The UK's Guardian provides an overview as to the current state and opportunities in the Czech property market.
Thanks to its many native sons the Czech Republic is synonymous with the world of art, literature and science – from Dvorak and Freud to Kafka and Kundera. The Republic is also home to Prague, one of the most picturesque urban landscapes in all of Europe and a popular location with western film crews (Daniel Craig’s James Bond comes to mind).
But the country has not always been so welcoming. The shift from a closed Soviet-style society to an open democracy began with the Velvet Revolution in 1989. Notwithstanding teething problems – and following accession to the European Union in 2004 – nowadays the Czech Republic is at the economic forefront of Europe’s emerging markets. Although in its infancy, the country’s residential property sector is meeting the new free market challenge with aplomb.
Country and economy
Czechoslovakia came into existence at the end of the first world war. A series of political crises culminated in 1938 when Britain, France, Germany and Italy detached Sudetenland from Czechoslovakia and gave it to Germany. Six months later Hitler occupied the whole country. Russian and US troops brought liberation in 1945 and a communist government came to power three years later.
Dubcek’s attempt to introduce liberal reforms was thwarted by the arrival of Soviet tanks in the 1968 ‘Prague Spring’. It was not until 1989 that dissident writer Vaclav Havel spearheaded the fall of communism. The division of the country in 1993 gave birth to the Czech Republic.
Following its creation, the Republic was deemed by the World Bank to be the most successful transition economy in central and eastern Europe. By 1997 the so-called ‘Czech miracle’ had ended, but between 2002 and 2005 annual GDP growth rose from almost 2% to 6%. Today GDP growth is 6.1%.
With per capita income just over $11,000, the Czech Republic has one of the highest income levels among the new EU member states. ‘Despite a broadly favourable economic performance, long-term employment remains high,’ reports the World Bank.
The market
In the build-up to EU entry, there was a lot of property activity. ‘Post accession, the market has levelled out considerably,’ says Gareth Williams, senior research analyst at Knight Frank. ‘As one of the most affluent ex-Soviet Bloc states, the Czech Republic is today a gateway from the west to the second wave of eastern European countries.’ Relative to western Europe, property prices remain affordable.
EU membership brought the right of individual property ownership to EU citizens. Residents of non-EU countries can’t normally buy property in the Czech Republic unless a limited liability company, an SRO, is formed.
What you pay for a property is obviously location-dependent. ‘The price for a new-build, grade A property in Prague is around €3,000 per square metre,’ says Williams. Prices for properties of a comparable size in the suburbs are about 25% lower. The most expensive apartments are to be found in the Malá Strana area of Prague – the baroque area at the bottom of the hill below the castle, where you can expect to pay around €3,800 per sq m, with prices for exceptional properties exceeding €6,000. At the lower end of the scale, reports Knight Frank, a three bedroom unit in the city suburbs will cost upwards of €500 per sq m.
In the country’s second-largest city, Brno, prices range between €220 and €1,500 per sq m (and sometimes higher). The average price increase in Brno during 2006 was 18%, while another location significantly above national average rates was Ostrava. Prague saw residential property price growth of just under 13%.
Buy-to-let investors should be aware that government rent caps apply to around 20% of total housing stock, limiting potential rental returns. A law passed in January this year will gradually reduce the amount of regulation, with the aim of convergence by 2012. ‘Regulated rents have historically restricted demand for owner-occupation of properties, as the regulated rent levels were so low as to remove any financial incentive to purchase property,’ explains Williams.
On the edge of Prague, a new village-style development with a sports centre, shops and a school is Sunny Hill, a buy-to-let investment hotspot set to attract the rising local middle-class market. Rent capping does not apply and according to Louis Mann, sales director at Validus2, capital growth is predicted to be between 15% and 18%.
One, two and three bedroom apartments start from €100,794. ‘Sale prices include VAT and are “fitted out”. You are not simply buying the shell, as is typical in many east European countries,’ says Mann. The price includes flooring, doors, light fittings and bathrooms, although kitchens are excluded.
More central is Prague’s leafy Vinohrady district where an 1890 brewery has been converted into modern studios and apartments with up to four bedrooms. Through Aquavista Property, units are priced upwards of €156,700.
In the historic village of Beroun, 12 miles from Prague, another renovation project features apartments of up to two bedrooms from as little as €24,400 – see Knight Knox; while the starting price for a one bedroom apartment on the periphery of Brno is €52,400 through Aquavista Property.
If you prefer a castle, there are plenty dotted around the countryside and some within easy distance of Prague. Take a 300-year old moated castle in Touzetin, 24 miles from Prague airport, for sale through Glo-Con Castles for €720,000. Or for something different, Chateau Vrchlabi, now converted into 17 apartments, is available from Aquavista for €2.3m.
Pitfalls and practicalities
The World Bank ‘Doing Business 2008’ report, which compares data from 178 countries worldwide, draws attention to the Czech Republic’s complicated tax laws. Property taxes, which are based on property size, illustrate how the basic rate can be set by the government but vary from one city to another, or within city districts.
The sale of new-build and newly renovated residential property is subject to a reduced VAT rate of 5% until the end of 2007, after which an EU VAT directive will come into force and VAT will go up to 19%. However, there may be an exemption that allows the Czech Republic to 'apply the reduced rate of VAT’ until 2010. ‘It may be that if this extension to the VAT reduced-rate exemption comes into effect, an anticipated growth in prices prior to the introduction of the higher rate of VAT will be delayed until 2009,’ says Williams.
Make sure that any off-plan property you are buying is not just a shell. Fitting it out yourself in a foreign land without language skills could prove troublesome.
Unless opting to form a company, EU citizens can purchase property only after obtaining what is called an EU Card. They will have to do this through the police and the procedure can take two or three months.
The Czech Republic may be a high-ranking eastern European market, but don’t lose sight of its emerging market status. A sometimes cumbersome bureaucracy is just one of many relics that date back to its communist days. The public sector is often out of sync with market-sector practice, for instance, when it comes to property title searches.
A useful starting point for your Czech quest is the government information website.
