Czech Republic: smart investments in a growing market
The Czech Republic’s real estate market presents investors a more affordable alternative to Austria and Germany. The country doesn't impose territorial restrictions on international buyers like the former and has cheaper property than the latter.
Investment in the local market is increasing rapidly. According to CBRE, investors placed €3.7 billion in the Czech property in 2016, an 86% increase from the year before. Analysts expect investment volume to exceed €3 billion again in 2017.
Why does the Czech Republic attract investors? This article looks at what is driving the local property market.
According to Eurostat, the Czech Republic's GDP has been growing by 0.9 percentage points more than the EU’s average over the past decade. In 2016, the country’s economic growth rate of 2.4% outpaced global powerhouses such as Germany (1.9%), the United Kingdom (1.8%) and the United States (1.6%).
The unemployment rate (Fig. 1) in the Czech Republic is one of the lowest in the EU. According to Eurostat, in June 2017, it shrank to 2.9%, which is lower than Germany (3.8%) or Austria (5.2%).
According to the Czech Statistical Office, the rate of inflation in the Czech Republic in 2016 amounted to only 0.7%. By July 2017, it grew to 1.7%, just exceeding the EU average of 1.3%.
Czech mortgage rates (Fig. 2) are among the lowest in Europe. According to Mona Real Estate, Tranio's partner in the Czech Republic, local banks offer loans with rates as low as 1.5% for residents and 2% for foreign nationals. According to Fincentrum, the average mortgage rate in the Czech Republic has fallen more than twofold over the past decade, from 4.5% in 2007 to 2% in 2017.
Foreign nationals can obtain LTV mortgages of 50–60% in the Czech Republic. The maximum age of the borrower is 70 years, while the maximum loan term for legal entities is 20 years.
Property price growth
According to official data, since 2012, property prices across the country have been growing at an average of 5% per annum, and by 7% in Prague, the country's most expensive market. At the same time, residential property in the capital is 2 to 2.5 times cheaper compared to Vienna and Munich, the most expensive real estate markets in Austria and Germany respectively (Fig. 3). Property prices are even lower in the regions of the Czech Republic – around €1,500/m² in Karlovy Vary, €800/m² in Ostrava and below €600/m² in Ústí nad Labem.
High rental demand
The country’s population has grown by slightly over 2% over the past decade, while the number of foreign nationals in the country has increased by 25%.
Since 11 June 2017, Ukrainians have been able to enter the EU visa-free. As such, there is has been a major influx of Ukrainian nationals in the Czech Republic, especially in Prague. Ukrainians are allowed to stay in Europe for 90 days every half a year, and do not have the right to employment. However, many seek illegal employment and need accommodation. This is increasing rental demand, which is already high, especially for units in cheap panel apartment buildings.
Apartments with high-quality repairs and three or more bedrooms are very popular in Prague's long-term rental market. Companies rent such properties for their contractors who come to Prague from abroad. Such property costs upwards of €150,000.
Small flats can be used for short-term tourist lease. According to MasterCard, Prague is among the 20 most popular tourist destinations in Europe. Small flats in the existing property market cost upwards of €70,000. According to Ms Akhrimenya, flats expected to be commissioned in 2019 have been bought out since mid-2017. New-build residential property in Prague costs at least €90,000.
According to Trading Economics, the Czech Republic's inflation will grow to about 2.6% by 2020. In early August 2017, the Czech National Bank raised the base interest rate from 0.05% to 0.25% for the first time since the 2008 crisis. Collier International believes that due to the anticipated growth in inflation, the central bank will raise the base interest rate at least once more in the near future.
The base interest rate increase will make mortgage loans slightly more expensive. As a result, the demand for residential property in the Czech Republic may fall, but no price collapse is expected. These measures will cool the market and prevent a bubble from appearing.