republic we saw a strong surge in buying in the first half of 2011.
Pent-up demand as well as record low mortgage rates prompted buyers sitting on the sidelines to jump into the market.
As we enter 2012 the horizon definitely looks gloomy and we expect a number of new factors to play on the residential market this year.
The biggest factors we can see affecting property prices are eurozone crisis paralysis and the sinking realization of sellers, including banks, that the market is not recovering as swiftly as they’d hoped.
There are a number of scenarios for how the eurozone crisis will play out but most certainly now every one of them will see Czech Republic’s economy slow markedly in step with Germany.
However, everything is not negative and there are some very positive things for Czech Republic including it’s enviable position of having comparatively little government indebtedness, a strong banking system and never having joined the euro currency.
In our report we’ve tried to present all the major factor which we feel will impact the Czech property market in 2012 and what effect we feel it will have on the residential market.
Eurozone crisis and buyer paralysis
Developers were hoping for an upturn in the economy to bring the buyers back to the market.
With a strong improvement in the real estate market looking still in the future and economists talking about a ‘lost decade’ in terms of economic growth for the EU, many sellers will feel that it is time to do what is necessary to sell their property.
Developers are also going to take some of the hit from the 10% to 14% VAT in January of 2012 and with another VAT increase looming they will not be keen to repeat that process.
We see this as a strong negative factor on the residential market in 2012, especially if the eurozone crisis deepens.
Lending Criteria Tightening
Many of the mother companies of the Czech banks have risk tied to loans to countries like Greece and Italy. Although there are regulations in place governing the level of capitalization required for the Czech banks, the mother companies may very well draw capital from Czech Republic to deal with the crisis to this minimum level.
This will have the effect of the Czech banks again constricting their lending criteria and lowering their LTV offered.
Most likely, however, the withdrawing of capital will be limited as the Czech branches are great generators of revenue. The mother companies don’t want to stop that flow in the middle of a crisis.
In addition to the reduction of capital there is again a likelihood of property prices going down. This will increase the caution of the banks in their lending.
Banks Executing on Bad Loans
Some researchers are claiming a devastating quantity of bad loans on the books of CEE banks (Czech Republic included) who refuse to deal with them.
In many cases the property values are under the amount of the loans. With the time and cost of execution quite high, the banks may have also been in the party of those hoping for a quick and strong recovery.
When a property is executed to repay creditors it can be sold by the executers for as little as 67% (2/3rds) of the valuation price. If banks all of a sudden decided they needed to do something about these debts this could have a negative influence on the market in 2012.
Many banks will instead sell the debt to third parties at a reduced price and allow these to deal with the execution. In either case, the sale of a large number of properties via execution is a negative factor on the residential market.
Softening Currency
CZK vs. EUR - Last 5 Years
The CZK has fallen quite a bit in conjunction with the Eurozone crisis.
Although we don’t understand the logics behind this (most EU countries are being equally or even more affected by the crisis), it is a good thing for the property market as it prompts large international companies to invest or reinvest in Czech Republic. Rather than look father east for the new production hall of their factory they invest where they already know the rules and the money goes further.
Although the effects of this are for the longer term when considering residential property prices, this investment will have a slightly positive effect in 2012.
Overall Economic Health
Czech Republic GDP (blue) vs. Euro area (17 countries) through 2009 crisis
With headlines of doom for the EU and even Czech Republic being thrown around like airport baggage is there sound reason for concern about the Czech economy in 2012 and beyond?
There is every reason to be confident that Czech Republic will go into a recession in 2012. This is not good news.
However, when viewed in relation to its neighbors we feel the situation in will not be critical, because of factors such as the government debt to GDP ratio, as well as the inflation and unemployment rates.
We expect a pattern through the crisis similar to the one through the 2009/2010 crisis of a stronger contraction than Western Europe but then a stronger recovery also.
End Conclusion – Short Term (2012)
There are some major negative influences on the residential property market for 2012. They outweigh the positive aspects and we feel there is more potential for a further downside than an upside.
Based on the factors above we expect property prices in 2012 to go down by roughly 4%.
In giving this prediction we see lots of economic uncertainty which could make the downturn greater.
In a best case scenario we would have stagnation for the year but our assessment is that there is a stronger likelihood of prices going down.
End Conclusion – Longer Term (2013/14)
With the instability currently on the European continent there is much uncertainty as to how deep or how long the eurozone crisis will be.
On the basis of supply and demand developers upped output in 2011 (about 28,000 new residential units in 2011 – source: Český statistický úřad) expecting a stronger recovery on the market than there was. The quantity was still very much reduced from the peak years of 2007 and 2008.
Even though net population growth is not strong in Czech Republic (about 25,000 in 2011 vs 2010 – source: Český statistický úřad) the latest 2011 census showed a big increase in separate households either from divorce or young adults living in their own properties vs living with family.
Based on supply and demand we expect over the longer term to see property prices increase.
Below is a full transcription of the video on the use of escrow accounts including a Czech notary.
Let’s look briefly at an escrow account and how it functions in the purchase and sale of real estate in Czech Republic.
The reason it exists is because of the needs of both the buyer and the seller. The seller wants to be sure that he will get the purchase price for his property when he transfers ownership to the buyer. The buyer, on the other hand, wants to be sure that the property will really be transferred to him when he pays the purchase money.
Watch the video explaining the use of a Czech escrow
Because of this it is common to use and it’s recommended to use an escrow account which is administered by an independent party. A three-part agreement is concluded between the buyer, the seller, and the independent third party.
Let’s look at an example of how this works. The buyer and the seller agree on a purchase price for the property. They conclude a three-part agreement with the trustee regarding the escrow account. The buyer sends the purchase price for the property to the escrow account. The escrow account administrator then informs both parties that the agreed amount of money is on his account. They, at this point, conclude a purchase contract and register it to the land registry. After it’s evident that the buyer is the new owner of the property, the trustee releases the purchase price to the seller.
This can be done a little bit different order but this is the basics of it.
It’s very important in Czech Republic to make sure that the seller pays the 3% transfer tax so this is often withheld by the trustee until there’s evidence that the seller pays it because otherwise it becomes the obligation of the buyer to pay this.
Who can work as a trustee?
First of all it can be a Czech public notary, it can be a bank, it can be a solicitor, or really it can be any one who works as an independent third party.
Generally speaking, a Czech notary charges the most but his exact fees are determined by Czech law.
Banks charge less than the notary, their fees are typically around 0.2% of the deposited amount with a minimum fee of $4000 to $9000.
With a solicitor you can usually negotiate the price of the escrow. Sometimes real estate companies offer to act as escrow agent; you’d have to be really careful in this case because they’re not governed by law and it would be very hard to recover your money in case it was taken.
So I hope this explains the basic use of an escrow in Czech Republic.
Although inflation continues to be benign in Czech Republic (2.2% in 10/2011) some of our wealthier neighbors are getting hammered. The UK during the same period reported getting hammered by inflation of 5%. Ouch!
Inflation like this puts intense pressure on investments. For example, this article showed how UK savers need a 6.25% interest rate (before taxes) in order to just hold the value of their nest egg. Those who pay income tax at the higher rate need a whooping 8.33% annual return.
With the average new bank account paying 1% an article estimated that 43 billion GBP of value will be wiped out by November 2012 in the UK because of inflation.
Don’t Let Inflation Rob Your Nest Egg
What we are going to propose to you takes guts to do, we are not denying that. But really, where can you point for a better alternative?
An individual with 8,000 GBP in a bank account earning a very high 3% per annum would earn 1,274 GBP over 5 years.
Ostrava Investment Opportunity Vs Savings With 5% Inflation
An individual with 8,000 GBP invested into the following project would earn (on a conservative estimate of 1% property price growth per year and no rent growth) 7,300 GBP for a compound yearly rate of 11%. See all calculations here. On this growth because of allowable depreciation and if you purchase as a physical person you will pay absolutely zero for taxes (not including property tax) in the Czech Republic.
As well, history has shown that rents typically adjust at the same rate as inflation. So we have the added bonus that the rent increases should meet.
Ostrava Investment Opportunity
We have just started offering a unique investment opportunity in Ostrava. This is a brand new building but completed and ready for rental.
The building is already completed and rental is immediate.
The developer is committed on another project, short on cash-flow and so has drastically reduced prices on this project for our clients.
We have also had an official bank valuation done and the sale prices our clients get meet the bank valuation.
CZECH POINT 101 has been helping property investors in the Czech Republic since 2003. We have assisted literally hundreds of property investors over the years with an impeccable record and plan to be in business for many years in the future. Would we throw it all away for one deal? Not a chance.
How sure are you that this property is rentable?
We meticulously track our occupancy rates and our office in Ostrava has achieved an occupancy rate of 96.52% over the last 12 months (see our overall occupancy for the last six months). So Tomas Repasky, who runs the office, is pretty darn good at what he does. Feel free to write him with specific questions or to ask him to prove his rent claims.
What security will my deposit have during the purchase process?
We have never, ever lost a clients money during a purchase. All your funds will be secured in an escrow account until you become the owner, ensuring 100% safety.
What if I don’t qualify for a mortgage?
The very first step we do is pre-qualify you for a mortgage. We do this free of charge first in our office and then through the mortgaging bank. We don’t want to waste our time any more than you do if it’s not possible for you to buy.
It’s so far away, how do I solve problems if something goes horribly wrong?
It is true that being away from an investment has its risks. However, there are tens of low-cost flights going into either Prague, Brno or Ostrava daily from all parts of Europe. Between Prague and Ostrava, for example, you can take the train for a paltry 590 CZK (20 GBP)…return! But don’t worry, Tomas is available constantly via Skype, mobile or email.
Will Czech property prices fall further?
Property prices have fallen considerably since their peak in 2008. In fact, we were dealing on this exact development for clients before the crisis and the prices have dropped since then by up to 1,000,000 CZK.
The Eurozone crisis will surely hit Czech Republic but comparatively we think it’s economy will do quite well in 2012.
Will it consume a huge amount of my time?
The process can be managed almost entirely through power-of-attorney by Tomas in Ostrava.
Your time requirements will be, however, that you collect some documents related to the mortgage and also that you have a personal presence in the Czech Republic at the mortgaging bank one time during the purchase process.
Are there hidden costs?
No, we hate surprises from our cooperating offices and we know that our clients are the same. All costs are clearly outlined from the beginning.
Special Offer
We believe this is such a good opportunity for our readers that we are offering as a bonus a free finishing pack which will prepare the flat for normal rental with curtains, mirrors, lights and the final cleaning. But hurry, this special offer lasts only for those who contact us before the end of 2011.
* if power-of-attorney has been given to a registered tax advisor such as ours these dates are extended to June 30, 2012.
We are making a special offer to all readers of our blog of 20% off our normal accounting rates if you register with us by December 31st, 2011. This offer applies only to new clients and for the tax year of 2011.
You can ask any questions about this article, register for the accounting discount or Czech tax in general, by contacting us at: accounting@czechpoint101.com.
With headlines of doom for the EU and even Czech Republic being thrown around like airport baggage is there sound reason for concern about the Czech economy in 2012 and beyond?
I am far from an economist but consider myself fairly pragmatic. Here are a few things I found about the Czech economy that you may find interesting.
There are also constant downgrades of the forecast GDP growth for 2012 including one predicted to be released by the Czech finance ministry on Monday, October 31st. The general consensus now is that GDP growth might hover around 1% similar to what is now predicted for Germany, Czech Republic’s biggest trade partner.
I am not denying that a double-dip recession could hit Czech Republic or that the collapse of the EURO zone would have a huge consequence for the country but often the fundamentals can be lost in the media-generated scare.
Czech debt to GDP
The fact is, Czech Republic sits in a very enviable position, economy-wise. Why can I say this?
One thing is the very low gross debt that the government holds as opposed to GDP. In 2010 this was around 38%, below all the neighboring countries and much, much better than the EU-27 average of 80%.
Germany, as Czech Republic’s biggest importer by far, is also very healthy fiscally and although their debt is slightly higher than the EU-27 average at 83%, has a very strong manufacturing sector, fantastic infrastructure and, in general, seem to have their heads screwed on right when it comes to running the finances in their country.
If you were going to go into business with a partner, which other EU country would you rather chose than Germany? I can’t think of a better one.
Why does debt to GDP make a difference?
Well, excess debt like we see in many developed countries forces them over the long-term to take steps which slow down the economy such as higher taxation and less government spending.
IMD Prof. Stephane Garelli, Director of IMD’s World Competitiveness Center said regarding this: “Government spending has reached new highs since the recession: on average 47% of the GDPs in the most advanced economies. 12 European countries are already above the 50% threshold. The 23 biggest spenders are all European governments. How long can it last? In a new world of ‘state capitalism’, government efficiency will become a key determinant to competitiveness. Alas, the time lag between government reforms and economic imperatives keeps on increasing.”
Governments are spending desperately to try to stimulate their economies as well as propping up banks and key industries. There is a finish line for each one of them with regard to how much debt they can handle as opposed to when it will start to seriously hamper long-term growth.
In this regard it’s as if Czech Republic got a head start.
There is still head room where other countries are at the point where they can’t move.
IMD estimated the time it would take for the higher indebted countries to pay down their existing debt to a point where it was sustainable (calculated at 60% of GDP). The numbers are appalling. Here are some examples: Japan in 2084, Italy in 2060, Portugal in 2037, U.S. in 2033, etc.
Will this affect these countries’ ability to grow in comparison with countries with low debt loads like the Czech Republic? Absolutely.
Czech Republic has had very muted inflation compared to the EU as a whole.
Different than in the case of many countries with high debt loads, using inflation to reduce government debt should never have to be considered by Czech Republic.
Lower inflation means that the buying power of consumers and business will not deteriorate, further stimulating the economy.
It also means that the Central Bank will have wiggle room with regard to interest rates, allowing them to effectively control the CZK’s exchange rate, such a key factor for the export-driven economy.
Czech Republic’s unemployment seemed to reach it’s scariest point in December of 2010 but has since improved.
The prospects look good also with the IMF, for example, predicting Czech Republic’s unemployment to continue to be reduced through 2015.
Low unemployment means stronger consumer spending, better tax revenue for the government and a number of benefits to society socially as well.
Conclusion
In today’s economic instability it is really hard to know what will happen from day to day, let alone a year or two in advance.
Really though, any economic news we receive has to be considered in context. Are surrounding countries faring better? Will surrounding countries be affected less than Czech Republic to a new crisis? What are the long-term prospects?
If I was a betting man, I would say that the odds are stacked in Czech Republic’s favor to outperform
With headlines of doom for the EU and even Czech Republic being thrown around like airport baggage is there sound reason for concern about the Czech economy in 2012 and beyond?
I am far from an economist but consider myself fairly pragmatic. Here are a few things I found about the Czech economy that you may find interesting.
There are also constant downgrades of the forecast GDP growth for 2012 including one predicted to be released by the Czech finance ministry on Monday, October 31st. The general consensus now is that GDP growth might hover around 1% similar to what is now predicted for Germany, Czech Republic’s biggest trade partner.
I am not denying that a double-dip recession could hit Czech Republic or that the collapse of the EURO zone would have a huge consequence for the country but often the fundamentals can be lost in the media-generated scare.
Czech debt to GDP
The fact is, Czech Republic sits in a very enviable position, economy-wise. Why can I say this?
