Czech Real Estate Market Overview and Forecast 2007
From choosing a neighborhood to picking up the keys, everything you need to know about investing in property in Prague
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.
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.
Prague has a unique socio-spatial structure, consisting of various building types and people from all social strata.
Major zones can be distinguished within the city. Prague is broken down into districts, from Prague 1 to Prague 10, with unique neighborhoods and micro-cultures that sometimes straddle the boundaries of these districts.
You might think that the numbers of these districts would indicate proximity to the center, but because of the age of the city and the long period over which it has developed, that isn't always the case. Some areas of Prague 4, for example, are more central than parts of Prague 2.
The city center is the area where people with higher incomes traditionally reside. The inner city consists of neighborhoods which, historically, have been home to both working class and middle class residents. Inner city neighborhoods typically feature rental housing stock - four-to-five-story apartment houses with anywhere from 10 to 30 apartments - built in the 1920s and 1930s. At the edge of the inner city, there are also many garden towns or garden communities, and these have the highest social status in Prague's social urban geography.
The center of Prague. Distinctive features of this district include Old Town Square, the Charles Bridge, the National Theatre and Wenceslas Square, making it the heart of the city. Many foreign firms have business residences in Prague 1 and the area is mostly dominated by tourists during the summer months. Prague 1 has excellent public transport connections via metro (underground railway) and tram. Car parking is difficult, but the area is easy to get around on foot. Most buildings were constructed prior to the 20th century and many were in quite a dilapidated state at the beginning of 1990s.
A traditionally upper class neighborhood, mostly built in the 19th century. Some dilapidation of housing stock occurred under Communism partly due to a lack of maintenance. There was also a decline in social status and a change in the character of the district under the old regime, due to subdivision and the redistribution of bourgeois dwellings to working class families. Despite this, Prague 2 has maintained its spirit over the years and, since 1989, the neighborhood has mostly recovered its former standing. There are good public transport links (metro and tram) and good access to highways. Car parking is still a problem on the streets but Prague 2 is in walking distance of the downtown area. There are also some B-class office developments in the area. Some neighborhoods, such as Vinohrady, have been branded by international agencies in attempt to revitalize the area.
Žižkov is considered by many Czechs to have a lower social standing than nearby Vinohrady. Proportionally there is a higher concentration of working class people and Roma here, and some of the city's most dilapidated housing stock. Žižkov is still very central, however, and has great public transport connections. A traditional university, the University of Economics, Prague (Vysoká škola ekonomická v Praze), is located in Prague 3, meaning that a large number of students live in the area. The neighborhood offers cheap accommodation and a unique set of local pubs and restaurants. Higher prices in adjacent neighborhoods mean that Žižkov is in the early stages of gentrification.
Nusle is traditionally a strong working class neighborhood, built in the first half of the 20th century. The district has a high proportion of working class people and Roma, and is characterized by busy squares and shops, and close proximity to the downtown area. Prague 4 is geographically one of the city's largest districts and experts argue that the district's downtown areas are the best places to buy, in order to profit from wealth expansion and price sprawling. Prague 4 is home to large, newly built A-class office developments, which have transformed the landscape and lifestyle of the area. With new office space coming online every month, people and money are flowing into the district, which shows signs of being a promising residential investment.
The geographical landscape of Prague 5 was significantly altered when it was transformed from a predominately industrial area into one of the city's largest A-class office spaces. Prague 4 is the only other area that comes close to competing with this district, which is home to Prague's largest shopping center, Nový Smíchov. Properties in this area are some of the most sought-after among young corporate Czechs at the moment. Prague 5 is very central and is a central point for metro lines, highway tunnels, and tram lines. It is adjacent to Prague 1 and is close to the historic center and it's still possible to find romantic riverside houses here, with glorious views of Prague. Lastly, the Smíchovské nádraží railway station will be a major hub for commuters traveling into the city from outside Prague. The train station connects to a metro station that is only three stops from downtown Prague.
Dejvice and Bubeneč are neighborhoods built mainly in the 1920s and 1930s. They're adjacent to one of the most attractive residential areas in Prague, and consist largely of apartment complexes. The local population has higher-than-average education levels with many members of the upper tiers of the employment sector making their homes here. The district also incorporates historic villas and an embassy quarter that was once home to a wealthy elite. Metro lines run to Dejvice, and busy retail areas help make the area a great place to live. There are also plans to extend the metro out to the airport, connecting many outlying areas of Prague 6 to the downtown area, increasing the attractiveness of the area as an investment opportunity.
