CZECH REPUBLIC RESIDENTIAL REAL ESTATE MARKET 2016 REVIEW AND OVERVIEW OF MAJOR TRENDS IN 2017

Last year practically whole Czech Republic experienced significant price growth of all real estate property types. In fact, prices of residential apartments in 2016 exceeded their previous historical maximums from years 2007 and 2008 before financial crisis took hold. As we reported in other article, historical limit of new apartment’s average price in Prague has been exceeded in 2016. However this high tempo in growth of residential apartments` prices is expected to slow down in 2017. That is to say, rapid growth of Czech real estate prices in year 2016 was rather anomalous – many factors that influence real estate prices accumulated last year and eventually created environment for remarkable growth of Czech real estate prices.

Page Contents

I. REVIEW OF CZECH RESIDENTIAL REAL ESTATE MARKET IN 2016

Here we summarize dominant factors which influenced historical growth of apartment prices in Czech Republic in 2016:

Release of postponed demand from previous years for all type of residential apartments. From 2010 to 2013 Czech real estate market was taking a recovery time after the worst years of financial crisis in Europe. During this period demand for apartments was continually decreasing till it reached its historical minimums. Due to big uncertainty concerning future development of economics, Czech people waited with their real estate transactions. Czech real estate market fully restored in 2015, especially due to very low interest rates and optimistic forecasts about future development of Czech economy. And postponed demand from previous years fully released last year. According to statistics Czech people do not like living in leased apartments. Therefore many Czech people used the advantage of low mortgage interest rates in 2015 and 2016 and purchased apartments into their private ownerships.
Rising popularity of investments in residential real estate properties among Czech people. Investment purchases of residential real estate are becoming more and more popular choice of conservative investment among Czech people who possess surplus of financial resources. “Ratio of apartments bought for investment purposes currently reaches up to 30% in some of our residential project,” said M. Soural, CEO of real estate developing enterprise Trigema which is active mainly in Prague. Other Prague real estate enterprises alleged to have similar statistics and also estimated that one third of their customers would buy apartment for investment in 2016.
Interest rates remained low in 2016. As we predicted in the forecast of trends in residential real estate in the Czech Republic in 2016 interest rates remained low whole year. Low mortgage interest rates created good opportunities for higher yields from rental incomes. Usual gross yield form investment apartment rentals in Czech Republic is from 3% to 4%. However in many cases investors can reach 5%.
Small supply of new apartments in Prague. As major Prague real estate enterprises predicted, the supply of new apartments in Prague in 2016 could not satisfy existing demand. That affected price increase of all residential apartment types available for sale.
Change of real estate tax law. In November 2016 finally entered into force long-awaited and discussed amendment to the Czech tax law. Amended law changes subject of real estate transfer tax. According to the new law, this tax shall now be reimbursed by the buyer and not, as previously, by the seller. Tax rate (4% of the property value) remained the same. Even though seller has no longer duty to pay real estate transfer tax, in many cases prices of real estate being offered on real estate portals did not reflect this change. In other words, many apartment owners did not decrease price of real estate they offer for sale by 4%.

II. 8 MAJOR TRENDS THAT WILL DRIVE CZECH RESIDENTIAL REAL ESTATE MARKET IN 2017

1. Tightening of lending rules for Czech mortgage banks will slow down demand for apartments

To avoid overheating of Czech real estate market Czech National Bank (CNB) is tightening its regulations with respect to granting mortgages. CNB continually reduces maximum loan to value (LTV) of mortgages that Czech banks can provide to their clients (LTV ratio is the size of the loan against the assessed value of the property). CNB especially tries to reduce number of mortgages with LTV between 80 to 90% which are very frequently granted mortgages in the Czech market. Currently not enforceable recommendations of CNB for Czech banks are expected to become legally binding in the mid of 2017.

CNB´s regulations will strongly affect demand for apartments this year. In majority of cases average mortgage applicant will have to cover at least 24% of real estate purchase price from his/her own funds (20% from property value and 4% real estate transfer tax). Average Czech has savings in amount around 120.000 Czech korunas. However average prices of apartments with disposition 2kk or 3kk oscillate between 2 to 3 million Czech korunas in Czech Republic. Therefore CNB´s regulations will affect majority of potential apartment buyers in Czech Republic who often will not be able to reach on mortgages.

2. New Czech Act on Consumer Loans will influence Czech mortgage market

This new law entered into force in the end of last year and significantly changed the way how mortgage loans are provided in Czech Republic. It strengthens consumers` rights concerning early mortgage repayment and tightens banks` monitoring procedures related to creditworthiness of clients. This changes in legal order will lead to increase of banks` administration and higher unpredictability of their financial losses related to early mortgage repayments. Therefore new Czech Act on Consumer Loans is expected to be one of causes which speed the growth of mortgage interest rates in 2017.

3. The most attractive locations for purchasing apartment in Prague

Apart from purchase price also good location plays crucially important role when deciding about purchasing real estate in Prague. In 2016 areas with the highest demand for apartments were districts Prague 9, 5 and 10. Favourite area is also currently very fast developing district Prague 8.