One thing is the very low gross debt that the government holds as opposed to GDP. In 2010 this was around 38%, below all the neighboring countries and much, much better than the EU-27 average of 80%.
Germany, as Czech Republic’s biggest importer by far, is also very healthy fiscally and although their debt is slightly higher than the EU-27 average at 83%, has a very strong manufacturing sector, fantastic infrastructure and, in general, seem to have their heads screwed on right when it comes to running the finances in their country.
If you were going to go into business with a partner, which other EU country would you rather chose than Germany? I can’t think of a better one.
Why does debt to GDP make a difference?
Well, excess debt like we see in many developed countries forces them over the long-term to take steps which slow down the economy such as higher taxation and less government spending.
IMD Prof. Stephane Garelli, Director of IMD’s World Competitiveness Center said regarding this: “Government spending has reached new highs since the recession: on average 47% of the GDPs in the most advanced economies. 12 European countries are already above the 50% threshold. The 23 biggest spenders are all European governments. How long can it last? In a new world of ‘state capitalism’, government efficiency will become a key determinant to competitiveness. Alas, the time lag between government reforms and economic imperatives keeps on increasing.”
Governments are spending desperately to try to stimulate their economies as well as propping up banks and key industries. There is a finish line for each one of them with regard to how much debt they can handle as opposed to when it will start to seriously hamper long-term growth.
In this regard it’s as if Czech Republic got a head start.
There is still head room where other countries are at the point where they can’t move.
IMD estimated the time it would take for the higher indebted countries to pay down their existing debt to a point where it was sustainable (calculated at 60% of GDP). The numbers are appalling. Here are some examples: Japan in 2084, Italy in 2060, Portugal in 2037, U.S. in 2033, etc.
Will this affect these countries’ ability to grow in comparison with countries with low debt loads like the Czech Republic? Absolutely.
Czech Republic has had very muted inflation compared to the EU as a whole.
Different than in the case of many countries with high debt loads, using inflation to reduce government debt should never have to be considered by Czech Republic.
Lower inflation means that the buying power of consumers and business will not deteriorate, further stimulating the economy.
It also means that the Central Bank will have wiggle room with regard to interest rates, allowing them to effectively control the CZK’s exchange rate, such a key factor for the export-driven economy.
Czech Republic’s unemployment seemed to reach it’s scariest point in December of 2010 but has since improved.
The prospects look good also with the IMF, for example, predicting Czech Republic’s unemployment to continue to be reduced through 2015.
Low unemployment means stronger consumer spending, better tax revenue for the government and a number of benefits to society socially as well.
Conclusion
In today’s economic instability it is really hard to know what will happen from day to day, let alone a year or two in advance.
Really though, any economic news we receive has to be considered in context. Are surrounding countries faring better? Will surrounding countries be affected less than Czech Republic to a new crisis? What are the long-term prospects?
If I was a betting man, I would say that the odds are stacked in Czech Republic’s favor to outperform
The fall in property prices has given rise to a fantastic Czech investment opportunity in Pardubice.
The investment opportunity is in small flats (in Czech real estate terms: 1 + 1 or 1 + kk) and then putting them on the rental market.
The calculations give a very conservate return of investment of 86% over 5 years or 13.2% compound annual growth rate. Please see the calculations here for 85, 75 or 65% LTV scenarios.
With banks offering 1% on savings accounts and the minimal risk of these investments in terms of the capital required, why would a person not put some money into this?
Conservative Gross Rental Yields of 8% On These Investments
Our calculations show that these investments have a gross rental yield of 8% (conservative estimate), which outstrips what is currently available in other cities such as Prague and Brno.
University With Very Limited Onsite Accommodation = Strong Rental Demand
Pardubice university has almost 10,000 students but very little onsite accommodation. Click here to watch video.
Pardubice is a big university city with almost 10,000 students including many from foreign countries as there are over 200 courses offered in the English language. However, even with all these students, the available accommodation on the university campus is sadly lacking (only 1800 beds) and the majority of students need to find their living in private rentals.
The university also continues to invest and expand.
For example, a recent article (August 28th, 2011) suggests that they have just started construction on an expansion worth about 500 million CZK (approx. 20,500,000 EUR or 17,900,000 GBP).
A search on rental property shows that there is very little available in Pardubice in the range that students can afford and our recommended apartment type would rent for 6000 CZK/month + utilities.
For references that this type of rental is possible please see our rent valuation for this type of flat, search Realio.cz, or Sreality.cz.
Average Studio Property Prices Down 28% From Peak in 2008
Who likes a 25% off sale? I sure do!
RealityMorava.cz shows 1 + 1 prices are down about 28% from their recorded peak in 2008 (click on the year links in the lower right of the popup to show the price progression since 2008). However, the last few months the prices have been stable and growing slightly indicating that the bottom is likely over.
A search on sreality for properties 1 + 1 or 1 + kk for 900,000 CZK or under shows 68 properties being available. This would indicate that it is still a buyer’s market and good deals are to be had.
Question: Should I Be Concerned Purchasing a ‘Panel’ Flat?
It is true that most of the flats advertised in this price range are of concrete ‘panel’ construction.
‘Panel’ flats have certainly been the biggest losers in terms of price depreciation since 2008. Czech would prefer not to live in them because of memories taking them back to Communist days.
There are definitely cautions which must be considered including the current state of the building and the available funds in the maintenance fund of the building association (in case of substantial repairs). All these are things which we will check when doing the due diligence on the property for you.
Many of the choice locations for rentals in Pardubice are filled with blocks of ‘panel’ flats, making this an obvious choice for students.
‘Panel’ flats are definitely not the preferred choice in terms of construction in Czech Republic but we do believe that they have suffered unjustly in the price depreciation and will benefit equally or more from the property recovery as other types of flats.
See below Czech Point's video opening of the Pardubice Office
The numbers on RealityMorava.cz for the average price of listed property in Czech Republic shows the average price up 5% over the same month last year. It definitely looks like the Czech housing market hit the bottom in 06/2010.
Average Czech property price is up 5% over 08/2010
Here is a chart that is being updated with the latest average prices from RealityMorava.cz.
Czech Real Estate Investment Volume 2011 Set to Be Second Highest on Record
As reported in CzechPosition, Czech real estate investment volume for H1 of 2011 reached 650 million EUR. This is a 25% increase over H1 2010.
The projections (for example see CBRE’s 1H 2011 analysis and projection) for the year are now at a total of 1.5 to 1.9 billion EUR which would make it the second or third highest year on record.
Will this positively affect the residential real estate market? We are sure that it will.
8 Reasons Property Investment Can Be Worse Than Other Opportunities
Last month we wrote about 6 Reasons to Still Chose Property Investment Over Other Opportunities.
But in all fairness we can’t say that property investing is for everyone. There are a number of negative factors that existing investors will know and would-be investors should be aware of.
1. Leverage
Just as leverage can be a very positive factor for returns when prices are appreciating, it can also be a devastating factor when prices are going down.
With leverage, it does not take much of a fall in prices and your entire deposit can be erased.
For example, let’s say you bought a 1,000,000 CZK property with a 90% LTV mortgage. This means you have 100,000 CZK of equity that you have in this property.
A 10% decline in the property value with a 90% LTV mortgage means that your total deposit has been lost not just 10% of your equity as would be the case if you hadn’t leveraged the purchase.
Historically property prices have gone up so leverage has been a major advantage to the real estate investor. However, as the last recession has shown, this is not always the case and timing of the purchase and sale can be critical.
2. Transaction costs
Have you ever bought an equity or bond where the costs of the transaction were 6 to 8% of the asset value (typical transaction costs in Czech Republic) or worse yet, 9 to 11% (typical transaction costs in Austria)?
3. Illiquid nature
It is true that you can sell your property when required. However, it can take months to get the right price, especially in a down market.
4. Ongoing capital investment
With equities, bonds or commodities you purchase and then there is nothing more required in terms of capital investment.
Property, however, can need continual inputs of capital for things like negative cashflows or repairs, the latter which could be substantial in the case of an older property.
5. ‘Pain in the butt’ factor
Real estate investing can require the meeting of many legalities, especially at purchase or sale, which can consume large amounts of time.
It’s every owners worst nightmare – bad tenants. They can cause considerable damage to your property, refuse to pay rent and/or refuse to leave the property. Resolving the issue can take months to resolve and be very stressful for the landlord.
6. Size of the capital requirement / Lack of diversity
A large chunk of an investor’s capital can be tied up in one property. This greatly increases the risk of a loss in the case of a market downtown or other negative development which affects the property’s value (ie. a factory being built on the previously empty field next door).
7. Steep learning curve / Amount of skills needed
Owning a successful property investment has been likened to owning a business in that a number of skills are necessary in order for it to succeed.
A landlord needs to be knowledgeable on a number of levels (think mortgages, construction, titles, insurance, negotiations, market familiarity, income potential, appreciation potential, etc.) and have the ability to deal with a myriad of little oversights or difficulties that will inevitably be encountered.
A landlord also needs to make periodic business decisions related to the mortgages, repairs (ie. whether to replace or repair the faulty furnace), tenants (ie. where to advertise, how much to spend, how to qualify tenants, etc.) and negotiations (with tenants, banks, sellers, buyers, etc.).
8. Liability
You could never be personally liable if a company you owned shares in was sued in some affair but you sure could be if someone was injured, or worse, killed in a property you owned.
Property investment is definitely not for everyone. In fact, in this article we identified more negatives about it than we did in our article about the positives.
However, for those who are willing to make the plunge and put in the effort long-term, I personally think the chances of achieving your investment goals are much, much higher than through any other available investment mediums. Then again, I may be biased…
6 Reasons to Still Choose Property Investment Over Other Opportunities
More people have made fortunes through real estate than through any other investment medium.
With so many investment mediums why has real estate been one of the most effective ways to generate healthy returns?
1. Leverage
Have you ever tried to get a loan to invest in the stock market? Or currencies? It is possible but extremely difficult.
In comparison, real estate is an investment class where banks will readily lend money to investors. This in itself is a strong vote of confidence that real estate is a more stable investment than most. Bankers are typically extremely conservative about how they lend out the bank’s money.
This allows the investor to leverage a small amount of capital into a much larger investment.
In an appreciating market this is a great way to increase returns, however, as the last downturn made too evident, it can also work the other way.
Many investors found their leverage worked against them, wiping out the entire deposit in a short period and moving the actual value under the mortgage amount.
Inflation is actually an advantage with leveraged debt on property as the mortgage becomes ‘cheaper’ with time. Case in point is to ask how large a 50,000 GBP debt would have been viewed in the 1960′s compared to if that size of a debt would be considered large today.
So clearly leverage is a valuable tool but, like most tools, needs to be used correctly to prevent injury or damage.
2. Positive cash flow
Real estate is a multi-dimensional investment and one aspect is the cash flow.
In properties either with a high rental yield or low loan-to-value ratios, it is possible to have positive cash flow each month.
Some investors will only purchase properties which have positive cash flow and use a measurement of cash-on-cash return to evaluate a property.
3. Appreciation
Property has one of the most stable and consistent appreciation histories of any asset class.
Equities have historically also performed well with an average of 9.9% compound annual growth rate (S&P 500 Index) if you measured from 1926 to 2010. However, the difference with equities is that the growth can be very sporadic with long-term down periods and other times of very high growth.
By comparison here is a chart of the median home value in the US since 1940 (click for source) With equities if an investor doesn’t have patience or makes emotional decisions, the timing can really work against them. In contrast, the non-liquid state of a property can force the investor to view things in a longer term way.
Median Home Value in the US
1940
1950
1960
1970
1980
1990
2000
$2,938
$7,354
$11,900
$17,000
$47,200
$79,100
$119,600
Although the compound annual growth rate from 1940 until 2000 is 6.37%, substantially lower than equities, this does not include the effects of leverage, which would put it much above equities.
The difference with property over equities is that the volatility from year to year has historically been more stable. Using leverage it is possible to achieve higher returns than equities.
4. Principal Reduction
In a tenanted property, the renter is paying down the leveraged amount of mortgage on a continuous basis. You can sell the asset at any time and recoup on the amount of principal that you have paid down.
5. Depreciation
There are few other asset classes where you can depreciate the value of an object and use this to reduce taxes in the short-term, when in actual fact, the asset is growing in value.
In fact, you can have considerable income from a property and not have to pay tax on it because depreciation makes it seem that there is actually not a positive net cash flow.
6. Tax Advantages
Have you ever been able to write off vehicle expenses or hotel costs for an equity investment?
The fact that you can expense many additional costs related to property is a tax advantage which lowers considerably the amount of tax you actually pay on your income.
Do you have any advantages to add to the list above?
After looking at the above advantages, is there any excuse you can make for not putting some of your investment money into real estate? We would be happy to advise you on the best real estate investments currently available in the Czech Republic.
Of course, there are also disadvantages to a real estate investment, including lack of liquidity, high transaction costs, management requirements, etc. This will be the discussion of a future article.
6 Reasons to Still Choose Property Investment Over Other Opportunities
More people have made fortunes through real estate than through any other investment medium.
With so many investment mediums why has real estate been one of the most effective ways to generate healthy returns?
1. Leverage
Have you ever tried to get a loan to invest in the stock market? Or currencies? It is possible but extremely difficult.
In comparison, real estate is an investment class where banks will readily lend money to investors. This in itself is a strong vote of confidence that real estate is a more stable investment than most. Bankers are typically extremely conservative about how they lend out the bank’s money.
This allows the investor to leverage a small amount of capital into a much larger investment.
In an appreciating market this is a great way to increase returns, however, as the last downturn made too evident, it can also work the other way.
Many investors found their leverage worked against them, wiping out the entire deposit in a short period and moving the actual value under the mortgage amount.
Inflation is actually an advantage with leveraged debt on property as the mortgage becomes ‘cheaper’ with time. Case in point is to ask how large a 50,000 GBP debt would have been viewed in the 1960′s compared to if that size of a debt would be considered large today.
So clearly leverage is a valuable tool but, like most tools, needs to be used correctly to prevent injury or damage.
2. Positive cash flow
Real estate is a multi-dimensional investment and one aspect is the cash flow.
In properties either with a high rental yield or low loan-to-value ratios, it is possible to have positive cash flow each month.
Some investors will only purchase properties which have positive cash flow and use a measurement of cash-on-cash return to evaluate a property.
3. Appreciation
Property has one of the most stable and consistent appreciation histories of any asset class.
Equities have historically also performed well with an average of 9.9% compound annual growth rate (S&P 500 Index) if you measured from 1926 to 2010. However, the difference with equities is that the growth can be very sporadic with long-term down periods and other times of very high growth.
By comparison here is a chart of the median home value in the US since 1940 (click for source) With equities if an investor doesn’t have patience or makes emotional decisions, the timing can really work against them. In contrast, the non-liquid state of a property can force the investor to view things in a longer term way.
Median Home Value in the US
1940
1950
1960
1970
1980
1990
2000
$2,938
$7,354
$11,900
$17,000
$47,200
$79,100
$119,600
Although the compound annual growth rate from 1940 until 2000 is 6.37%, substantially lower than equities, this does not include the effects of leverage, which would put it much above equities.
The difference with property over equities is that the volatility from year to year has historically been more stable. Using leverage it is possible to achieve higher returns than equities.
