Czech Real Estate Market Overview and Forecast 2007From choosing a neighborhood to picking up the keys, everything you need to know about investing in property in Prague
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After 1989's Velvet Revolution, Central Europe's economies were due for drastic changes. Since then, financial market maturity has led to significant legal and tax reforms, which have transformed the landscape for property ownership in the region, particularly in the Czech Republic. The Czech Republic's economy has transformed into a mature market and continues to outperform many of its European Union neighbors. Residential property prices have tripled since 1995 and capital growth has increased by 117% since 2001. Today, investors continue to see great property investment opportunities that still outperform many of their Western counterparts. Market trends and the Future of Property Prices Conservative forecasts show that over the next five years prices will grow at an average rate of 7.5% per year. If you were to buy a property today, you can expect around 39% return on capital over the next five years. Expected changes to tax regulation in 2008 will have a negative impact on the market, but changes to EU purchasing regulations in 2009 will have a positive effect. In 2008, VAT on new build developments are expected to rise from 5% to 19%, affecting speculative investments in projects that aren't completed before the new law is introduced. With increased taxes on new builds, re-sale properties may become more appealing, since they offer significant price differentials to new build developments. Many developers fear that the market will not be able to sustain any significant increases in taxes without incurring part of the tax burden. Many ongoing developments will be completed before the increase in VAT is implemented, and in the last quarter of 2006 and in 2007 this increased supply will can slow price growth. From 2008 onwards, development activity will slow, relative to the previous year, and price growth should revert to a long-term upward trend. As a result of these expectations, structural changes are expected. In 2009, the state is expected to eliminate many of the barriers to entry, and foreigners will be allowed to purchase apartments freely, openly and directly. It's expected that future price growth will also be fuelled by this reduction of barriers and by perceived inflation when the Czech Republic adopt the euro, which is expected to happen in five-to-seven years. At the very least, prices will grow for the next five years and investors will happily make returns on their capital. Purchasing Up until this year, foreign nationals could only purchase a property in the Czech Republic via a holding company, normally through an s.r.o. (limited liability company). Economic competition from neighboring countries has led the Czech government to allow EU nationals to purchase property directly, via a temporary residency visa. These limits are in place until 2009, when it is expected that all restrictions on purchasing property will be eliminated and anyone will be able to buy property in the Czech Republic. Until 2009, you'll need to have a temporary residency visa or form a holding company to purchase property. To purchase property directly, you must be an EU national. If not, you can only purchase property through a holding company. Using a temporary residency visa as a means for buying property has many advantages but you'll still incur some additional costs using this purchasing vehicle. When using a temporary visa to buy property, the application process still contains ambiguities and while it's likely that you'll be able to get a residency visa, it isn't certain. Forming a holding company, on the other hand, ensures that you'll be able to buy a property. An alternative to getting a residency visa is to apply for self-employed status, but this means that you'll be expected to pay social insurance and welfare costs, and could be liable for additional state costs. One of the advantages of owning a property via a temporary residency visa is that, after five years, if you intend to let your property out, you won't have to pay any capital gains tax. You'll be expected to pay income tax on your rental income but if you have only own one property you won't have to pay much. With this vehicle you will have to pay the 3% property transfer tax when you sell the property. In terms of mortgage financing, banks recognize this new vehicle and offer competitive mortgages to EU passport holders. If you purchase a property with an s.r.o. (limited company) property holding vehicle, you'll be expected to pay the current corporate tax on any gains you make on your property. You'll also be expected to pay up to 15% withholding tax when you try to take your money out of the country. Some countries have double taxation treaties with the Czech Republic so you should find out which tax rate you'll be liable for. One advantage of purchasing a property through a holding company is that it adds a level of certainty to the transaction. There's a long history of companies purchasing property here, whereas the residency visa vehicle is relatively new and the bureaucrats are still trying to get their heads around all the new changes. In the coming years, nearly all EU nationals buying property here will use the residency visa vehicle approach. If you're using a holding company, it's possible to get a mortgage, but banks view this as a form of corporate loan and the rates can be less competitive than domestic mortgage offers. |
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Article added on Tue 9th Jan, 2007 [last updated Thu 11th Jan, 2007]Share this page 
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