This comprehensive market survey was prepared for those foreign investors who are considering investing their capital in one of the most attractive European real estate markets – the Czech Republic. This study is based on a number of highly credible and publicly accessible market surveys and analyses, as well as on our professional experience. It aims to identify driving trends in the Czech residential real estate market in 2018 and in the upcoming years. This study primarily deals with the Prague real estate market in which 65 % of all apartment transactions in the Czech Republic occur. Accordingly, this is the predominant market of the Czech Republic, followed by Brno (centre of the Moravia region) with a 10% share in apartment transactions. Note: the information that follows refers to the Prague real estate market, unless explicitly stated otherwise.

Short look back at 2017 residential real estate market

The rapid rise in apartment prices over the previous 2 years was driven by many unique factors coming together at the same time. To name the most important: release of postponed demand from the global financial crisis years, very cheap mortgages, transfer of the obligation to pay the real estate acquisition tax to the buyer, a new Czech law on Consumer Loans and stricter regulation of mortgages by Czech National Bank (CNB). Many people wanted to finalize their real estate transactions before all of these changes began to apply.

Overview of 2018: small cool down after 2 hot years 

The majority of real estate market analysts and realtors expect a cool down of the real estate market in 2018 after previous two hot years. Prices of residential apartments in Prague VIP locations should either grow slowly (predictions oscillate between 5-10% year-to year increase) or remain stagnant, depending primarily on real estate location. Some realtors even expect a small decline of prices in the category of second hand apartments located outside of top Prague locations, which are primarily in demand by the Czech middle and lower class. 

The mortgage market this year is shaped by more expensive mortgages and dropping demand for them. Mortgages are becoming more expensive and less affordable for the Czech middle class that can have considerable impact on the real estate market in following years. However, right now the Czech economy is in outstanding condition and is expected to continue growing steadily. Unemployment is very low and salaries are rising. Due to the favourable economic conditions, people are still strongly motivated to purchase real estate even though mortgage regulations are tightening (read further). 

These, and other trends described below, should keep the real estate market in 2018 very similar to last year market. It is expected that there will be continuous high demand for real estate in Prague and other Czech towns from investors.

Detailed overview of trends in Czech residential real estate market in 2018 from investor`s point of view

Demographics: growth of domestic population and immigration

The population of the Czech Republic continues to rise. Year 2016 was even considered to be a baby boom year. In any event, regardless of growth driven by domestic birth rates, the population is steadily growing because of immigration. According to much cited statistics of Prague municipality, Prague expects until 2030 an additional 150 thousand new inhabitants. This number is based on official statistics. Unofficial estimations of immigration are higher. Needless to say, somebody has to satisfy this rapidly growing need for housing, either by building new apartments or offering rental properties. Construction of new apartments is proceeding very slowly in Prague and Brno as we reported in previous market forecasts. Those in the know regarding real estate trends speak of ongoing tension between developers and local and central governments regarding the constant delays in easing onerous regulations and administrative obstacles that delay the approval procedures of new projects. Apart from long administrative procedures, the municipalities of two biggest Czech real estate markets, Prague and Brno, are also continue struggling with drafting their future urban development plans. As relevant building legislation changes very slowly (read further) the supply of new apartments in Prague and Brno will continue to decline, as it cannot keep pace with growing demand. This will tend to push the prices of apartments` further up. 

Mortgages: interest rates will slowly increase

Mortgages are becoming more expensive and less affordable to the Czech middle class. Why? First, because the period of historically low interest rates is certainly over. From 1.77% in December 2016, interest continued to rise in 2017 and exceeded 2%. Interest rates have continued to rise in 2018 and are expected to exceed 2.5 % in this year. According to mortgage brokers, interest rates might even reach 3% this year, in line with the Czech national Bank (CNB) intentions. This will influence the affordability of higher mortgages, especially for the Czech middle class people.

Calculation of mortgages future development (in Czech crowns)

Source: www.central-group.cz

A restrictive mortgage policy of the Czech National Bank (read more about CNB`s restrictive rules on commercial banks regarding offering higher than 80% LTV mortgages) continues. Furthermore, since January 2018 commercial banks have begun to obey CNB`s maximum 80% LTV rule very carefully. Generally, they try to restrict mortgage applicants who try to arrange parallel loan financing to their mortgages in order to secure financing for more than 80 % of property value.