4. Principal Reduction
In a tenanted property, the renter is paying down the leveraged amount of mortgage on a continuous basis. You can sell the asset at any time and recoup on the amount of principal that you have paid down.
5. Depreciation
There are few other asset classes where you can depreciate the value of an object and use this to reduce taxes in the short-term, when in actual fact, the asset is growing in value.
In fact, you can have considerable income from a property and not have to pay tax on it because depreciation makes it seem that there is actually not a positive net cash flow.
6. Tax Advantages
Have you ever been able to write off vehicle expenses or hotel costs for an equity investment?
The fact that you can expense many additional costs related to property is a tax advantage which lowers considerably the amount of tax you actually pay on your income.
Do you have any advantages to add to the list above?
After looking at the above advantages, is there any excuse you can make for not putting some of your investment money into real estate? We would be happy to advise you on the best real estate investments currently available in the Czech Republic.
Of course, there are also disadvantages to a real estate investment, including lack of liquidity, high transaction costs, management requirements, etc. This will be the discussion of a future article.
How to Sell Your Czech Property for 40% More (Part Three)
How to sell your Czech property for 40% more, reduce your expenses substantially and have your money secure through the process. This is Part 3 of a 3 part series.
In this video we discuss simple tips to maximize profit for owners who currently have a tenant in their property or who own property via an SRO (also called an s.r.o.) or Czech limited liability company.
These are the top tips for selling your property in Czech Republic based on the experience of CZECH POINT 101′s Nathan Brown.
He personally sold 3 properties over the last two years using these techniques to acheive an average price 42% above valuation, a 10% reduction in expenses and the whole time having his money secure.
POSTED BY
NATHAN BROWN ON MON 6TH JUNE AT 11:14 GMT
Data from the real estate servers of realitycechy.cz and realitymorava.cz seem to indicate that the overall prices of property in Czech Republic bottomed in 06/2010 and we have seen a price gain of about 2.7% to the end of 04/2011.
Of course, these are the listed prices so do not reflect actual sale values but with a large volume of data, in my opinion, still represent accurate movements on the market.
Here is a chart that is being updated with the latest average prices from RealityMorava.cz.
The average flat price in Czech Republic in 2010.
The average flat price in Czech Republic so far in 2011.
Czech Mortgage Refinancing Quandaries – You Are Not Alone!
I earned 45,000 CZK/hr (€1,850 or £1,650) by renegotiating our Czech mortgage using the tactics given below. It is not rocket science but I hope this story will motivate you to do the same.
Our Czech Mortgage – The History
In 2007 my wife and I together with family bought a rental house in Brno with 4 flats in it and the potential for a fifth to go in the attic. We got a 90% LTV mortgage for a total of 5,500,000 CZK. With a 3.5% interest rate over 30 years the initial cash flow was fantastic. Our gross rent was close to 40,000 CZK and mortgage payments 25,800 CZK. It had a 7.3% gross rental yield with potential for additional increases in value by developing the attic space and dividing the building into separate living units to be sold individually.
*We purchased the above building in 2007 and then divided it into separate living units.
We only fixed the mortgage for 1 year because we planned to divide the flats into separate living units (in Canada we call this ‘condo-izing’) and this would cause a change to the mortgage agreement. Changes made to a mortgage agreement at the time of fixation don’t carry the high penalties of those done outside fixation.
What a shock we received in year 2 when the interest rate jumped to 5.58%, increasing our mortgage payments to 31,500 CZK.
In the subsequent years we managed to get the flats legally divided, re-evaluated and then the liens lifted off all of the flats except for two. This lowered the actual LTV based on the new valuations to 71%.
You would think this would mean a greatly reduced risk assessment by the bank and subsequently better mortgage rates. Well, think again.
Even with the base mortgage rate moving lower the banks in Czech Republic continue to keep their lending rates at the same level or at a higher level than before. Especially with foreigners and any who were getting or had mortgages for investment properties they kept the rates very high.
Our Czech Bank’s Mortgage Offer – 2011
This spring, with the news everywhere that mortgage rates were heading down, I waited eagerly for our yearly mortgage renewal offer, hoping for a much better rate.
My wife and I have a lot of mortgage debt (we own or co-own 39 residential or commercial rental units) much of which is attached to the base rate (or floating interest rates) so I am keen to lock down some of them for a longer period to mitigate our inflation risks. Our Czech property was one we had earmarked for locking down.
*Overall the base rate has decreased by 1.75% but our Czech mortgage rate has actually increased by 1.59%!
Imagine my disgust when our offer came in at 5.5% for a one year fixed. 6.09% for a 5 year fixed. Only slightly lower than the year before. I was choked!
If there is one thing I can’t stand and am very vocal about, it is the blatant greed of the major Czech banks and this was just another example, in my mind.
At this point came one hour of my four hours spent on this renegotiation as I ranted to my wife about the greed of Czech banks. She is an expert on the subject even though I manage all our banking.
The good thing is that our company has a mortgage advisor in-house who is experienced in handling mortgages for foreigners. I immediately spoke with him to get an idea if we could move our mortgage elsewhere.
Unfortunately for us and many other foreigners, there is a strong barrier to changing mortgage providers because:
1. There are not many mortgage providers now who will lend to foreign investors.
2. Any who do lend require personal presence at least one time in the process, really a pain for us, with investors living in Canada and probably for our readers also.
3. The longest mortgage now offered for an investment property is 20 years, compared to the 30 years previously possible.
Renegotiating our Czech Mortgage – Lessons
After determining that the mortgage offer we had received was very high, in fact, extremely high based on the LTV and good repayment history, I set about trying to renegotiate the mortgage or change mortgage providers.
First, our mortgage broker sent out our basic finance details to those banks who would possibly give us a mortgage to see what offers we would receive.
Second, I wrote a polite but very strong email to our current mortgage bank stating the reasons we considered the offer poor, why we were good clients for them (LTV was now low and we were always on time with our payments) and that we were in the process of getting offers from other banks. In my email I plainly stated that we thought a mortgage offer 1% less would be in line with other current offers.
Imagine my surprise when I received a phone call the next day from someone at the bank saying that they could offer me a reduction of .8%. After a few more days of negotiations we settled at a 1% discount for the 5 year fixed.
The 1% difference worked out to 3,000 CZK (approx. €125 or £110) a month of interest which we will save by not accepting their first offer. Over a 5 year period this saves us 180,000 CZK (approx. €7,400 or £6,600).
I estimate I spent a total of four hours on the renegotiation. One hour ranting to my wife after receiving the first offer. One hour spent with our mortgage broker talking about alternatives and two hours negotiating with our current bank.
This works out to payment of the 45,000 CZK per hour (€1,850 or £1,650) mentioned at the start!
What lessons did this experience reinforce in my mind and I want to emphasize to all investors who currently have mortgages in the Czech Republic?
1. Acknowledge that the bank’s first offer is often trying to see what they can achieve.
Most clients just renew at the first offered rates and the banks know and misuse this. They are in no way interested in the success of your investment or that you achieve the goals you set out with your property. They are only interested in returning profits for their shareholders. Period.
2. Determine if it is worth your time.
Calculate the difference it would make to negotiate a, for example, 0.5% discount over your fixation period and how much time it would take to get this discount. Perhaps if you plan to fix for just one year more and then sell it might not be worth spending the time on it. In most cases the effort is very well paid!
3. Be informed of your options.
Well in advance of the deadline to renew your fixation period be informed about your mortgage options and the current offers from competitive banks (we offer a free refinancing service so please contact us immediately if you would like to take advantage of this).
4. Start negotiations immediately if your current provider’s offer is poor.
If your current mortgage provider’s offer is not in line with competitors, inform them plainly with the following details:
a. that you are looking at alternatives (best is if you can inform them of potential competitive offers with specifics)
b. why you are a good client for them (repayments on time, property holding value, etc.)
c. what you would consider as a good offer prompting you to stop pursuing other offers
Be realistic but determine that you would follow through in changing mortgage providers if they don’t reduce the rate by a certain amount.
5. Offer your current bank an acceptable rate whereupon you would stop looking at competitors
If the bank starts negotiations and make a counter offer, let them know that you appreciate the offer. If it is still not in line with other offers, again inform them but say that you would stop pursuing other mortgage offers if they were to give you a rate of ….%.
I sincerely hope these steps will help you as it helped us, to get the best possible offer for your Czech mortgage! You will most likely be extremely well paid for the time you spend on it.
Why We Don’t Have More Accurate Property Price History in Czech Republic
In many Western Countries there is a publicly or, at least, paid access to a database of real estate transactions. This is advantageous for a number of reasons and assists a number of institutes. Some of the beneficiaries include:
1. Home sellers or buyers: It allows them to accurately price their home for sale or see trends in sale prices.
2. Real estate agents: It helps them to be an authority and accurately estimate pricing for sellers.
"It is estimated only 40% of residential real estate transactions are handled by real estate agents in Czech Republic."
3. Banks: It is easy to see if there are areas where prices are moving downwards or upwards which helps banks to fine-tune lending and prepare their business offers in accordance to this.
4. Governments: It assists housing departments to get a handle on the real cost of housing for their citizens and where there are needs.
5. Courts: In the case of settlements where real estate is involved, it is possible to accurately and transparently calculate the value of a property in question.
However, in Czech Republic, there exists no such database.
An interesting recent article gave some reasons why this does not exist:
1. It would be against the current Civil Code and law on protection of private data to force property sellers to register the sale price of their property.
2. According to Skalický, president of the Czech Chamber of Real Estate Agencies (ČKRK), only 40% of residential real estate transactions happen through a real estate agent. Thus for the database to be accurate it could not just include transactions through agencies. (For more information on why so many transactions happen outside the real estate industry please see a previous article of ours: Are Czech Republic real estate agents accredited?)
It seems apparent that the benefits of having such a database would be a huge benefit to all industries and individuals whose lives are affected by the price of real estate. In most countries, this is a vast majority of the citizens in the country.
Our very own Nathan Brown talks to Pavel Parizek of Czech Point 101's Brno Office on the local Property & Real Estate Market in this short video interview.
You can see all of Czech Point 101's YouTube video blogs by clicking here
POSTED BY
NATHAN BROWN ON MON 21ST FEBRUARY AT 13:14 GMT
Avoid These Costly Czech Republic Property Investment Mistakes
We have now assisted, and continue to assist, hundreds of investors with their property investments in Czech Republic and there are some recurring mistakes that we have seen them make.
Those who have done the worst in their investments usually made one or all of the following mistakes:
1. Not performing their own due diligence on the numbers given.
This continues to blow my mind when investors trust the word of marketing agents and put in substantial capital of their own without sitting down for a few hours to work through the numbers themselves.
Is positive cash flow being claimed? An investor should work out through the numbers and ask some questions. At what level LTV is a positive cash flow claimed? What are additional costs each month which would erode cash flow?
By doing some basic due diligence on real estate websites an investor can also check whether the claimed rents are realistic and whether their purchase price is in line with the market average.
I can assure you that lots of investors would have wished they would have traded a few hours of due diligence for the massive amounts of money (and most likely money earned through much effort) they lost in blindly believing a marketing agent.
This is not to say that marketing agents are deliberately trying to mislead people but sometimes even their sources of information could be wrong. Good agents will encourage you to do your own research on the numbers.
2. Not visiting the development or investment before purchase.
Although a saavy investor can find out a lot about the development through pictures and floor plans, a visit before choosing your flat can often pay off hugely in the long run.
Does one side of the building face a noisy intersection or directly into another building? These things will limit the ability to resell the property and achieve maximum rents.
As well, in some areas (and especially in Czech Republic) locals will shy away from any flat which could somehow be reached from the ground, because of security reasons. The height off the ground can sometimes be hard to determine only from pictures and floor plans.
Another major factor is the area that the development finds itself in. The marketing material may hide the ugly industrial factory which is just around the corner but a visit onsite will give an investor the complete picture.
It is vital to approach a deal with eyes wide open.
A good thing (and also be a bad thing) about property investment is that it is not extremely liquid. The barrier to retrieving your money from the investment is quite high. This is actually a good thing because it forces investors to spend some time thinking about whether they should really sell or not.
However, too often we see investors bail on their investments because of a short-term downturn or problem. Did a vacant period extend longer than you’d expected or rents have not increased over a couple year period? A problem tenant cause some headaches? Don’t throw out the baby with the bath water!
4. Not viewing the investment as it currently is.
Many property investors are in the unfortunate circumstance that the property has gone down in value since it was purchased.
When comparing purchase price to current value many owners determine that the investment is not performing as they had hoped and decide to move their money elsewhere.
However, what they fail to do is reassess the investment at the current value. If they were to sell and get their capital out, where would they move their money? At the current value is the rental yield good? What is the prospect going forward on this investment?
Starting a new calender year gives us the perfect opportunity to look back on the property market in 2010 and see how things went when weighed against what our expectations were in 2009.
Our 2010 forecast predicted a 5 to 7% increase overall in the year. Although numbers are not in for the fourth quarter, it looks like the market did not make this much advance and will end the year largely stagnant. Some reports indicated that the 3Q was seeing stronger movement and demand and this seemed to continue into 4Q.
Well things certainly look more rosy for the property market overall in 2011 than 2010 did. Does this mean we predict prices to grow even more? Well, although we expect it to be a stronger market than 2010 there are still some negative factors which will weigh on the prices.
The two new factors we feel will play into property prices in 2011 are both the large inventories of unsold new flats which developers currently hold as well as upcoming greater number of foreclosures by banks and the subsequent selling of properties at substantial discounts.
Most of the other factors bode well for 2011.
Once again, short of time and don’t have the patience to go through our analysis? Skip to the final page for our conclusions and predictions for the market.
Economic Recovery in the EU and particularly Germany (+)
The EU and Germany in particular seem to have avoided the dreaded double-dip, the threat of which hung over our heads through much of 2010.
Although the EU’s growth has been lacklustre, Germany has been a gem with Q3 having 3.9% y-o-y GDP growth. This is a very positive indicator for Czech Republic since nearly one third of all goods produced in Czech Republic are sent over the border to Germany.
Although Germany’s 2011’s growth is currently predicted to be more tempered than 2010, it will certainly be a top performer in the EU.
Foreign Direct Investment (+)
With 2009’s FDI being about half of 2008’s it is not surprising to see 2010 post big percentage increases over 2009.
By the end of 1H 2010, for example, FDI was reportedly 48% higher than 1H 2009.
It seems that this trend may continue to increase and again show healthier numbers of previous years but still off the peak of 2007/2008.
The crisis had the effect of dampening wage increases, making Czech Republic more attractive for companies which need access to European markets and also a relatively cheap but skilled work force.
An indication of this increased investment in Czech Republic is the increased office and industrial space take-up that we have seen over the last months.
Much of this has been reported to be by existing companies which are expanding their operations in the country. This is an indication that the Czech arms of international businesses are money-making parts of the overall picture.
According to a report from Jones Lang LaSalle, the industrial market is leading the upward trend with the take-up levels in Prague for the first half of 2010 being greater than that of all 2009 combined. The vacancy rate is reported down 14.1%.
Below is a chart from Jones Lang LaSalle which indicates at which point in the real estate cycle the office rents are for each city. The chart depicts the situation as of the end of June 2010. To read the full report at this date please go to: http://bit.ly/eVEG5f.
