Residential Real Estate News
From the Q4 of 2009 until the end of the Q1 of 2010 the prices within the residential segment have been affected by the economic crisis. In Prague alone the price of new housing dropped by between 20-25%, panel houses by 35% and family houses by 15%. In global terms this does not seem like a significant drop in comparison to lets say Ireland or England whereby the market has completely if not totally collapsed, but what we are seeing here in the Czech Republic and especially Prague is a price fixation. This in terms is not seen as a real problem for potential buyers but more of an opportunity within the next 2 years to buy property.
To explain the above we will have to start from the beginning. For many years Prague was a hot spot for Buy to let investors. With the Czech economy being one of the most blue chip economies within „New Europe“ the rate of Foreign Direct Investment increasing year on year from 1993 but most importantly the price of housing located around the city centre (Prague 1,2) and in the suburbs (Prague 6) being so low, investors were able to afford luxury apartments and housing for very cheap. The legislation of course did not help during these times but with many foreigners coming and living in Prague either for work reasons or to start up business‘ the systematic approach to buying property within Prague was quickly becoming easier.
From the point above and mainly from the year of 2000 when many developers were starting to complete new developments within and around Prague, the prices per sqm were increasing 2 fold quicker than the average household income. This obviously had a negative effect on the local market (to buy) and thus had a positive effect on the foreign investor because with new apartments, there were more buy to let opportunities due to the increase in locals demanding quality rentable and affordable apartments. When mortgages first became available foreign investors (roughly around the year 2002) the average interest rate was (3%) and with prices still affordable to the foreign investor rental yields within Prague were highly attractive at (6-7% gross). This continuity of supply for the buy to let market, with affordable prices and highly attractive interest rates could not be sustainable.
Since Q3 of 2008 when the credit crunch finally hit the shores of Europe the demand in real estate across the board was reduced dramatically. No longer was there an influx of foreign investors looking for property abroad, no longer were banks so easily willing to hand out mortgages, the days of the interest only mortgage disappeared and so did the buy to let investor.
The above scenarios are a couple of cases to which the prices for property (first and second hand properties) within Prague have now dropped to a level whereby the inflation aspect has been removed and developers are now having to accept realistic if not pessimistic prices for their apartments. The impact of the global financial crisis including the aspects briefly explained above have caused the balance of power within Prague’s residential market to shift decisively to that of the buyer.
While looking for apartments before and actually being able to negotiate prices with developers, many buyers would of expected a short supply of choice (in regards to different styles of apartments due to the fact that all developments were mainly new build) and when it came to negotiating prices there was little if any chance of expecting a deal from a once then „Dominant” developer. Now on the other hand, many buyers can expect a list of developers as well as apartments accommodating their needs. With recent figures indicating roughly 4.000 unsold apartments located in and around Prague and 30.000 new apartments to be developed over the course of the next 12 months, many more developers will be competing aggressively and thus benefitting the buyer in kind with special discounts or other non fiscal offers to attract buyers.
According to a leading Prague-based real estate company, as much as 70% of apartment sales within 2009 were discounted in some form or another. Buyer interest last year focused the smaller more inexpensive apartments, in particular 1+kk or 2+kk located on the upper floors which would enable good views and also south facing. It is maintained that circa 25% of all apartments sold in 2009 were for investment purposes. These figures above should carry into 2010 and lead the way to 2011.
Naturally due to the global economic crisis the market has become far more flexible for apartment buyers allowing them a broader choice of completed apartments as mentioned before. The situation will not last indefinitely. With the lack of recent development from the due difficulty to obtain financing for developers and mortgages for buyers means that the choice of completed product will narrow throughout 2010.
Thus, with the choice of apartments diminishing over a period of time due to the lack of new development completions investors both locally and internationally will see prices stabilize in the medium to long term due to supply and demand. What will also happen as explained by a representative of FINEP is that more emphasis will be placed on quality of the apartments internal fit out and finishings while not necessarily increasing the price of the apartment overall.
Although the economic crisis has hit global property negatively, the price decrease in the Czech Republic but essentially Prague has not been totally negative. Developers are becoming more price aggressive and are willing to negotiate to get a deal done and there is more initial choice on the market for the buyer. In regards to the investor whom invested in Prague before the 2008 crash, although prices have suffered, they have not fallen drastically like in other areas of Europe or the world. The price decrease will be overcome in a relatively short period of time due to the lack of overall projected development completion for the next 12 – 24 months.
Overall, the Czech Republic, while not as aggressive with the yields for buy to let investment is still a blue chip investment for any investor looking to buy an apartment to either rent or live for the next 5-10 years. With prices now more affordable than previously, and it now being a buyers market, the investor will be able to negotiate terms more favourably to them and thus get a better deal in general.
For more information, contact us to speak to one of our agents.
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