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  • The Prague real estate market
  • Developer projects

An increase in the influence of domestic investors, supported by sufficient capital and trust in a stable economy, is creating good conditions for the further development of the Czech real estate market. Growth in property prices is continuing, but the Czech Republic is not in danger of suffering a price bubble.

The Trend Report 2018 is a unique publication that maps the Czech property market. The Association for Development of the Property Market (ADPM) has been publishing it since 2002, and it has included comprehensive research that summarises the opinions of experts from all parts of the property market since 2005. Research respondents and the authors of the various chapters of the Trend Report are leading figures on the Czech property market. They are leading representatives of development and investment companies, law and advisory firms, banks and other organisations active on the market, including estate agencies, which include LEXXUS.

Thanks to the authors’ wide knowledge and deep interest in the real estate market, the resulting Trend Report 2018 is a comprehensive document that guarantees that this sixteenth edition of the publication summarises events in this area objectively and with added value, which was provided by experts from various areas of the real estate market. It was presented at a meeting of experts under the auspices of the Association for Development of the Property Market in Prague, on 26 April 2018.

Prosperity—Common Denominator for All Chapters in This Year’s Trend Report

The economy is doing well, the real estate market is experiencing a long boom. The January forecast of the Czech National Bank assumes that growth in the Czech economy will slow down compared to last year, but this year and next year it will exceed 3%. Despite favourable economic conditions, experts are drawing attention to the lack of affordable housing, in particular in Prague. Is there therefore a risk of a real estate bubble in the Czech Republic? Experts reject this claim.

“You could talk about a real estate bubble in the event prices exceed a balanced level. When the bubble bursts, prices will fall. But this isn’t happening here, it’s a natural development, where we are getting closer to developed countries also in other areas, property is no exception,” said Zdeněk Tůma, former governor of the Czech National Bank. “On the one hand, not many new apartments are being built. On the other hand, people’s salaries are growing, they can be certain that in a year’s time they won’t lose their job,” said the former governor.

The increase in the price of residential properties predicted by last year’s Trend Report came about. It warns that owning your own home, the same as living in rented accommodation, is becoming unaffordable for lower income groups of the population, primarily for young people. A break also occurred in the area of residential property. 2017 was the first time in a long time when less apartments were sold in the capital than in the previous year and the first time ever that it was less than in the regions. The main reason was slow approvals for new projects by the authorities and the resulting increase in the average price of apartments.

“2018 will be similar to the previous year. In the area of residential properties we can expect further slowing of price increases, which is caused primarily by the lack of new apartments. There may be second-hand properties on offer, mostly older apartments in original developments, but they often require significant investments in modernisation. There haven’t been many affordable apartments for a long time and supply is continuing to contract, which is due to the generally good condition of the economy and specifically an increase in salaries and the interest Czechs have in owning their own home,” added Zdenka Klapalová, president of the Association for Development of the Property Market.

Local Investors on the Rise

The Czech property market is attracting not only foreign, but also local investors. The total volume of investment in the Czech Republic reached approx. EUR 3.56 bn in 2017, which represents a slight 3% fall in comparison with 2016. Private investors are a more and more important part not only of the Czech, but also of the global market in properties. In 2017 in the Czech Republic private investors participated in 20 transactions whose total amount was EUR 53.5 m. This represents a smaller percentage share of the market than the aforementioned global average, but the importance of private investors is continuing to grow. They are focusing on bigger and bigger transactions and therefore competing with institutional investors in properties that are at the lower limit from the transaction size viewpoint for institutions.

“From the viewpoint of revenue trends, the current situation is uncertain. Revenues are low at the current time, but there is lively interest in quality properties and there aren’t enough products to fully cover demand. It is therefore impossible to rule out the idea that revenues could fall slightly even more,” said Pavel Kliment, a partner in KPMG Česká republika responsible for the property sector.

Approval Processes That Take Too Long

With regard to the very long approval processes, developers are not able to flexibly and appropriately respond to current trends and the related demand. It is positive the representatives of the capital city of Prague are continuing a dialogue with Association for Development of the Property Market, are expressing an active interest in the situation concerning the city’s development and understand the necessity of co-operation between the private and public sector.

“All the involved parties are well aware that the complicated situation in Prague needs to be dealt with. The city can significantly support the construction of new apartments by setting suitable conditions, i.e. primarily by accelerating approval proceedings. This primarily concerns large development areas,” added Pavel Kliment.

“Funds have been very cheap and affordable for a long time, which encourages interest in investing in property. In addition, specifically in Prague there is a lack of suitable investment opportunities. The capital is attractive for investors for many reasons—rents have been stable for a long time and purchasing power is higher than in other parts of the country,” said Zdenka Klapalová, president of the ADPM.

In addition to the slow process of permitting buildings, respondents mentioned as the second negative factor the lack of a Metropolitan Land-use Plan. The generally unclear and inflexible legislative situation concerning preparations and realisation of construction projects is the biggest problem for the Czech property market. Experts often say that the inflexibility makes it impossible to respond to long-term changes.

Location and Quality Will Be Decisive

Experts expect smooth growth in rent, in all segments in the property market. It will be most evident for housing in connection with trends in household income, the labour market and the demographic situation. Rents could be increased by a proposal by the outgoing government from the end of February to increase taxes for natural persons on apartment rental by up to 60%. Such landlords account for most of those on the market. Any compensation by reducing payments of social and health insurance is not clear and will be effective only for half of them. Together with the impossibility of deducting input VAT this burdens landlords and pushes rents higher. Experts also agree that the decisive factors will again be primarily a property’s location and quality.

Slight growth in the investment market in commercial properties will, in the future, be driven primarily by a stable situation on the financial market. Nevertheless, experts agree that quality properties are taken and, the same as in the case of residential properties, demand exceeds supply.

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