June 2010 - Office Real Estate Cylcle Assessment by Jones Lang LaSalle
King Sturge predicts a 10% increase in commercial real estate transactions as interest in offices and shopping centers increases according to this Reuters article: http://reut.rs/h2BlXR.
Of course, the effect on the residential market will be delayed as the effects of more jobs and a growing economy takes time to flow through to the bulk of the residential property consumers.
Developers With Large Unsold Inventories (-)
At the end of the property ‘gold rush’ there were many new apartment projects built on speculation. Construction costs and land costs for the developer were all at a premium.
For the unfortunate developers whose projects completed in 2009 or early 2010 this means they paid top dollar for the construction but the market was no longer there to resell the flats at the same premium.
The result of this is that many developers are sitting on large stocks of unsold new property, currently unwilling to go down in price. The number of these flats in Prague alone is estimated to be around 3500 (see article: http://bit.ly/gUFbsj).
Below is a chart from iHNed article mentioned above that shows some of the projects and the number of flats sold. The first column is the project name, then the number of flats finished (‘dokoncene’), the number unsold (‘neprodane’) and the final column the percentage of unsold flats.
Prague Unsold Flats
Although the number of flats being held is not huge, we feel that developers will need to lower prices in order to move there flats and this will have a negative effect on property prices in 2011.
Foreclosures by Banks and Unloading Inventory (-)
There was an increase in foreclosures in 2010 estimated at about 10% more than in 2009, according to sources quoted in this article: http://bit.ly/fOEU35. However, this is much less than was originally estimated and overall the economic hardiness of Czech households has been very good.
Our conversations with the banks we cooperate with indicate that the number of foreclosures will continue to increase in 2011.
Again, the same as with the newly built stock that developers are holding, the amount of flats are not large enough to make a big impact on prices but will for sure be a dampening effect in 2011.
Wages & Unemployment (+)
In 2009 it was predicted that unemployment would surpass 10% in 2010. However, it stayed just under with the peak measurement being 9.9% in February 2010. Since then it has improved to around 8.5% as of the writing of this report. Estimates (see this article: http://bit.ly/f5eVcF) see it decreasing to 7.5% in 2011.
The employment situation has remained resilient and this, we feel, will be a strengthening factor for the housing market in 2011.
Wages themselves grew in 2010 which was better than the stagnation of 2009. However, it is estimated to end the year at growth of about 1.5% after being adjusted for inflation.
Although this is not very much, it does show that the purchasing power of households is increasing. This also increases family’s abilities to take on mortgages and save for down payments.
The wage increase will be a slightly positive factor for the housing prices in 2011.
Overall Economic Health (+)
At the end of 2009 it was predicted that Czech GDP for 2010 would fall around 0.8%. The current forecast is for the year to end at around 2.2%, so much, much better than forecast.
If this trend of excessive pessimism (it is not socially acceptable to err on the side of optimism these days) is correct that means the current predictions of 2% will also fall short of the actual.
Good numbers like these do much to bolster citizen’s confidence that the crisis has been averted and they can be sure to have a job and growing income.
This confidence translates into upward pressure for the housing market.
Rents (+-)
In 2010 we saw rental demand stagnate in most areas with a small increase in demand in optimal locations.
At the start of 2011 rent controls for about 450 000 flats in Czech Republic will be finished, allowing the owners to demand market prices for them. What do we expect this to do to market prices overall?
We expect that this will bring a stronger demand on smaller and cheaper rental apartments while larger apartments may fall in rental prices. This is due to the fact that many tenants will look for apartments which matched what they were paying under rent control, even though this means reducing the size of their apartment.
We feel that any movement (if there is any) in rents during 2011 will be muted and have little effect on property sale prices.
Currency Trends (+-)
The CZK has strengthened considerably to the EUR through 2010 and we don’t feel it will have any further effect on the Czech property market in 2011.
Here are two charts, one showing the strengthening which occurred in 2010 and the other showing the trend since 1999.
EUR/CZK Exchange Rates 2010
EUR/CZK since Jan 1999
Government Budget Deficit (-)
In our 2010 Czech Property Forecast we had felt that there was a strong likelihood we would see an increase in corporate tax, property tax and/or a capital gains tax on property because of the budget deficits the government was running.
So far there have been small increases in property taxes but not in a way that would affect home owners or have any impact on prices.
However, with budget cuts for 2011 being very timid, there will still be need to make more drastic steps in the future to make ends meet, something that even President Klaus has recently admitted.
We feel there is a very strong possibility that new tax measures could be introduced in 2011 which would negatively affect property prices. For sure we wouldn’t see tax changes which would have any positive effect on housing.
Conclusion – Short-term (2011)
When looking at 2011 we feel that the positive factors on the market slightly outweigh the negative and we will see a net growth in property prices over 2011.
How much would we expect to see?
We would expect to see a maximum of 3% year-over-year with much of the growth coming in the spring.
Last year’s spring growth had been stymied by an election which had everyone nervous about the future of their jobs and the economy. These will not be a factor this spring.
Conclusion – Longer-term (2012 to 2013)
Many of the negative factors which will affect growth in 2011 should be more stabilized the end of the year such as the government budget deficit, developers unsold inventories and bank’s foreclosures.
With these negative factors out of the way and the economy continuing to grow we would expect property price growth to increase to the range of 5% per year in 2012 and 2013.
For a PDF version of this 2011 forecast, click here
Cesky Krumlov is a beautiful town in the south of Bohemia. Probably one of the biggest tourist spots in Czech Republic outside of Prague. The old part of the town is built in the middle of a bend in the Vltava River. It is really a fabulous town to visit if you haven’t been there already.
In this beautiful setting unfolds a story that emphasizes the importance of having a team working on your side of a real estate transaction in Czech Republic.
Alan and Eve Hunt had been going to Cesky Krumlov for about 10 years from the UK. In fact Eve was born in Czech Republic but had been taken out of Czech Republic when she was a very small child to England, where she grew up. However, she has always said regarding Czech Republic that she was “a granddaughter of the soil.”
As a family effort including their children, Alan and Eve decided to purchase a house close to Cesky Krumlov and make their trips more pleasant and hopefully to be able to live there permanently sometime in the future.
The Story Begins Summer of 2009…Things Start Well
In the summer of 2009 they started negotiating on a property which they had fallen in love with. The advertising real estate company assured them they would take care of everything. A number of documents were signed and then Eve was asked to wire over the purchase price of 21,000 GBP (about 615,000 CZK or 25,000 EUR) to the real estate agency’s bank account.
Now this real estate agency was not a one-man shop working out of his car. Their website advertises (yes, they are still actively in business) themselves as “the biggest estate agents in Ceský Krumlov and one of the biggest in South Bohemia.”
Alan, Eve and family felt that they could trust this company and especially this agent, who was an owner of the company.
The Horror Begins
Well soon after wiring the money the horror began. They noticed that the house was again listed as being for sale. The agent stopped responding to phone calls and emails.
After exhausting all other means to try to contact the agent they flew to Czech Republic in order to confront him. When they saw him on the street he actually turned and ran away from them!
The Police Get Involved
At this point they decided they needed to get the police involved. After spilling the story the police informed them that this was not the first time this real estate agency and specifically this individual had done this and they wanted to prosecute him for fraud.
We are happy to say that the prosecution was successful and in the fall of 2010 a guilty verdict was given and the agent sentenced to repay the money and to 6 years in prison.
The agent has claimed to not have any assets so to date the money has not been returned to the Hunts.
To add insult to injury the real estate agency continues to function and make money – under the direction of the culprits son!
Semi-Happy Ending
There is a semi happy ending to this story in that the children were able to scrape together enough money to buy their parents another smaller cottage (with no running water) in the meantime while they try to recover the original funds.
To quote their daughter: “We are heart broken over what that so-called man did. A man with no honor or respect for people and their dreams.”
Hunts’ Words of Advice to Czech Buyers
•Only deal with large reputable real estate chains. •Never pay any money until all parties have signed the purchase contracts in a solicitor’s office.
CZECH POINT 101 Would Add The Following Best Practices
•Commit all funds to a third-party account such as notary office, bank trust account or attorney’s escrow. •Have a trusted attorney versant in your native language and Czech review all contracts and advise on the steps of the purchase.
CZECH POINT 101 would like to know of any other similar horror storys that you may have suffered when purchasing property and not only will we publish any that are shared with us for the benefit of those also purchasing in foreign countries, for the best ones sent in before 15th December 2010 we will also offer 25% discount on all CZECH POINT 101's services.
20% Off Your Czech Accounting Rates - Latest CZR News
News from Czech Republic
The last month has brought a flurry of positive economic news that will have positive results for the property market in Czech Republic. Probably the most positive news was that GDP jumped to 3% year-over-year in Q3, the fastest pace in nine quarters. It was a result which exceeded even extremely bullish forecasts.
Related with this has been news regarding the increased demand and occupancy in the commercial real estate market, with some forecasting shortages by the end of 2011.
In fact, we are already hearing of property prices increasing in different parts of the country in Q3 2010 but especially in Ostrava, the third largest city in Czech Republic.
To read all these news reports and more go to our blog: click here and subscribe.
News from CZECH POINT 101
As a company, we have worked hard for our clients over the last month at a time of year when occupancy typically starts to fall. I am proud to say that our occupancy has held very high with it currently steady at 94.5% across our three offices in Prague, Brno and Ostrava.
We have branched into new avenues of advertising such as on Facebook (here) and also attribute much of the success to our regular tenant draw, where we reward tenants for paying their rent on time. See our latest draw on YouTube here
In other news, we are proud to announce a fantastic investment possibility in Ostrava with 5.8% gross rental yields and 5% back from the seller. The opportunity is so exciting and, personally, I think the timing is so good, that my wife and I are purchasing one unit ourselves! Have a look at the details on our website: here
Special Offer – Accounting
Recently when we received the previous year’s tax filing from a new accounting client we found that the previous firm who had filed taxes (in fact, a major property management company focusing on foreign clients) had not claimed valid expenses such as depreciation and utility expenses. We were shocked! Whether it was a careless oversight or not this type of error can end up costing an investor thousands of CZK either immediately or when the property is sold. At a time in history when every investor is trying to maximize profits or struggling to break even, attention to details counts!
CZECH POINT 101 at this time is making a special offer to all Property Secret readers of a 20% discount on our regular accounting rates (please see our offer here) if they registered with us by December 31st, 2010. This would apply only to new clients and for the tax year of 2010.
Register now to have experts on investment property in Czech Republic file your tax return for 2010 by emailing 2010taxoffer@czechpoint101.com
Under Czech law, if an individual owner is collecting rent from the rental of a Czech property, they must file a tax return in Czech Republic.
This is also the case for those who own their property through a Czech company or SRO.
In both cases a tax return must be filed even if there was no net profit. Losses can be carried forward to offset income in a future tax year.
There is a double-taxation agreement between Czech Republic and the UK or other EU countries which would prevent you from paying taxes in another country.
Here are the upcoming tax deadlines for the 2010 tax year:
Property Tax Registration: January 31, 2011 (required for all properties where a new owner was registered in the Land Registry in 2010).
Individual Income Tax: March 31, 2011
Corporate Income Tax: March 31, 2011 (if power-of-attorney has been given to a registered tax advisor such as ours this date is extended to June 30, 2011).
We are happy to offer the following services for our clients directly from our internal accounting team:
Property Tax Registration: 1500 CZK + VAT (we would complete and submit the application to the appropriate Financial Office with power of attorney).
Property Tax Registration form: Free (please email us and we will send you the correct application free of charge: ).accounting@czechpoint101.com
Rates for our existing Property Management clients: (in CZK and without VAT).
Our contract system is the most secure being used by any property management company in the Czech Republic.
If you currently have a tenant in your flat are you aware that the following Czech laws govern the relationship between you and your tenant? (Civil Code 40/1964 Coll §685)?
1. An owner wishing to sell his property must first offer it to the tenant at the owner‘s asking price. The owner must allow the tenant 6 months to decide.
A tenant’s legal rights: A tenant could block the purchase process of the sale of a property if the full six months are not provided.
2. An owner does not have the legal right to enter his own property, even after giving reasonable notice, unless the right of access is specifically stipulated in the contract.
A tenant’s legal rights: A tenant could refuse to allow access to the owner or someone designated by the owner in the process of finding another tenant or viewings of a potential buyer.
3. Eviction of a non-paying or undesirable tenant is extremely difficult under Czech law.
A tenant’s legal rights: A tenant could stop paying rent and stay in your property as long as two years while your case proceeds through the Czech court system.
4. Use of money collected as a damage deposit can rarely be used to pay for tenant damages
A tenant’s legal rights: Unless there is a final court decision on the use of the damage deposit or the tenant agrees in writing to its usage, the owner must return all of it to the tenant.
Czech Point 101 has developed a unique contract system which protects you, the owner, from all these situations and more but still respects the rights of the tenant.
Profit Oriented Fee Structure
Many property management companies will charge you even if a flat is not rented.
Our fee is entirely revenue oriented. So if you aren’t collecting rent, we are not collecting a property management fee. You can imagine how this motivates us to find quality paying tenants for your property.
Here is a comparison of the pricing structure of most of our competitors to our pricing strategy.
Here is an example of a new rental with a rental price of 15 000 CZK/month. The flat is empty two months at the start while completing items are sourced and a renter is found (actual times can be shorter or longer). This comparison takes place over a one year period.
Description
CZK Competitor
CZK CP101
1st month empty (Competitor has fee even if flat is empty)
892.50
0
2nd month empty
892.50
0
Beginning of 3rd month tenant signs rental contract (Competitor has fee of one month’s rent for placing a tenant)
17 850.00
0
PM fee on collected rent for months 3 to 12 (10 months) (Competitor’s fee is 9% and CP101 fee is 12%)
16 065.00
21 420.00
Total Fees on One Year Rental
35 700.00
21 420.00
Czech Point 101's fees would only equal their competitors after 3.5 years of rental by the same tenant.
Innovative Ways to Maximize Profit
Owners love tenants paying on time and so do we! Because of this we started a program where we reward tenants who have paid their rent on time with prizes.
In the following draw two tenants win gift certificates to IKEA.
We are constantly looking for ways to maximize profit by either increasing revenue or decreasing expenses.
3 Lessons Learned From A Stock Market Crash Applied to Property Investing
“The definition of stupidity is doing the same thing over and over again and expecting different results.” — Albert Einstein
How can this be applied to investment property or investment in general?
Most stock markets reached their lowest point in years in March of 2009. The carnage was widespread and devastating. I would be lying to say that I predicted this fall and had the foresight to sell out all our stock and mutual fund investments.
However, one thing that I did read again and again was that the rallies coming out of stock market crashes were spectacular. Trusting that history repeats itself and knowing that there was no way I could predict the bottom of the market, I systematically invested money in ETFs each time the market had a big drop and hit a new low. I did this from the fall of 2008 until the spring of 2009.
Sure enough history held true and by the time of selling out at the end of 2009 when the money was needed for another venture, these investments had averaged a 30% return over the year. It helped to erase losses I had sustained in the parts of the portfolio I had held from earlier.
S&P 500 Index Prices Since 2007
I will be the first to admit that I am not a guru investor or a huge risk taker but I like to think I am analytical and I always try to learn from history, whether from others history or my own. I don’t want to fall into Einstein’s definition of a stupid person by doing the same mistakes through my life (or repeating the mistakes of others) with exactly the same consequences.