A unique mixture of working class and middle class residents defines the character of this district, which starts on the river across from Karlín. Prague 7 features some of the city's most plentiful green spaces, its most important soccer stadium and an ice hockey arena that stages major concerts, ensuring that there are plenty of leisure options. The district is also very central with fast transport connections, by tram or metro, to the center of Prague. Experts argue that many Prague 7 neighborhoods are undervalued. It's possible to find well-priced apartments, many of which were built in the 1920s and feature attractive art nouveau elements.
This district's Karlín neighborhood was seriously affected by the 2002 floods but a great deal of A-class office space has sprouted alongside the river since then. Karlín is very central and, because a group of investors have decided to focus their capital on completely rebuilding this part of the city, it is undergoing a major transformation. The area's historical character has been preserved alongside the ambitious new projects. This dynamic district offers good opportunities for future neighborhood growth. Other neighborhoods in Prague are already beginning to see developers acquire land for new build development and prices have started to climb. This is partly a result of a lack of available land in the city center.
A less central district but one with much appeal. This part of Prague, to the northeast of the downtown area, has been overlooked by many developers and investors. Typically, there are great public transport connections, via metro, bus, and tram, and the construction of the Sazka Arena ice hockey stadium has increased investment in the area. The area has a distinctive mix of villas, apartment complexes, and Communist-era housing.
Beginning with the central Vršovice neighborhood and spreading southeast, this hilly district offers some spectacular views. Prague 10 is traditionally a strong working class area, built in the first half of the 20th century. There is a high proportion of working class people and Roma here, plus busy squares, shopping areas and good tram links to the downtown area.
Mortgages in the Czech Republic
Terms of Mortgage Acquisition
1. Foreigners with a Czech Residency Permit
• An EU national can acquire property directly and is eligible for full mortgage financing. If their job is in the Czech Republic, banks are more likely to offer competitive conditions similar to domestic offers
• Typically you can expect to achieve mortgage financing of around 80-85%. Some EU nationals have reportedly received 100% financing for their loan-to-value (LTV) mortgages, but you shouldn't expect this if you plan on purchasing a property. Instead, go into a purchase with at least 15% on hand
• Interest rates range from 2.5-5.5% depending on the term
• Mortgage periods typically can be as long as 20 years for EU nationals, and some lenders claim to offer 30-year terms
2. Foreigners Without Czech Residency Permits
• Typically, foreigners without Czech residency permits are able to buy property through a sole-purpose company and are eligible for a corporate loan. This form of loan is similar to a mortgage in that it is leveraged against the property within the company
• Leverage of up to 85% of LTV is available. Some buyers have reportedly received up to 100% financing but this is rare
• Interest rates range from 3.0-5.5% depending on the fixed rate
• The typical mortgage period is up to 15 years and some lenders offer up to 20 years
Investment Intent That Can Be Financed
• Purchase of a property for personal ownership (purpose of living)
• Purchase of a property through a company
• "Buy-to-let" rental income plays less of a factor in getting financing. Typically, financing is based on income stream or guarantees from the customer
• Refinancing to pull equity out of your property
• House construction or the reconstruction of a house/apartment and/or other
Taxes in the Czech Republic
The most transparent tax you'll face when considering a property purchase is the property transfer tax, but you'll only need to pay this when you eventually sell the property. The rate is 3% of the sale price. When you do buy a property, though, have your lawyer make sure that the seller actually does pay this tax.
Under current Czech legislation, property owners aren't obliged to pay VAT on rental income. In order to reclaim VAT, however, you must first be registered to pay it, so some owners might, for business reasons or to offset the cost of the apartment, choose to do this. The current rate of VAT on rental income is 19%.
If you're buying a property through a limited company (s.r.o.), there's no VAT on capital gains, since any such gain would be taxed at the prevailing corporate tax rate.
Corporate tax on capital gains is unavoidable. There is pressure to lower corporate tax rates but no indication that action will be taken any time soon. With many competing economies taking this step, however, the Czech Republic will most likely follow suit.
