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.
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.
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.
* 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
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.
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.
Although most of it focused on the office and commercial real estate markets, some of it touched on the residential. One particularly interesting chart was this one showing the relationship in the UK over the last years between GDP growth and rental growth.
Could the same be said for Czech Republic?
It is hard to say if you also take into account all the commercial rental rates but I would say the general trends hold true. During 2006 and 2007 when GDP was taking off we saw also increase of rents in residential properties, although not to the same degree as actual GDP.
In 2009 when Czech GDP fell 4.1% we also saw residential rents fall over the next six to nine months into 2010.
It will be interesting to see if this trend also holds true over the next couple of years as GDP recovers.
*This chart shows the direct correlation between overall rental growth and the UK's GDP.
Available Housing per 1000 Inhabitants
The second chart which I found very interesting was this one which shows the available housing units per 1000 inhabitants. Czech Republic is the highest of the new members of the EU but still below most Western European countries.
*Czech Republic has the highest number of housing units per 1,000 inhabitants of the new EU members.
What are your thoughts? Do you think that these indicators point to the future rent and price trends in Czech real estate?
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
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.