What did I learn (or hope I learned) from the above experience in terms of investing in stocks? A contrarian viewpoint is valuable in terms of investing. It takes guts and you have to really believe in what you are doing in order not to sell short. In retrospect I wish I had trusted my research, had a lot more guts and invested a LOT more money.
I am also glad I did not sell my existing portfolio at the bottom of the market even with fear raging that markets would fall far, far lower. Because of the holdings contained in the portfolio, it has actually recovered it’s full value even though it now shows no return or very little over the years it was invested.
Here is a fantastic chart which shows typical investor sentiment swings and when the best opportunities are.
Market Sentiment Cycles
Now, what lessons can we take away from this and apply to the current property investment market?
First of all, I have to emphasis that the factors below are only talking in terms of capital growth. There are many other factors to consider for an investment property and the most important is cash flow but this topic is for a separate discussion.
Also, because of the illiquid nature of property, prices and the cycle move at a much slower pace than do the cycles in a stock market. There is much more time to make a very calculated decision about your investment.
1. Judge market sentiment
Where would you say that real estate investors now fall on the chart of Market Sentiment Cycles? For the US real estate market, I would personally venture to say that the average investment owner must be past panic and either at the capitulation or despondency stage.
What about in Czech Republic among those who invest in property (ie. not for personal living)? I would venture to say that we are also somewhere between desperation and capitulation. Personally the majority of comments I hear are that Czech real estate prices will fall still more or that they will be flat for years and years.
Can a person reliably predict the absolute bottom of the market? No.
2. Don’t sell out anywhere near the bottom
After realizing that they bought at the wrong time in the cycle many owners may be tempted to sell out and move their money along. However, by selling at the bottom or close to the bottom they risk missing the recovery which often occurs after a big fall.
3. Invest at regular intervals
We can’t predict the absolute bottom but by purchasing at regular intervals we have a good chance of buying at a great price which will give us a great return over the long run.
With the large amount of money involved (for most investors) this last step can be very difficult and you might be able to make only one purchase at the bottom of the cycle swing. However, this will be a purchase that does you well.
Does anyone want to fit Einstein’s definition of stupidity in terms of our investing by repeating the same mistakes for the same results? The choice lies with each one of us. Have you learned from your past mistakes?
POSTED BY
NATHAN BROWN ON THU 30TH SEPTEMBER AT 14:53 GMT
Get a ‘Czech Mark’ on your property purchase process
Property purchase in Czech Republic can be complicated and there are definite dangers to be wary of.
Here are some factors as published by CEREAN (Central European Real Estate Associations Network) in their Czech Republic section:
‘When buying real estate in the Czech Republic, it is of the utmost importance to thoroughly go through all available documentation on the basis of which the ownership rights have been granted to the seller, or as the case may be to any of his family members, either living or deceased. The goal of this investigative process is to find out whether there was ever an ownership dispute or conflict in the past that could in the future threaten the rights of the investor.’
CZECH POINT 101 and their legal team have literally protected and assisted hundreds of investors in their purchase of property in Czech Republic over the years. A ‘Czech Mark’ from our legal team on your purchase process is a guarantee of success.
For more information you can contact Nathan Brown on 00420 774 460 996 or email our expert with your question here
Last month when we wrote our update we said we expected occupancy to hit our target of 95% by the end of August. Well it did and went right on climbing. Presently in Brno we have occupancy of 98% with our overall occupancy in all locations combined at an excellent 97%. Over the next month or two we will start increasing the rental prices to see what the market will sustain without losing much on our occupancy rates.
In Brno we moved to a new office space. It is a lot roomier and is definitely a better presentation of our company. We are looking forward to helping many investors through these offices over the coming years! There are pictures on our blog here: http://www.czechpoint101.com/newsletter/?p=1368.
There are very positive signs in the Czech economy including higher than expected GDP growth, a solid rise in salaries and lower than expected unemployment rates. All of this is having a positive effect on consumer's outlooks and also on the appetite for properties. Because of this we are expecting good movement on the real estate market over the next couple of months until the snow flies.
In Austria we are in the process of investigating and meeting with various banks to find out the options for foreign investors purchasing property. For centuries the rich in Europe have put their money into Austrian property and haven't been disappointed. Austria has also been one of the best and most stable property markets in the world over the last few years, posting consistent gains. In Q1 2010 it was up 4.8% over 2009 and 6.1% over the last quarter. All indications are that it will continue.
High-level overview of article: In the first half of 2010 saw prices of residential housing in the Czech Republic, the minimum decrease in average between one to two percent, which analysts consider a sign of stabilizing the price level in the Czech real estate market. According to a report of international consultancy companies in the real estate King Sturge published in those days.
Our take: In my opinion, if all the factors listed (unemployment, reduced lending, economic situation) did not drop the prices further over the last 3 to 4 quarters, we will not see any significant changes to the worse in the future.
High-level overview of article: Czech central bank board member Kamil Janacek said policy makers will “certainly” discuss the level of interest rates at their next meeting given the growth of exports and rising commodity prices.
Our take: We should expect significant strengthening of the CZK over the next months.
High-level overview of article: The Czech National Bank (CNB) will probably raise the benchmark interest rate by 0.25 percentage point to one percent at the end of this year or at the beginning of 2011, Czech National Bank (CNB) Bank Board member Robert Holman told server Tyden.cz.
Our take: I think the funniest sentence is this: “CNB Bank Board member Kamil Janacek told the server of weekly Hospodarske noviny on Wednesday that the times of low interest rates were over in the Czech Republic.” Personally I don’t think consumers ever saw low interest rates here although the banks did.
High-level overview of article: In the first half-year of 2010, the average wage reached Kc23,135 and was Kc521 or 2.3 percent higher compared with the same period of 2009. Real wage rose by 1.4 percent.
Our take: Good overview in the second half of the article regarding where analysts think wages will go over the next year or so.
Czech Point do Austria, Flat Filling & Office Moving
Over the last two to three weeks or so we’ve been busy filling flats for our clients in Brno. Every August brings a rental crunch when all the university students (estimated at 50,000 in Brno) start looking for flats. It is not that they are necessarily interested in the flats we have on offer, since they are often looking for the absolute cheapest prices on the market, but it fills up excess supply and causes other tenants to look for higher-grade flats.
As at the time of this writing our three offices in Ostrava, Prague and Brno are at an average of 90% occupancy, with it looking positive the numbers will hit our target of 95% by the end of the month.
We are excited about a new branch of CZECH POINT 101 which will offer property services in Austria related to recreational and investment real estate purchases. We will be offering an Active Search package in conjunction with a stay at our apartment in the Alps close to Salzburg: www.austria-houses.com. At this time we would make a special offer to Property Secret’s subscribers of 5% off the regular prices listed on the website if your holiday is booked by September 15th. This offer does not have to be used in conjunction with an Active Search package (yet to be released).
Finally we have recently moved our offices in Ostrava to a fantastic new location. This will be great for business in the city going forward. Below are a couple of images of our central base by the main City Hall: Blahasova 3324/2A.
High-level overview of article: The Czech koruna extended its rally to the strongest level against the euro since November 2008, boosted by automatic purchase orders from investors who previously bet on the koruna weakening. It’s been the world’s best performer in July, having gained 3.7 percent against the euro.
Our take: We expected this to occur but a little more gradually than in one month. It should continue to climb but at a much slower rate for the rest of the year.
High-level overview of article: Foreign direct investment (FDI), one of the key economic indicators for the Czech Republic, plummeted more than 50 percent last year, but analysts have been quick to defend the buoyancy of the Czech economy and banking system and say that the decline is short-term and expected.
Our take: Movements from the peak or the trough always seem extreme. The starting point has to be compared.
High-level overview of article: The Czech National Bank (CNB) raised its estimate of Czech economic growth in 2010 to 1.6 percent in its latest forecast from the previous 1.4 percent, CNB governor Miroslav Singer said at a press conference today.
High-level overview of article: The four largest banks in the Czech Republic made aggregate net profit of Kc21bn in the first half of 2010, a year-on-year growth of 9.2 percent, the banks’ first-half results have shown.
Our take: Banks: ‘We were mistaken for gouging everyone during the crisis under the guise of expected loan defaults, but oh well.. by the way, profits up again.’
High-level overview of article: Unemployment in the Czech Republic grew to 8.7 percent in July from 8.5 percent a month earlier mainly owing to arrival of new school leavers on the labour market, analysts have told CTK in a poll.
Our take: Still below the much feared 10%. Definitely will not be getting there.
High-level overview of article: Domestic construction industry continues to decrease. Construction output compared to the same month the previous year in June fell 4.7 percent against the previous month by 0.4 percent. Said yesterday that the Czech Statistical Office.
Most housing construction dropped a home, opened the year 31.8 percent fewer buildings. Particularly striking is the decline in housing construction in residential buildings by 45.9 percent, the decline in family homes is “only” 19.2 percent.
Our take: We are on the down side of the wave. Expect a good crunch as demand over-strips dwindling supply.
Affordability of Prague Flats Reasonable for Locals
A recent study by International Real Estate Agency Gordon Rock compared the average income of residents of different cities in the world to the price of purchasing a 70 m2 flat in the same city. The results were surprising when compared with the situation in Prague and recent reports we have heard regarding a study from the Czech National Bank on Czech Republic property prices.
“International real estate agency Gordon Rock to determine the number of years, which need to be worked by residents of large cities in the world and Russia to buy different types of apartments in the city. In accordance with research, the people of Berlin for the purchase of a model apartment will require only 3 years old, residents of large cities in the U.S. and Canada – no more than 6 years old, residents of most European capitals – from 7 to 14 years, residents of London, Paris, Rome, Tokyo, Sydney, Kiev, Moscow, St. Petersburg – up to 20 years, and residents of Singapore – an anti-record 36 years. Russian cities with million to purchase several types of apartments to be worked from 10 to 14 years, ie like most Europeans, and less than Moscow and St. Petersburg.”
“The methodology of research on data on average annual income of residents of the largest cities in the world and the Rosstat data on average wages in Russian cities. It is important to note that the calculation carried out for the average income of urban residents – ie for those whose profession can be attributed to working professions, services, education and servants. Consequently, the assessed value of such properties, which are in demand is for ordinary urban residents. As a model of the property in the study adopted a flat area of 70 square meters, which is located in the peripheral areas of the city and which can be arbitrarily assigned to the class of ‘new development model’. Therefore, the cost per square meter in a particular town, used in the study, below the average cost per square meter, which significantly affects housing luxury and business class.”
If we compare to the figures in Prague, it shows that the real estate market in Prague does not seem overpriced at this point. If we take 29 000 CZK as the average gross salary (Q1 2010 according to CSU) for someone living in Prague and the average CZK/m2 for a 70 m2 ‘newish’ flat on the peripherals of the city (as per the survey) at 45 000 CZK so a purchase price of 3,150,000 CZK (which is generous based on figures from: iDNES.cz, realio.cz and bezrealitky.cz) it would take 9 years to pay the property off.
One thing we don’t know from the articles is whether the survey used gross or net salary. Even if we used net salary (roughly 23% less than 29 000 CZK/month) we get a payback time of 11.75 years.
Some other factors to consider regarding whether property prices are affordable to the local market in comparison to other cities in the survey:
1. Czech Republic has a lower unemployment rate, 7.5% than the EU average of 10% based on the May, 2010 figures from Eurostat.
As a way of comparison we got the figures from CE Invest Hungary on Budapest, Hungary and it would take 6.5 years to pay a similar property off on the average gross salary and 10 years if using net salary in the equation.
In Bratislava, Slovakia it would take 12 years to pay off a similar property based on gross wages and 14.5 years based on net (courtesy CE Invest Slovakia).
In comparison to other European cities this puts Prague prices at a reasonable level and definitely not “unaffordable” for local citizens in comparison with other cities of the world as local media reported the Czech National Bank claimed in a recent study. Perhaps when compared to historical averages this holds true but definitely not when comparing to other cities of the world.
How to pick a company/legal team to represent me in a Czech Republic real estate purchase?
This is the critical question every investor needs to ask themselves. Forego this step and you set yourself up for a lot of stress and very probably, lost capital.
Here are the critical factors we would emphatically insist on in a company representing our capital:
1. Experience on the local market of at least 5 years and a proven track record of successful investments for clients.
In Czech Republic, established relationships with trustworthy partners cannot be overemphasized. These things can only be developed with time.
2. Without vested interest in the properties they are recommending to you.
A totally impartial advisor is the absolute best idea. You can be sure you are not getting ‘pushed’ a certain property because it benefits them but not you.
3. They acknowledge potential risks, inform you of them and then present their strategy for minimizing these risks.
Czech Republic is no place to have a ‘head in the sand’ approach to investment and you should be wary of any company who says there is nothing to be worried of.
Is it common to pay a deposit when purchasing a Czech property?
The short answer is yes, it is common but does not need to be done. Especially in the buyer’s market that we find ourselves in 2010.
Experience has shown that once the money goes into the real estate agent’s hands it is very difficult to retrieve. Even if a deposit contract is signed don’t expect it to be honored.
In one situation a signed purchase agreement was cancelled at the instigation of the seller and he acknowledged this in writing but the real estate agent still refused to refund the deposit. This situation is progressing towards the courts.
Usually the real estate agent wants the deposit before you have even seen the purchase contract or have anything in writing concerning the final price. Being committed with a substantial deposit plays into their hands because then you are more inclined to agree to changed or otherwise unacceptable terms to the purchase agreement.
What we recommend to our clients is that you first have everything in order and then when you find a property that you are interested in, proceed directly to the future purchase (if buying with a mortgage) or purchase agreement (if buying cash).
How can you protect your money during the purchase of a Czech property?
As the purchaser only legally becomes the owner when they are registered as such in the Land Registry, there is a period between signing the purchase contracts and them actually becoming owner by registration.
Protect your money during the purchase process.
It is always recommended to have the purchase price in an escrow account through this time period. Otherwise, you could have the situation where there is a problem registering you as owner at the Land Registry (it can be even small details like a misspelling of your name or residence address which would halt the process) but in the meantime, the buyer has the full purchase price. Not a great situation.
Notary offices in the Czech Republic function as a neutral third party and are safer to deal with than committing the purchase price to the real estate agency itself. Here is a list of notary offices in Czech Republic.
Even though agents may insist that it is ‘company policy’ for them to handle the full purchase price we have found they will agree to commit everything to a notary when you convince them that you are serious and coming forward with cash.
It is also possible to use a bank or an attorney in this same function.
If your real estate agent continues to insist that they will only accept the purchase price going directly to them, move on to another agency or drop the property altogether as something strange is going on.
What are the risks of purchasing property in Czech Republic?
Here are some factors as published by CEREAN (Central European Real Estate Associations Network) in their Czech Republic section:
Czech Republic property purchase is not without risk.
‘The Czech legal code gives preference to the real owner of a property instead of that which is written into the public records (in the cadastre of real estate). An extract from the cadastre of real estate does not always reliably reflect the ownership rights to real estate. It can happen that a seller can bring forth documentation of ownership of a lot or piece of land from the cadastre of real estate, an investor buys the land, and the cadastral office registers him as the owner. A few years later, though, legal proceedings are begun to determine the actual ownership of the land, and a court decides that the owner of the land is someone else.’
