11th July 2013
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The Czech Republic: Emerging as a safe haven in the current climate
The Czech Republic remains one of the most attractive places for property investors, and during these uncertain economic times might prove to be a safe haven for anyone looking to put money into property at the moment.
It is unlikely that any European country will be immune from the effects of the worldwide economic slowdown, but of all the Central and Eastern European economies, the Czech Republic is probably better placed than most.
Having said that, it is true that the Czech Republic has been a significant beneficiary of FDI, and many large international firms have set up shop so this could have a negative impact on employment if and when the multi-nationals are forced into cost cutting and production cutting because of recession at home.
However, many companies were attracted to The Czech Republic in the first place by high skilled but relatively cheap labour, and that is unlikely to change anytime soon, even though average salaries are increasing about 5% year-on-year. Employment rates at below 5% suggest an economy with intrinsic strength.
A potential drawback was that inflation reached new highs in 2008, peaking at about 7% compared with the Czech National Bank target of 3%, but this was a problem common to many economies, and did not stop the Czech National Bank from slashing interest rates late in the year from 3.5% to 2.75%, giving the lowest rates, at that time, in the EU.
Obviously such a dramatic move indicated fears of a slowdown but politicians argued that monetary independence, the Czech Republic not yet having adopted the Euro, and a strong Koruna, had helped shield the Czech Republic from the worst of the 2008 financial crisis.
The low level of interest rates is obviously extremely beneficial for the local property market, which was already strong because of relatively low rates and an expanding mortgage market. Even so, in comparison to the more developed economies of Western Europe, the mortgage market has immense growth potential which, long term, will result in growth in property prices. Domestic demand for mortgages is increasing significantly, and loans are readily available for foreign investors. Mainly these are capital repayment loans as the equivalent of buy-to-let loans, and interest only loans, are not yet available. But LTV's are good and individuals can shop around and find loans of up to 85% LTV.
There is a strong domestic property market. This is largely explained by the large number of Panalaks, Soviet-era apartment buildings, which are of poor construction and many of which are now in need of extensive repair and are probably reaching the end of their useful lives. As a result many Czechs want to, and need to, move and upgrade. The result of this strong demand is the significant growth in the number of developments under construction. At the beginning of 2008 almost 200,000 new dwellings, mainly apartments, were under construction, many in Prague, and also in the principle secondary cities.
Until the relatively recent past there was also strong interest from foreign investors although an immediate effect of the credit crunch has been a noticeable decline in the number of sales to British and Irish investors. However, there is increasing interest from Russian investors who, it is predicted, will make up for the smaller number of Western European investors over the next few years.
Prague remains the main focal point of foreign investor activity, having a relatively mature property market and strong demand for new-build property, both from renters and owner-occupiers, fuelled by a strong labour market. 1-bed apartments remain popular, both with local owner-occupiers and with investors, as there is strong rental demand for this type of property.
Most investors tend to buy in the suburbs, avoiding districts Prague 1 & 2, the old town, where high property prices result in low yields. Most investors buy in the suburbs, Prague 3 - 9, with Prague 10 being popular due to its proximity to a substantial 'out of town' business district with several major employers.
Although the sales market slowed last year, it is estimated that 'average' prices in Prague still rose by over 10%. The letting market remained strong, but rent increases lagged capital growth, meaning typical yields now average around 6%. However, with interest rates so low this makes an attractive return for many investors, especially as there is still the prospect of capital growth, unlike in many other European capital cities.
But the Czech Republic is not a one-city location. Many investors have also bought into Brno, the second city, where developments have been offered by a number of investment clubs and agents. Here the rental market is possibly stronger than in Prague, with many multi-national companies locating here, as well a large student population and, as prices are typically 10-20% lower, yields of up to 8% can be still be achieved. Ostrava, the third city, has also caught the eye of some investors, which has enjoyed an economic boom and regeneration over the last few years.
All in all, the Czech Republic remains a strong investment choice and despite the credit crunch and worldwide economic slowdown there is optimism that long term growth will continue coupled with low inflation. For property investors, easy access to Czech finance, at low interest rates, will rekindle interest. And from 2009 it will no longer be necessary for individuals to take out residency when buying a property.
Despite the current uncertain economic climate it is predicted that over the medium to long term property prices will continue to grow at an average of around 10% per annum, a forecast revised down from a possible 10-15%. So the potential is unquestioned, other than some uncertainty as to how FDI will be affected by the global slowdown, and what effect this could have on GDP over the next few years. However, even if growth slows, given the economic fundamentals, this is likely to prove short-lived and the economy should recover quickly and potentially earlier than its western European counterparts.