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.

Doom and gloom in the headlines

First of all, I should outline some of the articles which I am speaking about so you can get a sense of the ‘doom and gloom’. They are headlines such as Double dip recession threat looms over Czech Republic or Czech economy has good reasons to fear Greek default.

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%.

Czech Debt to GDP Ratio Best in Region

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 inflation

Czech Republic's Inflation Best in Region

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 unemployment

Czech Republic Unemployment Among Best in Region

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

Nathan Brown www.czechpoint101.com

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

If you have any questions or for more information you can contact Nathan direct at investments@propertysecrets.net

Nathan Brown talks to Pavel Parizek of the Czech Point Brno Office in discussing the latest movements in the local Real Estate Market.

If you have a property in Brno or elsewhere in the Czech Republic, you can contact nathan@czechpoint101.com for a valuation on rental or resale today.

Czech Point 101's Nathan Brown talks to Pavel Parizek on mortgaging & refinance in the Czech Republic.

For a free mortgage or refinancing assessment contact Czech Point's Mortgage Advisor Pavel via email: pavel@czechpoint101.com

Nathan Brown interviews Khuppi Gin Khan of Czech Points Prague Office for a latest Real Estate Overview of the city.

For a FREE rent or resale valuation email khuppi@czechpoint101.com

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.

Nathan Brown www.czechpoint101.com

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

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.

Nathan Brown www.czechpoint101.com

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.

See below for the second part of Nathan Brown's video blog on making the most of selling your property in the Czech Republic.

Stay tuned for Part Three - Coming Soon!

Unparalleled Protection

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.

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.

View this article on our blog to see how you could be saving up to 30 000 CZK per year by following 6 simple steps.