‘An extract from the cadastre of real estate is not, therefore, sufficient documentation for closing a contract. The results of privatization and restitution of real estate do not always correspond to the actual, factual state of affairs. When buying real estate in the Czech Republic, it is of the utmost importance to thoroughly go through all available documentation on the basis of which the ownership rights have been granted to the seller, or as the case may be to any of his family members, either living or deceased. This requires adequate knowledge of local conditions and the legal directives in individual time periods in which the evaluated documentation came about. The goal of this investigative process is to find out whether there was ever an ownership dispute or conflict in the past that could in the future threaten the rights of the investor.’
‘Strict rules and regulations are valid for transfer of real estate in the Czech Republic. A purchase contract can be declared invalid for slight errors in how the real estate is named or described, or because certain less than specific wording is used. It is not enough for the cadastral office to agree to register the ownership rights to the cadastre. There have been and continue to be cases when the formal validity of a contract is disputed years after the cadastre office has agreed to an investment or transfer. The actual contract itself, then, by Czech law, is rendered less important. Simple, mechanical inspection of foreign contracts can act to rob an investor of his money and his real estate.’
‘During the Communist era, in 1951, there occurred on the territory of what is now the Czech Republic the denial of traditional principles known as ‘superficies solo cedit’, which up to that time had been valid. This legal principle made it impossible for one person to own a building on land which belonged to another person. Essentially, what the new legal ruling did was make it legal for one person to own a building on another person’s land. This rather inconvenient amendment to ownership law has remained on the books until today.’
‘A general problem in the Czech Republic is the slow rate of court proceedings. Like a number of other countries, the Czech Republic has been sanctioned for its slow pace of court proceedings. The European Court of Human Rights has ruled that the country must pay compensation in a court case on the settlement of a real estate dispute in the common name of a married couple. The court case was stuck in the court system for more than 10 years. ‘
The results of the election held the end of May has been viewed as very positive for businesses.
Taxes should be stable for businesses and we don’t see any big changes to the tax structure on the Czech side which should seriously affect investors and property investment.
We expect that property taxes will increase slightly but are currently at such a low level that any increase will not greatly affect cash flow on a rental property.
Although we’ve had a weak spell with rental demand in Brno our offices in both Prague and Ostrava have done extremely well with keeping occupancy high.
We are currently going through the most common questions asked by our clients and what the answers are. For example: what are the typical selling costs in Czech Republic? Or Are Czech real estate agents accredited? These and more can be viewed on our blog: http://www.czechpoint101.com/newsletter/ and will continue to be shared over the coming weeks.
For any who own property in Czech Republic and want to get an idea about the current value of their property or what it would rent for, we encourage them to download our Property Valuation form, fill it in and email it to the appropriate office for a free valuation. This is available either for current rental or sale prices.
What are typical selling costs for a property in the Czech Republic?
With many owners thinking of reselling at this point, one of the most common questions we get asked recently is about what the selling costs are in Czech Republic. Here are a list of them which may or may not apply to your property.
1. Real estate commission or fee
The costs of selling Czech real estate - explained.
3% of the sale price or valuation price (based on a valuation by someone authorized by the State) whichever of the two is higher. This is paid by the seller to the State.
3. Cost of the valuation for real estate transfer tax
Typically from 3,500 to 7,500 CZK + VAT per flat.
4. Redemption cost of the mortgage
If you don’t pay your mortgage out at the time of fixation there are typically heavy penalties from the banks. The penalties range from 10% to 25% of the remaining unpaid amount of the mortgage at the time of making a payment.
5. Final tax accounting and filing
If you have collected rent in the year in which you sold the property or made a net profit on the sale, you will be required to file a tax return to the local Financial Office. This can cost from 7,500 to 15,000 CZK + VAT.
6. Income or corporate taxes on net profit
If the owner of the property was a Czech SRO the company will need to pay corporate tax (in 2010 this is 19%) on any net profit. This includes on capital gains of the property or rental income.
If subsequent payment to the owner(s) exceeds any shareholder loans this additional amount would be subject to a 15% dividend tax.
An individual who has not held the property for at least 5 years (the time at which an investment property becomes capital gains free) will have to pay income tax (in 2010 this is roughly 15%) on the net profit whether from rental or capital gains.
7. Possible additional costs
It is advisable to have an attorney review the sale contract as the real estate agencies often don’t protect the interests of the client but are just interested in securing their commission.
There can be additional costs based on whether you would be physically present for the concluding items such as signing of the sale contract, turn-over of the apartment, transfer of utilities, etc.
If the property was owned by an SRO there can be the additional costs of liquidating the company.
Over the last month we have seen steady movement on the real estate market. The first quarter of 2010 has reported a decrease of 1.3% overall in property prices over the year before. Initially we had been expecting a jump in demand for real estate due to some pent-up demand being fulfilled in second quarter of 2010 but there have been a few factors which have squashed this. Let’s go through them.
General Elections – The general elections (May 28th and 29th) have been weighing on people’s minds. Definitely it appears that there will be a change in government and perhaps by the time of your reading this there will already be a decision. Almost positively it will be a coalition.
I know readers from the UK will understand what an unsettling effect this can have because of the recent elections there. Most parties have included an increase in taxes in their policies. It is inevitable because of the current budget deficit. Because of this tax uncertainty, many businesses are putting off hiring, salary increases, etc. until they know which party will be elected. This all filters down to the consumer and has the same affect on them. We are feeling the effects of this in both the real estate and rental markets.
Uncertainty of jobs – With unemployment at around 10% and many analysts forecasting for more layoffs in the future, most potential buyers are unsettled and would rather wait until there is a stronger feeling of security.
Banks Holding Strict Mortgage Conditions – Our expectations had been that banks would begin easing lending conditions for both Czechs and foreigners but this has not been the case. The conditions which most banks implemented in the first half of 2009 when fear of a financial collapse was highest have been held through to present.
On a positive note, we have seen signs that the economy may be recovering at a quicker rate than initially expected. Estimated GDP growth for 2010 has been gradually increased by different organizations over the last months.
Our different offices have been working hard to meet our occupancy goals on managed flats of 93 to 97%. In Prague and Ostrava we are happy to report occupancy at 100% for flats under management. In Brno we saw a number of contracts which ended the end of April and beginning of May and so currently have an occupancy rate of around 80%. This is much below our goal and we are working hard to help this to recover.Historically this time of year has the least demand as students (estimated to be 50 000 in Brno) finish their semesters in Brno universities and all these flats come on the market.
Our ‘Gold’ power of attorney resale has proved very successful and in Brno we have been able to sell 7 flats over the last few months with about half of them being purchased by individuals without real estate agencies being involved.
For any who own property in Czech Republic and want to get an idea about the current value of their property or what it would rent for, we encourage them to download our Property Valuation form, fill it in and email it to the appropriate office for a free valuation. This is available either for current rental or sale prices.
Czech Banks - The Battle to Secure a Investment Mortgage
*(This article is regarding mortgages to foreigners for the purpose of an investment property. Properties purchased for personal use fall under a different set of rules.)
As the theme reads, it is currently a real battle to get a good mortgage with all the factors an investor wants including an acceptable interest rate, LTV, repayment length and reasonable conditions. It is not possible to apply to the bank and have it approved without a sometimes very painful process of getting the documents translated, notarized and verified.
Let’s have a closer look to the Czech mortgage providers and let’s see what they can offer to foreigners who are purchasing an investment property in Czech Republic:
1) Hypoteční banka (HB) – they currently offer mortgages for investment properties.
The LTV is 85%, nevertheless they are using coefficient 0.95% to all valuations, which means that if you are able to get maximum LTV, then you can get a real 80%LTV. Truth is that the bank valuation is almost never the same as the purchase price, which means that you could possibly get a mortgage somewhere between 70-80 % of the purchase price. The current interest rate is around 5.99% for 3 years and the bank generally does not want to negotiate about it.
The disadvantage is that the length of the mortgage is only 20 years until the applicant reaches their 65 birthday – which makes the cash – flow a little bit negative except on exceptional purchases. Also this bank doesn’t accept the income from dividends. The advantage is that even though that they are trying to do only the most secure mortgages, they are still accepting foreign investors and they do not required any kind of residency permit or visas. The whole process could take around 2 weeks, which is excellent.
The bank is good for those that are willing to put around 20-25% of the purchase price in cash.
2) Raiffeisenbank (RB) – they currently offer mortgages for investment property, too.
The LTV is between 75% - 80%, with the interest rate around 6%, length max. 30 years till 70 years old. However, they are providing the mortgage for rentals only to those that are living in Czech Republic for at least 2 years and that have an income from Czech Republic or an income sent to the account in the Czech Republic. So if you are a foreigner and want to buy a property in Czech, this bank won’t be your best choice unless you can prove that you are living here through phone statements, utility statements and unless you are satisfied with sending your salary to a Czech Republic bank account. Otherwise, this bank offers a very good quality service.
By the way this bank also doesn’t require any kind of residency permit or visa, nevertheless by requiring that you have to live here at least 2 years, the bank de facto push you to have one.
The bank is good for those that are living and working in the Czech Republic.
3) Oberbank (OB) – offer mortgages for investment purposes but only really an option if you live in a country where they have a branch.
They are offering 85% LTV and great possibility to make a unique (to Czech Republic) so-called PRIBOR or floating interest rate, where the fixation period is only 3 months and interest rate between 4.2 – 4.6%. Their main business is not providing mortgages, so they are little bit inexperienced with providing a mortgage for foreigners from different countries than where they currently have a branch (Germany, Austria, Czech,…). Because of this, it can be a really painful process when someone from, for example, the UK applies for a mortgage. If he is not living in Czech Republic, then the bank ask for many other documents and, in the end, the result is not sure.
The whole process could take even longer than one month due the approval time required by the office in Prague to whom the application is sent. Nevertheless it is one of the small numbers of the banks that offer also mortgages in EURO and definitely in the EURO field would be one of the best ones.
So this bank is good only if you are the citizen from the countries where they have a branch.
4) Komerční banka (KB) – They currently do not provide mortgages for foreigners for the purpose of investment.
5) CSOB – they have similar conditions as the HB bank, nevertheless the process is more bureaucratic and sometimes they have very long processing times before a decision is received.
6) LBBW – a possibility for those with high income, residency permit and a premium property
A new dynamic bank that offers 80% LTV for 1 flat and for more than 1 they offer 70% LTV, but the applicant’s income must be more then 50 000 CZK in order to get the mortgage. The interest rate is between 5 and 6% and they require some kind of residency permit or visas.
The bank is doing only “good deal” mortgages, which means good client, good property, and minimal risk for them.
Czech market has more banks then I mentioned above, but the lending criteria of the others are not very open for foreigners that are looking for a property as an investment. All together we can say that currently the best option for a classic investor (I mean those that are not living in the Czech, not having an income from Czech and do not have any kind of residency) would be HB as all the other banks usually have some “BUT” in their lending criteria. For those that are living here, I would propose to try HB, RB or LBBW as they can offer similar conditions, but could be different from project to project.
If you need more specific information please contact us or your bank adviser.
The Czech real estate investment market has kept up the momentum seen in the final quarter of 2009. Thus, Q4 showed the positive results of the real estate market’s waking up as interest is growing and demand is slowly starting to turn for the better.
As the Czech unemployment rate went higher through the last half of last year, rental demand turned to a lower standard for example, a person who had been renting a 2+kk changed to a 1+kk. Residential flat rental demand increased as demand for the typically larger priced house rentals went down.
With our ‘on-the-ground’ experience, Prague’s areas outside of the immediate center in the size of 1+kk (studio) or 2+kk (1 bedroom), in the standard of economy or middle class, which have become the most attractive options for renters would be the best right now in which to invest. Of course, in these areas it is critical that the property is accessible to public transport.
The good news is rental has strengthen over Q1 2010 and we expect prices overall to go up through the year.
Are you looking to sell your property in Czech Republic?
Perhaps you want to realize profits from the improved exchange rate, capital gains over the last years or, in the worst case, you have a negative cash flow property which you want to unload. Before selling because of this last option please see our earlier article: 6 Simple Tips to Save 30,000 CZK a Year On Your Czech Rental Property which may help you to turn your cash flow around.
In each case, you want to be able to sell your property and get the maximum value possible for it. Most of the time you will also be under a time constraint due to your mortgage fixation period (see point 1 below). How can you manage both of these things in the sale of your property?
We have compiled our top 5 tips from CZECH POINT 101’s years of real estate experience in the country which are vital for executing a resale for maximum profit.
If you live outside the country and are unable to manage the sale yourself, consider these factors as a criteria list for who you would chose to resale your property.
1. Research your mortgage payout options
Almost certainly you have purchased with a mortgage. The thing many buyer’s don’t realize is that Czech banks have very high penalties if you try to payout the mortgage at a time other than when the fixation comes up for renewal.
The penalty can run up to a massive 25% of the unpaid amount of the mortgage. Ouch, ouch, ouch! There goes any currency gains you were looking forward to.
Also important to realize is that there is an exact time period, sometimes as short as a day, in which the bank expects payment to be made. Missing this by one day can mean paying the penalty.
Often the bank also needs to be notified at least a month before the fixation day comes up that the mortgage is going to be paid out.
As you can see, all of this requires timing and research!
2. Have a price reduction strategy
Based on your deadline, whether it is the mortgage pay down date or a date you personally need the cash, set definite dates at which point you would lower the price if you didn’t have a future purchase contract signed.
3. Advertise the property on ‘for sale by owner’ websites
It has been estimated that 50% of property in Czech Republic is sold without going through a real estate agency.
Why is this?
Firstly, real estate commissions are from 3 to 5% and typically on the higher side of this range.
Secondly, real estate agents have a very bad reputation in Czech Republic for and partly because there are no barriers for entry into the industry as there are currently no regulations for getting a real estate license. Because of this, fraud and agents acting only in behalf of their commission (ie. saying or doing whatever is necessary to get their commission) has been common and continues to occur with alarming frequency.
There are a few ‘for sale by owner’ websites but the one with the most recognition is www.bezrealitky.cz. It is also good to advertise on other real estate servers where agents also advertise including www.sreality.cz.
4. Check real estate agencies’ cooperation agreements
It is not common to have exclusive agreements between a real estate company and an owner in Czech Republic but some real estate firms do require it.
If you sign such an agreement with a real estate firm be sure to check out which other agencies they cooperate and have some rough idea about how the commission would be split if another agency brought a buyer. 50/50 is common but some agencies try for 75/25. If a cooperating agency will only get 25% of the total commission they will not be motivated to bring a buyer.
5. Ensure cooperation of the tenant, if there is one
Inform the tenant early on about the desire to sell the property and try to get their cooperation with viewings. With a conventional rental contract it could be necessary to wait until termination of the agreement in order to hand the ownership over. When using CZECH POINT 101’s contract system, three month’s notice is possible.
You are just completing on your property and are now being offered a furniture pack. You are surprised about how much it will cost. 36 500 CZK!
You scan the list and see that, yes, these are items you would need if you personally were going to rent it.
However, you need to look at any outlay of money and ask yourself – am I really going to get this back? Is it really worth my money to furnish the property? And if you do decide to furnish, what are some things you can do to reduce your risk? These questions are answered before in the three C’s of Considerations, Calculations and Cautions.
Please note that this article is taken from the consideration of a long-term rental and not short-term, which is a totally different matter.