When taking funds out of the Czech Republic, withholding tax is up to 15%. However, many countries have a double taxation treaty with the Czech Republic. For instance, a treaty between the Czech Republic and the United Kingdom prevents double taxation and as a result the withholding tax for UK residents is only 5%.
Some Things to Remember
Co-op ownership allows you to have ownership in a building but only in the form of a stock, and not direct title ownership. This makes it virtually impossible to get a mortgage for your property. Don't sign a purchase contract for a co-op-owned property unless you intend to pay cash, although some private brokers are structuring high interest loans that allow you to finance a purchase.
Don't sign a purchase contract for a co-op-owned property unless you intend to pay cash. Also, be aware that if you do buy into a co-op, you'll have to abide by the building's rules and regulations.
Co-op-owned apartments typically sell for less than privately owned apartments due to a lack of financing and purchase transaction frictions. EU guidelines announced in 2005 could lead to Czech regulation that prevents a co-op apartment being sold for less than its market value.
This could hinder this segment's future liquidity within the market and may even hinder its growth.
Your lawyer should perform a basic title check to make sure the apartment is registered as a unique identity, and that the person selling you the property is actually the person who owns it.
You might also ask your lawyer to research the people living in your building. In some cases, the building may have regulated rental tenants who either don't pay rent or pay very little. Owners of apartments of this sort may choose not to carry out repairs, since their rental income doesn't cover basic costs.
Be sure to check out your building's rules and policies, since you'll be responsible for your apartment, and you won't want to upset your neighbors.
It might also be wise to look into your building's bank account (fund), to make sure you don't inherit deferred maintenance or somebody else's bills. Fortunately, these kinds of problems aren't as common as they once were, and a tour of the building will usually be a good enough indication of the state of the building and the type of people who live in it.
Good Legal Representation
Good legal representation is important wherever you're buying property, and the Czech Republic is no exception to that rule. Typically, your lawyer will be with you every step of the way, from the reservation contract, to the future contract, to the signing of the purchase contract, and right up until the property title is registered in your name. A good lawyer will oversee the entire process, and make sure that the right steps are taken at the right time, and also help you deal with contracts written in Czech.
Once you've decided to buy a property, it'll usually take four-to-six weeks to get mortgage financing, and you should factor this delay into any contracts that the seller's agent sends you. Have your lawyer adapt the contract to fit this timeframe and avoid paying any silly penalties for time delays.
It will usually take a bank at least three-to-six weeks to value a property, assess your credit-worthiness, and put money into your escrow account.
Agents will generally push for early signing dates, because they usually get paid at the end of the selling process and therefore want to push deals through as quickly as possible.
In between signing the reservation contract and completing the mortgage process, you'll have to pay the deposit (usually 10-30% of the purchase price) and then sign the future contract.
As part of the mortgage, you'll be expected to arrange life insurance and building insurance, and your bank won't give final approval to your loan draft documentation until this is done. Be sure to arrange this in advance as it can cause a delay of a couple of weeks, especially if you're living outside of the Czech Republic.
You'll be forced to sign and pay for a notary deed to allow the bank the power to foreclose on your property should you miss mortgage payments. All banks typically ask for this deed because normal foreclosing measures are lengthy, costly and bureaucratic, and the deed speeds up the process.
When financing is ready to be released you'll sign the purchase contract, and then have five-to-seven days to deposit the money into a joint escrow account. The bank will transfer the funds into the escrow account and you should be able to get the keys after the agent or lawyer transfers the electricity and natural gas into your name.
Once all is set the documentation will be sent off to the local municipality and it should take five-to-seven months before the ownership title is in your name. Be sure to have your money in an escrow bank account with the seller during this period to ensure that your money is safe and that the seller doesn't run off to Bermuda with it.
From start to finish, it should take around six-to-eight months before you legally own your property, and spending money on a good lawyer will not only ensure success, but will most likely also speed up the purchasing process.
Finally, you should organize your time wisely -- the hours you'll spend in meetings with bank managers, lawyers, and other people involved in the purchasing process can be substantial. If you don't live in the Czech Republic, it may be useful to give power of attorney to a lawyer that you trust, since you may not be able to fly over on a whim.
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