This development certainly does not harm either domestic or foreign investors. Interests on Czech bank accounts are still close to zero. This will motivate domestic investors to search for stable alternative to saving accounts to deposit their savings in. Moreover, although interest rates are growing, even a 3 % rate is still cheap, affordable and attractive for foreign investors, if we take into account returns of investment achievable with taking mortgages with such an interest rate.

Apartment affordability: growth of apartments` prices and rent prices growth

The number of middle class people who can afford to buy a new apartment in Prague will continue to decrease. The main reason for that is dramatic growth of new apartments` prices compared to 2 years ago, together with lower mortgage affordability. According to statistics, the affordability of apartments measured by the purchasing power of Czech people is the worst in country`s history. It takes 11 years for the average Czech person to save enough money to purchase a typical70 square meters flat. This statistics of one of leading public real estate portals realitymix.cz displays the rising price of a 60 meter flat in Prague over time. 

Source: realitymix.centrum.cz

Decrease of apartment affordability among the middle class pushes rental prices up. Last year they grew even faster than the purchase prices of new apartments – in many locations by an average 25% annual increase. That development was again positive for investors because it moderated the risk of their investments. Statistics from different developers differ, but we can assume that over one third of all residential apartments in Prague are being purchased for investment purpose. 

Development of salaries and the Czech economy

Czech economics is in outstanding condition. It has been growing continually for 5 years now. Salaries are growing in all sectors and unemployment is low (and practically non-existent in Prague).  According to many economic analysts, the Czech economy is set to continue growing at its current rate for the foreseeable future. Its future condition remains, of course, highly dependent on global markets, but so far everybody is optimistic. Currently, the main problem businesses face is not a lack of work, but lack of a work force. This applies to both blue and white colour work.

Very optimistic forecasts about the future development of the Czech economy and greater demand for new labour force led to significant growth of salaries in 2017. This trend continues in 2018. Inflation is expected to reach 2.5% this year. If we take into account inflation, real salaries should grow by 4% to 5% this year. The unemployment rate dropped in 2017 under 3% and, according to the prognosis of the CNBm should fall beneath 2.6% this year. This creates a unique opportunity for all employees to ask for raises and employers must be responsive if they wish to retain their work force. A combination of rising salaries, inflation and poor appreciation of savings on bank accounts, as aforementioned will lead to rising investment in real estate.

New regulation: Airbnb, Building Act and real estate services

The Airbnb phenomenon radically disrupted the real estate market in Prague, especially in the Prague 1 neighbourhood. Around 11 thousands Prague flats are now registered on the Airbnb website. So far, Czech legislation bodies have not put much efforts to regulate shared economy services. Currently these services operate in a sort of “grey” zone. This means that they are not illegal, but there are many controversies in interpretation of the law, and even disagreements by different authorities on how the existing legislation should be interpreted.  This is expected to change - and soon. Czech governmental bodies in cooperation with the Prague municipality are now preparing new legislation that should define new rules for modern shared economy services as Airbnb or transportation platforms as Uber.

In January, the much anticipated new amendment of the Building Act entered into force. The Ministry of Regional Development, initiated new legislation that promised to solve, through this amendment, the most crucial legislative problems which delayed new residential development in Prague and Brno. New amendment merges merged what have until now been separate administrative procedures (environmental impact, urban planning, and building permit procedure) into a single procedure to shorten the length of the integrated approval process. Although developers welcome this new law and see it as a step in the right direction, at the same time they don`t consider it to be a long-term solution. The majority of developers are sceptical about its practical impact. The new law has not shortened the decision-making periods of public bodies. In addition, there are still approximately 40 other minor laws that regulate particular parts of the building permit process (fire safety, public health, water management etc.). Developers assume that unless a completely unified new Building Act is adopted, and all approval competencies merged under a single ministry, nothing will really change. They also assume that the new law will not increase the availability or rate of construction of new apartments. Therefore, the supply of new apartments in Prague and Brno in the upcoming years will not meet the demands of the growing population. This will keep prices of all apartments high.

As we wrote in the past, the Czech Republic has been waiting for new regulations of real estate services for far too long. Due to elections and changes in the central government, the new law will most probably not leave the table of Ministry of Regional Development. How much longer will it take?