Considerations
Pros
1. Damage to property is reduced as moving furniture is one of the most damaging events your property will experience
2. Lower vacancy (in some cases)
3. Higher rents
Cons
1. Initial outlay of money for furniture, delivery and installation
2. Additional risk of damage
3. Repairs and replacement
4. Potential of theft
5. Risk of the furniture style becoming obsolete
6. Additional accounting as depreciation is different than real estate (furniture in Czech Republic is depreciated over 5 years and real estate over 30 years)
It seems from this list that cons outweigh pros 2 to 1! Does it make any business sense then to furnishing a property?
Calculations
It all depends on payback. Certainly you should look to have the furniture paid back in 2 years at a maximum. The furniture should last for at least 5 years, depending on the quality of the furniture installed and what kind of tenants you get in place.
How do you calculate if you are getting your furniture paid for over this time period? Well, for sure you need to look at the increased rent you should get for a furnished flat. So let’s say you put out 36 500 CZK for a furniture pack and your flat normally rents for 15 000 CZK/month unfurnished. This means that you would need to rent the flat for 1500 CZK/month more in order to get your pay back in 2 years.
However, there is another factor which weighs in the calculation. If having furniture means that your property would be vacant for 1 less month than if it was unfurnished, this is worth 15 000 CZK right off the start. Thus if you had occupancy one month earlier and were able to charge an additional 1500 CZK/month you would have payback in 14 months. Not too bad!
So it is very important to include vacancy in your calculations about whether furniture is worth it or not.
After the payoff point, you are making money on your furniture! Congratulations, you are now in the furniture rental business, and, most importantly, making money on it.
In terms of the quality of furniture we would recommend, we think only in the rarest of circumstances is it worth furnishing at a luxury level. The additional premium for luxury furniture is, in our experience, rarely recovered in comparison to the same flat furnished with slightly above standard quality of furniture.
In order to assess whether rental is the best option for you, it is extremely important to know the local rental market that you are targeting. If you hire a property management company, you need to know that they have people on the ground with a good knowledge of the local rental market.
A recommendation we have for newly completed flats or flats which had been rented unfurnished in the past but are now unoccupied is to offer them as furnished or unfurnished. You can make a list of furniture which would be required to furnish and then calculate what sort of premium you would need to get a property return. If you are furnishing from IKEA, it is possible to have the flat furnished within a week. However, be sure to have the first month’s rent and damage deposit from the potential renter before heading off to IKEA!
Cautions
If you do decide to rent furnished what are some cautions which can help you to realize your return on this investment?
From our years of property management experience in Czech Republic we would recommend the following:
1. Increase the damage deposit by another half month’s rent
2. Don’t rent to people with pets but, if you do, increase the damage deposit even more
3. Consider carefully before renting to smokers. It is possible to remove a smoke smell from an unfurnished flat but rarely will it be possible if it is furnished. A smoker early in the life of the furniture could decrease the return you will get on it
4. Furnish at a basic standard (medium to slightly above medium quality) and not completely. The tenants can add filler items (pictures, plants, kitchen items, etc.) which can be costly and are the most easily damaged pieces of furniture.
By stepping through the three C’s of furnished properties in Czech Republic, you can decide whether you should go into the furniture rental business or not!
It has been said that 95% of the work of property management is done before the tenant actually occupies the property. Rush this and you can pay (monetarily and emotionally) for months. Here are three critical tips for making the most of this crucial stage.
1. Put your property in the spotlight
Get your property out to as many venues as possible. The more interested parties, the more chance of selecting a good tenant.
Of course, nowadays the internet is one of the most effective methods of advertisements and that also goes for the Czech Republic.
A large rental market in Czech Republic is the foreigners. Do you know where the foreigners look to find rental properties? There are many websites which have forums in different languages which often have a posting section of properties for rent. Find which ones they are and keep a record of it for future requirements for rental.
Don’t overlook the local rental market.
Talk to locals and find out where they would look to find rental properties. A major local website is the real estate directory: www.sreality.cz. Post your ad in both English and get a friend to help you with the Czech side.
Locals also like to try to rent without using a real estate agency because of their standard fee of a month to month-and-a-half rent. So it is good to list your property on websites which are without commission such as: www.bezrealitky.cz.
Referrals are an excellent way to get quality tenants.
A famous Japanese proverb says: “when a character of a man is not clear, look at his friends.” Do you have good tenants who pay their rent on time, respect your property and are good to deal with? Ask them for a referral. In fact, you can even offer them a one-time bonus for helping you find a quality tenant. 500 to 1000 CZK is nothing compared to the value of getting in a good long-term tenant.
2. Screen your tenants
Ask for references! Potential tenants should be able to provide you with references to their boss at work and their last landlord at the drop of the hat. A good tenant who has good relationships will have no hesitation offering you contact for their boss and previous landlord. Any hesitation is a bad sign and stroke against the applicant. Of course, a potential renter truly may not have the contact information on them but in 95% of the cases, they would.
Check the references. Don’t be afraid to phone the references and make sure everything sounds legitimate.
Faithful in little, faithful in much. You can, to a certain extent, judge character by how they handle the few contacts that you have with them. Do they show up on time? If they are late (it happens to all of us) do they apologize or just ignore the situation? Are they respectful of you and your property? These can all be indications of how the tenant will continue to treat you in the future.
3. Get it in writing
Be sure to document everything in a relationship, right from the start. Make notes on the contracts if something unexpected occurs at the time of signing or inspection. No one has a perfect memory and it is also the case that you might promise something and not remember two months down the road. So put everything in writing.
Be sure to have professional contracts. Make sure your contracts fair for both parties but be sure that your rights as landlord are protected. In Czech Republic the laws are very strict in favour of the tenant in a direct tenant-landlord relationship. Under this relationship, it takes either a court proceeding or the tenant’s written agreement to use some of their damage deposit toward legitimate damage they have caused.
CZECH POINT 101 have developed a unique contract system which both protects the owner and has fair terms for the tenant. Read more about tenant’s legal rights in the Czech Republic on our blog here: http://www.czechpoint101.com/newsletter/?p=123.
Have the agreement in English and Czech. It is not fair to have a contract in a language not understood by the tenant. Of course, you cannot be expected to translate a contract into Swahili but having both English and Czech ensures that the tenant clearly understands the terms of the rental.
Do your work up front, or ensure that your property manager is doing this, and you can be guaranteed better return on your properties and more sleep at night!
6 Simple Tips to Save 30,000 CZK a Year on Your Czech Rental Property
Cash flow is the life blood of an investment. Without cash flow the investment can rightfully be called speculation.
Many investors bought in Czech Republic at a time when cash flow was not positive unless large amounts of cash were plunked down as a deposit. However, that does not mean that you just want to give up on your investment, call it a write-off and move on. Much can be done to improve the cash flow of your investment by tweaking little things.
Here are our top tips for maximizing cash flow on your Czech ‘buy to let’ property investment which, potentially, could result in you putting a staggering 30 000 CZK in savings into your pocket each year.
1. Make sure your property is not insured twice (savings: 100 to 200 CZK/mo)
It is usually the case that the bank granting the mortgage will require proof of property insurance before releasing the funds. Many buyers take out new insurance, not realizing that there is often insurance which the building association also takes out on the building.
You will never get paid twice for the replacement of the same property so this is a waste of money.
Note: it is good to check what exactly is covered by the building association’s insurance because sometimes it would not replace the finish inside the flat (ie. flooring, kitchen, furniture) and also would not cover liability. However, these items can be added separately by the owner still resulting in savings of at least 100 CZK/month.
2. Including water usage in the utility fees paid by the tenant (savings: 100 to 250 CZK/mo)
Although not common in other parts of the world it is normal here for the tenant to be responsible for the consumption of water.
3. Always collecting more than the normal monthly deposit required by the utility companies – otherwise transferring utilities into the tenant’s name (savings: 200 CZK +/mo)
Try to transfer whatever utilities possible into the name of the tenant. When not possible, be sure to collect more than the average monthly deposit required by the utility company.
Usually the meters are only read once a year which means your tenant could be long gone having racked up a monster utility bill which you will never collect from him. It is always easier to return money to a tenant than try to collect more after they have moved out.
4. Minimizing vacancy periods by having a lengthy cancellation (savings: up to one month’s rent/year)
Make sure to have a lengthy notice period (2 to 3 months is normal here) in order to give yourself ample time to source another tenant including renewing advertising, showing the flat and getting another contract signed.
If you are in a strong market and you are confident about getting another tenant quickly, it is possible to give exceptions to individual tenants but having a lengthy period can save vacant periods of up to a month.
5. Minimizing turn-over (savings: up to one month’s rent per year)
Is there some persistent problem with your property which results in tenants not being content and moving before an average tenancy period? Every time your property changes tenant’s hands it costs you with advertising, showings, vacant periods and move-in/move-out damage.
6. Minimize bank fees (savings: 200 to 500 CZK/mo)
Bank fees in Czech Republic are disgusting.
There is no other way to put it. Especially coming from a very competitive banking atmosphere like I did in Canada was I shocked at the amount of money that went out the door for bank fees.
But is there anything you can do about it? Yes there is! Especially if you purchased property through an SRO or Czech company.
In such a case you have a terrible layer of two to three bank accounts. Sometimes you will have your SRO bank account, then a personal bank account which is mandatory with your mortgage and then your mortgage account. All, in fact, are necessary according to bank lending requirements and state laws regarding SROs. What can be done in this case?
We can strongly recommend setting up a bank account with Fio for your SRO. Fio offers a banking services which has almost no fees. It’s accounts are covered by the same insurance offered by the State of up to 50 000 EURO in one account so your money is safe.
For an SRO which is only held for the purpose of owning property, this can save up to 500 CZK a month in bank fees.
If you don’t want to do this, at least minimize the number of times you get printed bank statements, cancel your bank card and look at all other ways to reduce the fees you are paying.
Do you think some of these suggestions have a return that is too little to act on?
Think of how an eves trough combines even a small amount of falling rain over a large area to equal a sizable amount of water coming out the spout. It is the same with your rental property, by taking care of all these little things you can do each month it can result in a sizable return at the end of the day.
Nathan Brown (Czech Point 101)
POSTED BY
DANIEL PEACOCK ON MON 11TH JANUARY AT 16:12 GMT
“In this world nothing is certain but death and taxes.” – Benjamin Franklin
________________________
Under Czech law, if an individual owner is collecting rent from the rental of a Czech property, they must file a tax return in Czech Republic.
This is also the case for those who own their property through a Czech company or SRO.
In both cases a tax return must be filed even if there was no net profit. Losses can be carried forward to offset income in a future tax year.
There is a double-taxation agreement between Czech Republic and the UK or other EU countries which would prevent you from paying taxes in another country. ________________________
Here are the upcoming tax deadlines for the 2009 tax year:
Property Tax Registration: January 31, 2010 (required for all properties where a new owner was registered in the Land Registry in 2009)
Individual Income Tax: March 31, 2010
Corporate Income Tax: March 31, 2010 (if power-of-attorney has been given to a registered tax advisor such as ours this date is extended to June 30, 2010.) ________________________
We are happy to offer the following services for our clients directly from our internal accounting team:
Property Tax Registration: 1500 CZK + VAT (we would complete and submit the application to the appropriate Financial Office with power of attorney)
Property Tax Registration form: Free (please email us and we will send you the correct application free of charge: accounting@czechpoint101.com)
Rates for our existing Property Management clients: (in CZK and without VAT)
If you would like to use CP101 to register your property! Email here or call 0115 9853963 before January 15th 2010 and get ahead of your tax deadline for HALF PRICE!
Wow! It appears the worst of the economic firestorm is over.
But, is it really? Or is this economic uptick we are seeing in late 2009 just a sugar-high on stimulus money which is bound to collapse soon? Once again, the factors affecting the property market in Czech Republic are complex.
The factors which we feel will influence the property market the most in 2010 which also affected our predictions for 2009 are the global credit crisis, Czech wages and unemployment vs. housing prices, the overall economic health of the country as well as rents vs. housing prices. We’ve rehashed these sections to see how these elements will apply to investment property in 2010.
New factors which we feel will also play a factor in 2010 and are considered in this article are: pent-up demand, currency trends and the government budget.
Factors which we predicted would affect investment property in 2009 but we feel no longer plays a major role going forward are the US housing market and the potential accession into the EURO currency (pushed off into the indefinite future).
Please remember that each of the topics is discussed on the basis of how it will affect residential property bought with the purpose of investment.
Short of time, tired of our dribble and only want to read the final analysis? Page 6 has our conclusions on how we feel all these factors will affect the Czech investment property market in the short and longer term.
Global Credit Crisis Easing (+)
Czech banks have been demonstrated to be extremely stable in the face of this firestorm. For example, the Czech National Bank reported that overall in Q3 2009 Czech banks as a whole increased net profits by an average of 10%.
Through the crisis the Czech banks have been net lenders to their foreign mother companies and, combined with the general atmosphere of fear in the world-wide banking sector, severely strangled the credit market.
With the global credit crisis easing, the Czech economy holding up comparatively well and loan defaults on the low side of their predictions we expect banks here to ease their purse strings and increase mortgage lending. However, we don’t expect to see this trend in the banks until late in 2010.
Czech Wages & Unemployment vs. Housing Prices (-)
One indicator whether housing is in for more growth or a correction is the difference in earning power versus price appreciation as this affects affordability.
In 2009 we still saw growth in wages which exceeded inflation. For example, the statics from the Czech Statistical Office for Q3 2009 showed that average wages increased 4.7% over 2008 even when adjusted for inflation. This is very positive for the housing market when over the same period housing prices dropped by about 5% overall.
However, analysts agree that this increase was mostly due to dismissal of lower paid employees as businesses tried to cut costs.
From unemployment at 5.3% in 11/2008 to the figure of 8.6% in 11/2009 it is a trend which could continue to exceed 10% in 2010. Still, the unemployment levels are about 2% better than the average in the EU.
Overall we feel that any increase in salaries will be offset by employment making this element overall being a negative factor on the property market.
Overall Economic Health (-)
From growth for 2005, 2006 and 2007 being over 6% to 2008 where it came in at 2.5% and 2009 being forecasted as -4.8% we can see the shocking results of the worldwide economic crisis. 2010 is predicted to fall in the range of 0.8%. So there is not much in the way of good news on this front.
Among the CEE countries which joined the EU in 2004, Czech Republic is clearly a top performer. However, until the core members of the EU, who are the main consumers of Czech products, see substantial growth, the Czech economy will continue to lag.
Rents vs. Housing Prices (++)
Rental demand increased strongly in 2009 while prices decreased. This has made the rent to housing price ratio much better. In many cases the gross rental yields (calculated by dividing one year’s gross rents by the purchase price of the property) increased up to 2% to the 7 or 8% range in many parts of Czech Republic.
We expect this trend of increasing rents to continue which will improve cash flow for those investors who already purchased property and make further purchases attractive for strong buyers.
The threat of increasing rents has been recognized and anticipated by the government which has passed a bill which guarantees loans for rental housing construction. Long-term this will have a negative impact on existing investment property owners but until the effects of this program are felt, it shows concretely where rents will be headed.