4. Czech real estate enterprise firms began to create special offers for investors

To react to growing popularity of investments in residential real estate some Czech real estate enterprises started offering new apartments that represent tailor-made solution for investors. This solution includes purchase of apartment suitable for investment, assistance with financing and later on finding tenant, renting apartment and providing property management.

5. Luxurious properties are growing in popularity in Prague

It´s been longer time now since demand for luxury properties in Prague overreached supply. According to research of real estate agency Lexxus Norton there is especially lack of small luxurious apartments (up to 65 sq. m. and 6,5 mil. Czech korunas) that include parking place and nice view over the city on the market. Clients are very often seeking for luxurious apartments in Prague 1 where apartment prices stably grow by 4% annually. In following years whole segment of luxurious apartments in Prague is expected to grow.בזמן האחרון הדרישה לנכסי יוקרה בפראג עולה על ההיצע. לפי מחקר של חברת ה

6. Fast population growth in Prague supports claims of real estate developers to speedup housing development in the city

Whilst outside the Prague number of population grew only by 2,4% last year, in Czech capital city it was almost by 10%. And in Prague`s outskirts population grew even faster – 19% to 24%. It is important to emphasize that this statistics reflects only “official data”. It is estimated that completely outside of statistics are tens of thousands of people who live and work in Prague without having registered their permanent residence there. According to analyses of the new “Urban Development Concept. Prague 2030” population of Prague should increase of 160.000 residents in following 14 years. Therefore the strategy for urban development in Prague to 2030 states that it is necessary to build 5.500 new apartments every year. However Prague municipality currently faces huge critics from Prague major real estate enterprises which complain on its bad politics regarding building permission approval procedures. They allege that to sustain city´s growth and to avoid rapid growth of new apartments` prices in the future, municipality must quickly shorten length of building permission procedures (see the next point).

7. Slow build-up of new apartments already affects their prices in Prague

As we reported before, in 2016 many Czech real estate enterprises forecasted that slow build-up of new apartments in Prague will soon affect prices of all types of residential apartments in Prague. In 2016 real estate enterprises sold together approximately 6.500 new apartments. However in the same period they began with construction of only 4.000 apartments. Since demand for new apartments does not ease off, this will affect prices of new apartments which will go rapidly up. Czech Republic belongs to countries with longest building permission approval procedure. Average length of building permission approval procedure in Czech Republic is 247 days. Due to delays with granting building permissions Czech real estate enterprises are not able to build as many new apartment houses as existing demand could bear. That is creating a very strong pressure to raise the prices of all apartments in Prague. According to Evžen Korec, CEO of the EKOSPOL, leading real estate enterprise firm in Prague, some real estate enterprises already abuse this situation and disproportionately increase prices of apartments they sell.

8. Ministry of Regional Development in Czech Republic completed draft of law which will regulate activities of real estate agents

As we analysed on other place, one of the main defects of the Czech real estate system is that current legal order allows virtually any adult to become a real estate agent. In our article The four most expensive mistakes of foreign investors in the Czech Republic we explained that currently there is no required knowledge, no training and no defined rules regulating this profession. Unprofessional real estate agents in many cases either deliberately or unknowingly complicate (or blown on) real estate transactions of big value.

This situation will probably improve in second half of 2017, when new legislation regulating real estate brokerage services should finally enter into force. Ministry of Regional Development in Czech Republic already completed draft of the Act on Real Estate Brokerage Services. Draft of the act introduces many changes for activities of real estate agents. Person in order to become real estate agent should meet certain educational standards and have liability insurance. Only then can attain permission from public authorities to perform real estate brokerage services.

III. SUMMARY: REAL ESTATE INVESTING IN CZECH REPUBLIC IN 2017

According to key forecasts concerning Czech residential real estate market in 2017 we should expect growth of interest rates and certain decrease of demand for residential apartments. The question that remains is – to what extent

Tightening of lending rules for mortgages will cause growth of interest rates and less reachable mortgages. This will consequently lead to decrease of demand for apartments. However it is predicted that decrease of demand in 2017 will not be any dramatic. J. Macek, analyst of Swiss Life Select financial group, stated that in the near future we cannot expect dramatic growth of interest rates in Europe, since European economics are simply still not ready for it. Therefore rather than the bursting of real estate bubble we can expect gradual cooling of demand in Czech Republic. Also Czech National Bank`s regulations reducing LTV of mortgages will enter into force not sooner than in the mid of 2017.

Some experts even consider current preventive measures of Czech National Bank as partly curative for Czech real estate market. Although they will slow down demand for apartments for a while, on the other hand they will help real estate enterprises to catch up with build-up of new apartments that has been significantly delayed due to dragging administrative procedures.

To sum up forecasts for real estate market in 2017 brings good news for solvent investors. Firstly, growth of interest rates and cooling of demand should slow the growth or even lead to a stagnation of real estate prices in 2017. Secondly, even though demand for apartments will slow down in 2017 we can expect its continuous growth in a long term in Prague since its population grows very fast every year.

That is why Czech real estate will certainly remain a good investment opportunity for rational investors also in 2017.