Major trends on new apartments market in Pragu

The distribution of new apartments` prices has changed significantly over the previous years. Apartments priced at under 45 thousands CZK per square meter have basically disappeared from the market. Price per square meter of new apartment in Prague have risen, on the average from 60 to 90 thousands CZK in the past 3 years. Furthermore, it is common for apartments to be purchased for these prices by investors during very first phase of new developer projects – pre sale – when they exist ‘only on paper’. Investors will later resell those flats with profit margins that will influence the statistics of new apartment prices for both the purchase year and the following year.

The graph below represents evolution the average prices of new apartment in the period of 2013 – 2017. This calculation does not include extreme cases, that is the 5% most expensive apartments and the 5% least expensive apartments. The Graph indicates that the average price of new apartment has been growing rapidly since the second half of 2015. Since then it has grown by 50%.  In the end of 2017 it reached 81 526 CZK incl. VAT, equivalent to an annual10% rise in prices since 2013. The most dramatic growth was in the highly popular neighbourhoods of Prague 1,2 and 6.

Source: www.trigema.cz

According to two Studies of developer companies published by consulting companies KPMG and CEEC Research (2017), the demand for residential real estate will once again exceed the supply in whole Czech Republic in 2018. The Prague market of new residential apartments is currently mostly driven by the absence of new building permits and quality lands for construction. The most attractive locations suitable for new residential development from a developers` perspective are Prague 5, 9 and 10. Developers will continue to focus on smaller apartments with 2+kk layout with very good amenities in surrounding of apartment building. More than three quarters of asked developers are planning to increase prices of new apartments in Prague by 4% in 2018. However, the number of new apartments released in the Prague market should only increase very mildly (0.6% year-to year increase).

The majority of real estate developers estimate that the prices of new apartments will continue growing over the next 2 years, however growth will not be as dramatic as it has been over the previous 2 years. There are couple of reasons for this. Firstly, housing affordability strongly depends on salaries and their growth – although stable – currently does not reflect price growth in new apartments market. Indeed, there few Czech middle class people who can effort to buy a new apartment at 90.000 CZK per square meter, which was the common price of new apartment in 2017. One example above all: one of the major Czech real estate developers – company Central Group – in its press release displayed a calculation according to which potential buyers can purchase in 2018 in Prague a small studio for the same price for which they could have purchased a 2+kk apartment two years ago.

Regional trends

According to the portal cenovamapa.org which provides the macro data of the Czech real estate, real transaction prices per square meter in 2017 for all flats – old and new – were 65.000 CZK in Prague (to complete a picture, average offer price of apartment in Prague on real estate portals was 73 526 Kč which is approximately 10% annual increase), 50.000 CZK in Brno region, 35.000 CZK in Pilsen region and 29.000 CZK in Liberec region.

Pilsen has become third strongest Czech region in number of new apartments offered for sale. The average price offered for new apartments in Pilsen is currently 49.000 CZK which is 1000 CZK above the national average. The average sale price of a flat in Pilsen is 2.5 million CZK. Considering the dramatic rise of apartment prices in Prague, the return on investments for apartment rental properties in Pilsen are in many cases more favourable. Therefore, many experienced realtors prefer real estate investments in Pilsen over Prague.

New apartment prices have also been rising in other county towns in the Czech Republic,  especially in Brno and Olomouc. In Brno, the situation in regards to poor approval procedures of new residential development is very similar to Prague. Realtors expect 7% price growth of new apartment prices in 2018 there. Continuous dropping of new apartments supply in Prague and Brno also influences the prices of second hand apartments.

Executive summary for foreign investors

The Majority of experts involved in real estate, and realtors do not perceive rapid growth of apartment prices in Czech Republic as a bubble. Quite the reverse, they claim that growth is based on very real factors – more people are coming to live and work in Prague or Brno (and other towns) as new construction stagnates, preventing supply from keeping up with demand. Lower apartment affordability will force more and more locals to either postpone their real estate purchases or choose to purchase residential apartments outside of Prague (which is already a big trend and many developers are building and purchasing lands in Prague` s surroundings for new residential projects).

Changes in the mortgage market still do not have much effect on foreign investors. They are not seeking a 100% LTV in any event. Moreover, although interest rates grow, they are still relatively low. In other words, mortgages are still cheap and attractive for foreign investors. According to the Studies of developer companies published by consulting companies KPMG and CEEC Research (2017) every fifth apartment (23%) in Prague is currently being purchased by foreigner. With respect to demographics and affordable mortgages on one side versus rise of rental prices in 2017, investment purchases of real estate in Prague and other Czech towns (Brno, Olomouc, Pilsen) will bring every satisfactory returns of investment.

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