Czech Business Weekly, 11.01.2010

In 2009 the Czech real estate market saw its largest decline in the country's history. Construction of new commercial and residential projects dropped to a minimum, while construction of industrial buildings ground to a halt.

Investment in the sector dropped by 80 percent year-on-year, and rents for commercial property fell by 5 to 10 percent, depending on locality and quality of the property. In the residential sector, 40 percent fewer mortgages were approved.

This year however, analysts and developers expect a significant upturn in investment at least in certain sections of the property market. "Investors will be interested in first class office buildings in Prague. We can also expect transactions of prosperous shopping malls in larger regional towns," says Dušan Šťastník, an analyst with property consultants King Sturge.

Rising prices for new residential property

Developers who completed new residential projects last year made a concerted effort to prevent a wholesale fall in prices. Nevertheless, they came up with numerous special offers and a whole range of added bonuses for buyers, even including cars.

In the coming months, however, several large developers plan to raise prices for new developments, largely due to the hike in VAT rates on property purchases as of January 1. The lower rate of 9 percent and the basic rate of 19 percent have both risen by one percentage point as a result of the interim government's bill of economic austerity measures. The lower VAT rate applies to family houses with a floor area of up to 350 m2 and apartments up to 120 m2. The basic rate of 20 percent applies to any larger houses and apartments. "Unfortunately, the fall in prices of new apartments and houses, especially in the second half of 2008, significantly lowered developers' profit margins. In order to preserve the essential economics of construction, there is now no room for developers to carry the cost of the increase in VAT rates and therefore they will have to pass the added cost on to the final customer," said Aleš Novotný, executive director of Central Group. Developer companies Finep and CPI Group also admit that they will raise prices to cover the higher tax rate.

However, another major player Ekospol claims it will at least partly cover the costs of the VAT hike from its profits. "Although the law requires us to pay higher VAT, we are not obliged to pass the entire extra cost on to our clients," Ekospol's general director Evžen Korec says.

Banks saved the market

According to King Sturge, Evžen Korec there is no reason to fear any significant rise in residential property prices. Prices will most probably stagnate, though towards the end of the year prices for certain apartments could begin to rise moderately. Analyst Ondřej Novotný says rises in price will not exceed 3 percent. In 2009, residential property prices fell between 5 and 20 percent depending on locality and type of property. According to Novotný, there are no precise figures for demand for residential property. Demand is generally calculated according to the number of mortgages approved. According to the Ministry for Regional Development, the Czech mortgage market contracted by 37-5 percent year-on-year in the first three quarters of 2009, with banks providing mortgages worth a total of Kč 56.5 billion [?2.1 billion], whereas in the previous year, the figure stood at over Kč 90 billion. However, according to Novotný, had the banks not dramatically reduced lending, developers would now be in a much worse position. "In doing so, the banks prevented the market from collapsing completely. Otherwise, developers would have continued building with the same verve as in previous years," he said.

Construction on order

Certain indexes for commercial property are expected to fall further this year. Last year, 116,600 m2 of office space was constructed- a fall of 65 percent compared with 2008. This year it is expected that 80,000 m2 of new office space will be go on the market with only two significant projects due to be completed: City West and Filadelfie. "Demand will depend on the overall state of the economy. Nevertheless, we expect it to be at levels similar to 2009. We also expect the amount of vacant office space to rise slightly, though the composition of vacant space will change," says Eva Lovětinská, head of King Sturge's office property department. According to Lovětinská, more lower-quality office space will become vacant this year, whereas occupancy of high-quality office spaces will increase.

As for industrial and logistics property, this year almost all construction is expected to be on order only. "We don't expect any major speculative construction projects," says Milan Korbelář, head of King Sturge's industrial property department. Nevertheless, Korbelář predicts that more industrial and logistics property will be rented than in 2009 and the amount of vacant sites will decrease due to low levels of construction. In this segment Korbelář said that rents will stagnate, though developers will be willing to negotiate depending on location and size of property. As in 2009, developer and tenant interest will be greatest in Prague. Development of logistics locations in Plzeň, West Bohemia, Brno, South Moravia, Ostrava, East Moravia, Hradec Králové and Ústí nad Labem in East Bohemia, Ústí nad Labem, North Bohemia and Olomouc, Central Moravia is expected to be significantly lower with most activity in expansion of existing sites. "Construction of completely new projects will be few and far between and only on the basis of demand of specific clients," Korbelář predicts.

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