Pent up demand (++)
The property resale market has seen pent up demand being satisfied in Q3 and Q4 2009 as buyers who had sat on the sidelines in fear of what would happen to property prices decided to proceed. This has had a positive effect on property prices as there was an increase overall of 2.1% in property prices for Q3 2009. Statistics for Q4 have not been released yet but we expect a similarly positive number.
We expect more and more buyers to come off the sidelines as sentiments about the economy and strength of the property market improve.
A substantial number of the properties which we resold in late 2009 were bought or had interest from Czech ‘buy-to-let’ investors. We expect these buyers also to play more strongly on the market as overall signs continue positive and apparent risk is decreased.
Currency Trends (+)
With the interest rate being dropped one quarter of percent on December 16th, the Czech crown has softened to around 26.5 CZK to the EUR as of this report being written.
As the graph below shows, for 2009 we have the EUR in a little stronger position against the CZK than the same time last year.
Over the year of 2010 we expect that this will strengthen slightly but will not be a major factor as the Czech National Bank wants to keep a weak currency to encourage the export driven economy.
Below is a graph containing the overall currency trend since 1999 which shows a pattern of increasing strength with the last year or so being basically flat.
Government Budget Deficit (-)
With the Czech government running a significant deficit, projected to be 5.3% in 2010, we expect taxes to increase in 2010 or at least be in the process of being increased by the end of the year.
With an election scheduled for spring of 2010 and the balance of power not strongly in favour of one party, we could see a change in the government. Whether or not the current government will change there is already talk from all sides of increasing taxes which had been in the process of being lowered over successive years.
Possible detrimental changes in taxes for investors is that we could possibly see a capital gains tax being imposed and/or current time limits for the tax free period for individual buyers either being increased or abolished in the case of investment property. Nothing has been discussed about something like this to date but it is a possibility.
Increasing of corporate taxes could mean less foreign investment resulting in less jobs being created, smaller wage increases and Czech business owners moving their tax base abroad. Those who purchased property through a Czech company (SRO) would see this affect their profit at the sale of their property and immediately if they have positive cash flow.
We can expect municipalities to also increase property taxes as a way to improve balance sheets. Currently they are a negligible part of a property owner’s calculation but could pay a larger and larger role.
Other Possible Factors (-)
We expect some distressed sales in 2010 which will have a negative effect for other property holders. However, because of the limited number of investment properties on the market the effects will not make a major impact.
Any further news into 2010 which indicates the economy might not recover as soon as expected or that there might be the double-dip which many economists are forecasting will have a negative effect on the market. It will cause pent up demand on the part of sellers to be unleashed as they stop waiting for property prices to get back to their peak and decide to sell at a reduced price.
Conclusion – Short-term (2010)
Weighing all of these factors we believe that the positive aspects for the Czech property market outweigh the negative and we will see property prices grow in 2010. The biggest bump we expect to see in the spring. Overall we would expect prices overall to go up 5 to 7% through the year. By the end of the year prices should equal peak prices which we saw at the end of 2007 and beginning of 2008.
Rents should continue to strengthen as most seeking residences will chose to rent instead of buying because of the difficulty in getting approved for a mortgage as well as the difference between mortgage and rent payments increasingly being in favour of renting.
Conclusion – Longer-term (2011 to 2012)
Most of the factors which will play a role in the property market in 2010 will continue to affect things for the following years. Based on this we feel that property prices should move up each year. Not at the torrid pace which we saw in 2005 to 2007 but at rates between 5 to 10%.
POSTED BY
DANIEL PEACOCK ON TUE 29TH DECEMBER AT 11:43 GMT
Sourcing Exceptional Tenants in the Czech Republic
You’ve spent time picking the best apartment in the complex. Southern exposure and a huge balcony will be a pleasure for any tenant. Hey, this is a place you would love to live in. Instead of installing the standard kitchen you splurged on some extras, upgrading to better quality appliances and a dishwasher (not common in Czech Republic). Everything is ready for your first rental.
You show the flat to the first viewer. She is well dressed and seems pleasant. She says she works on her own trade license and is quite successful at it. Yes, she is interested in the flat. It seems too easy! Do you sign the contract and hand them the keys?
Stop for a second and take a breather!
You have put down of your own money, perhaps 20 000 GBP, perhaps much more, on this property. In fact, including the money you have borrowed, it most likely is worth 100 000 GBP +.
If you had a Ferrari worth this much would you lend it to just anyone to drive or would you be pretty particular about who you let take the steering wheel? You can bet that you would be incredibly particular about who took your car for a spin and it is the same about how you should proceed with your property. Of course, the amount of damage that can be done to a Ferrari in a short time as compared to a property is a little bit more but the value is the same. It really doesn’t take long to damage a flat way beyond the damage deposit.
As described in our recent article on the Czech landlord and tenant laws (to read this article please go to the following URL: http://www.czechpoint101.com/newsletter/?p=123), using a direct contract puts an owner at a real disadvantage in case of dealing with non-paying or destructive tenants. Because of this and even with CZECH POINT 101’s unique contract system, it is incredibly critical to have a very good system of sourcing quality tenants.
The fundamental step to this is collecting and checking, yes really phoning, the references. Just trusting your gut feelings has gotten many people into problems before. Your guts do play a part but don’t play a Russian roulette game with your investment. In some countries, relying only on your guts can get you into legal problems as you can be sued for discrimination. I have never heard of a case like this in Czech Republic but it is really important to have a system for screening tenants.
Let me warn you first that screening of tenants is not common in Czech Republic. Most tenants are used to the process where the only screening done is if you put the money on the table. So it is important to explain to them why you need to do this. As a company, we have maybe 1 out of 50 who walk away because of it but probably we wouldn’t have wanted them as renters anyway. A good renter has nothing to hide.
First, you should have a rental application which the prospective tenant needs to fill in to its entirety. The good tenants are the ones who can fill it in on the spot. The bad ones will start going through and you will hear excuse after excuse about why you can’t contact their boss because they haven’t actually signed the contract yet, how they’ve lived at home before this so there is no rental reference and oh, sorry but they don’t have any backup references because their mobile got stolen and they lost all the numbers. Good-bye!
You should have the policy – no references, no rental.
When checking references it is also important to be clever in the way you do it so that you can be confident that you are really speaking with their previous landlord and not a friend posing as such.
One very good method I learned for doing this is that when you first phone do not state the exact reason for your call. Start off by saying that they were listed as a reference for so-and-so (no clue as to whether it is for rental or potential employer, etc.) and then ask the first question: ‘Can you please tell me how you got to know them’ or ‘Can you please describe your relationship with this individual’. With no clue, the phony previous landlord will have a hard time knowing what to answer.
Interestingly, when I used the above approach checking references recently for one prospective tenant, the ‘former landlord’ said that the prospective tenant was his girlfriend. The method works and you should use it.
When you do contact a valid former landlord, there are many questions which are good to ask such as how long they have lived in their property, whether they paid on time, etc. but a critical one which will tell all is the question of whether they would rent to these tenants again if they had the opportunity.
Sourcing good tenants in Czech Republic takes time, but the careful landlord will be paid back for these efforts many times over.
This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Nathan Brown or Czech Point 101 for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Czech Point 101 in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with written permission from Czech Point 101.
POSTED BY
ALAN FORSYTH ON FRI 27TH NOVEMBER AT 09:25 GMT
In the year 2008 Ostrava region saw the incredible property price increase of close to 30%. So far this year prices have either decreased slightly or stagnated. The developers for new flats have, in most cases, been keeping the same prices as during the peak but offering things like free kitchens or a 10% discount for the first 10 buyers. Purchases have not seen a recent increase in transaction activity which other centers like Brno and Prague saw.
However, on the good side, there is increasing demand for the renting of flats, so rents in many localities have gone up. One website which lists properties for rent, bezrealitky.cz, said that there was an increase of rents, on average, of about 8% from the beginning of this year in the region and demand for rental properties has increased by about 10%.
Ostrava is certainly a region with growing potential, for many reasons including progress on the highway between Ostrava and Prague. It promises better traffic access and will bring more opportunities to the area.
As well, car production factory Hyundai expects to employ around an additional 700 people in next few months and another 700 to the end of 2010. This does not include the additional jobs created by all the related businesses with this factory.
One of the regions of Ostrava, Frydek-Mistek, also saw the rapid increase of property prices in 2008. Market prices of flats and the rents have been positively affected by the fact that a lot of money has been invested into manufacturing in this region (including the above mentioned Hyundai factory and satellite companies) and the fact that the highway between Frydek-Mistek and Trinec (Cesky Tesin – Poland) was completed. However, the area became overheated and there has been an overall decrease in values in the area since the beginning of 2009. All indications are that this has stopped by the time of the writing of this article.
All of these developments over the last year or so in the Ostrava region have emphasized the importance of considering factors such as locality, type of dwelling and the overall quality of living when considering where to purchase.
This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Nathan Brown or Czech Point 101 for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Czech Point 101 in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with written permission from Czech Point 101.
POSTED BY
ALAN FORSYTH ON TUE 17TH NOVEMBER AT 09:19 GMT
High-level overview of article: The inflow of foreign direct investments (FDI) in the Czech Republic fell by about a half to Kc46.6bn in H1 this year, compared to Kc90bn a year ago, according to an analysis of the development of the domestic economy released by the Industry and Trade Ministry.
Our take: Investors are painting Czech Republic with the same paint brush as other CEE economies which are not performing as well. Next news item gives the view of an enlightened chap.
High-level overview of article: Foundations of the Czech economy are better than in most other countries in the region and its growth potential is higher than the EU average, European Monetary Affairs Commissioner Joaquin Almunia told journalists yesterday.
Our take: Yaaah! Someone who also thinks future is bright for Czech Republic and he can’t be called biased like we are. Unless he also is receiving briefcases of money from Czech governments new stimulus package….
High-level overview of article: There is a new reality on the Czech property market – the market rent is substantially less than the mortgage payment. This applies to all flats in big cities.
Our take: This is great for those owners with existing rental properties. Rents and rental demand is increasing!
Nathan Brown (Czech Point 101).
POSTED BY
ALAN FORSYTH ON MON 16TH NOVEMBER AT 11:14 GMT
Overall the markets seem to have stabilized and there was some pent-up demand being satisfied in 3Q 2009. Statistics have shown a price increase of 0.5% for this period. Prices outside of Prague increased by 2.1% while Prague itself decreased by 1.4%. Q1 and Q2 of this year saw a combined fall in prices of around 7% over all of Czech Republic, according to statistics.
Not too bad considering the banks’ current mortgage lending and the recession thinking which plagued everyone.
Below are some details from individual areas:
Brno: Prices have fallen over Q1 and Q2 of this year similar to the figures for all of Czech Republic. However, in the last month we have sold three flats only 8% under their peak price in late 2007. All three were reserved within days of being listed. If the owner had not been keen to move them quickly we feel we could have sold them at only 5% under peak prices. The client was using our Gold PoA Sale Service.
The prices the flats were sold for and the proven rental on them gave them a rental yield of 7.3%. Up considerably from the 5% which late 2007 saw the flats being sold for.
Prague: Prices have moved down slower than other areas but seems to now still have the momentum as it saw the biggest continued decline in 3Q 2009.
Ostrava: Prices has fallen similar to Brno but it didn’t see the jump in 3Q that Brno saw. It might be a slow starter.
With some pent-up demand being seen in purchases now we feel that the absolute best purchasing window may have passed now. We don’t think buyer’s will have the upper hand as strongly as they did about two months ago.
However, we expect it to remain overall a buyer’s market and prices to remain stable at least until spring 2010. If you have been holding off on a purchase of a rental property, this is a great time to get yields of 7 to 8%. With mortgage rates at around 5% and 80% LTV it is a good time for strong buyers to pick up some cash flow positive properties!
Nathan Brown
POSTED BY
ALAN FORSYTH ON THU 29TH OCTOBER AT 15:14 GMT
6 Keys to Retaining Quality Tenants in Czech Republic
By Nathan Brown
Tenants are the life blood of an investment property and in order to have the best return over the long run for the property, it is essential to attract and retain top quality tenants. Reducing vacant periods is critical to cash flow.
In this article we are going to assume that you already have sourced a quality tenant. This is the first and most important step of being successful with an investment property. Ninety percent of the success of your property is in this initial step.
The best piece of advice I have ever received on this subject of retaining top quality tenants is to view each of them as customers.
It is vital in your relationship with your tenants to be friendly with them. Don’t change once they’ve signed your contract and are legally bound to the property.
However, there is a fine balance between being friendly and being friends. Being friends means consumption of your time, phone calls in the evening about trifling matters and it can make it difficult to deal firmly with nonnegotiable matters such as the timely paying of rent.
Here are six keys to causing a tenant to turn into your best customer:
1. Always give plenty of warning before having to enter the flat, whether for maintenance, inspection or otherwise. Contracts in Czech Republic can have a notice period from 1 day to 3 days prior to entrance but don’t insist on the letter of the contract if the tenant is not agreeable to a certain day. Be flexible and reasonable.
2. Change locks if requested and even suggest it in certain situations. If a tenant loses their keys or their property is broken into, change the locks for them. Even if they don’t request it you can suggest that they do so for their own safety. They will appreciate the thoughtfulness.
3. Have portable electric heaters available in the case of emergencies. Sometimes construction or unforeseen circumstances (like the Ukraine blocking natural gas flow!) will cause the property not to be heated properly. This can be particularly true in new construction or reconstructions when the tenants are the first ones to occupy and glitches have not been worked out.
4. Remember their names! Nothing shows personal interest more than being able to remember the names of your tenants if you see them around the building or town. Also, any other specific details about their life such as where they work or family member’s names. Warning – if the tenant is Czech, sometimes additional questions may be viewed as intrusive rather than personal interest.
5. Listen to your tenants with both ears open and your mouth shut. Practise good listening by looking them straight in the eye, asking additional questions and not jumping in to offer a quick answer.
6. Redecorate before your best tenant moves out. It is often common practise to repaint or decorate an apartment after the tenants have left. However, if you notice that there are things which need attention while the tenant is there, you can be guaranteed that the tenants notices them also and might be looking for an apartment in better condition. Offer to paint the flat or make necessary improvements before the tenant gives you their notice.
In the buy to let business the easiest part is to manage the property itself. Much more difficult is to manage people.
Become skilled at managing the people in your property and you will find the key to successful buy-to-lets.
Nathan and his team are based in Brno, and can advise on finance, management, fit outs, and resales in the whole of the Czech Republic – he has successfully managed the completion and rental of over 200 apartments for us previously. If you have a question relating to investing in the Czech Republic – you can email Nathan directly at Nathan@czechpoint101.com or email Daniel at investments@propertysecrets.net who can help with any queries.
POSTED BY
ALAN FORSYTH ON TUE 27TH OCTOBER AT 19:27 GMT
Nathan has been providing honest, reliable assistance to foreign investors in the Czech Republic since 2003 and is owner and Managing Director of the popular Property Management & Real Estate service CzechPoint101.
With branches in Prague, Brno, Ostrava and Pardubice, Nathan’s ever growing team offer a complete service with knowledge of the local market inside & out.
Have you ever tried to get a loan to invest in the stock market? Or currencies? It is possible but extremely difficult.
A good thing (and also be a bad thing) about property investment is that it is not extremely liquid. The barrier to retrieving your money from the investment is quite high. This is actually a good thing because it forces investors to spend some time thinking about whether they should really sell or not.
