2009 Czech Property Forecast, Part 2

There are many factors to consider regarding where the property market will go in Czech Republic in 2009. The ones that we feel are most relevant and are discussed in this report are the US/UK housing markets, the global credit crisis, Czech wages versus housing prices, the overall health of the Czech economy, rents versus housing prices and accession to the EURO.

This may be better than their Western neighbours–the euro zone’s economy most recently contracted by 0.2%, quarter on quarter–but is still a sign that the east is not invulnerable to the problems plaguing Western economies, which have been hit by a storm of financial market losses, and soaring food and fuel bills.

The forecast for 2009 range between 0.8 and 1.2% and are even being projected lower as of the last revision of this report in 01/2009.

“Our great advantage, however, is that last year (2007) we were at the peak of the economic cycle and reckoned with slowdown this year and what will happen will be a greater slowdown (than expected),” said Tuma.

Although we can see a declining trend through the last three years, it certainly is a lot healthier than the recessions that are either in full bloom in Western countries or are just on the horizon.

On a side note, few people know that before WWII and the subsequent events until 1990, Czech Republic was one of the top 6 industrial powers of the world, surpassing economically countries such as Japan, Italy and Spain. The country was once on par with France and this shows, perhaps, where it aspires.

If we look at the relationship between property prices and rent, it continues to appear favorable in most parts of the country while Prague, Brno and now Ostrava have declined overall. Although basing property prices on earning potential is not always a reliable indicator as the credit market, transaction costs and risk premiums all would justify housing prices fluctuating differently from rents.

Looking at different areas, we can see Prague having only a small increase in rents while property prices have risen again. This has pushed the gross rental yields to between 3 and 5%. In Brno the situation is similar with property price increases from 2005 to 2007 not being matched by rental rates increases. Current gross rental yields are also in the range of 4 to 6% with the highest being in small studio flats. Outlying cities such as Zlin and Olomouc have slightly higher yields of 5 to 7% because of having more moderated property price growths.

Our expectations for 2009 are that rents will start to rise. This is due to less active home-buying as well as a reverse migration trend as Central Europeans who have been living and making better money in Western economies return closer to home as these economies slow.

In view of the above we expect gross rental yields to increase in 2009 in the major centers such as Prague, Brno and Ostrava at least 1 to 2%. This will be a big boon to existing investment property owners as they see their cash flow improve.

There is much anticipation as to what will happen to the property prices once Czech Republic joins the EURO currency. This date had originally been targeted as 2010 but recent statements show that the state proposed budget contains conditions that might delay Czech Republic meeting the Maastricht criteria until 2012 or 2013.

In other countries the move to the EURO has resulted in an immediate price gain, however, much of the price gain is considered to be already priced into the Czech market.

Regarding any exchange gains, the current exchange rate stands at around 24.5 CZK for 1 EURO as of the first version of this report in 09/2008 although as of this update, 01/2009, it has eased to around 27.5 CZK. The gain of the CZK has exceeded even the most optimistic predictions including previous Prime Minister Jiri Paroubek who, in 2007, predicted a rate of 25 CZK/1 EURO when Czech Republic joined the EURO around 2012.

Will the trend continue or can we expect the exchange to remain stable?

GDP growth and inflation internally vs. European neighbors indicates a continued overall upward trend in the value of the CZK although not to the extent that we have seen in 2007/2008.

There is now considerable pressure from the export driven economy to halt the appreciation of the CZK against the currencies of importing companies. It is our prediction that the global slowdown and resultant contraction of the Czech economy will prevent the CZK from making further big gains however, the overall trend will be a continuing strengthening of the CZK against other major currencies such as the USD, EURO and GBP.

A major factor which helped create real estate bubbles in Western countries was speculation by investors. Outside of Prague, investment from foreigners is very, very limited, making up only a fraction of the overall market.

Czechs typically have not invested in real estate besides their own living residence. Although 2007 saw a growing trend of Czech professionals and companies buying investment property overall it was very limited and not a notable contributor to the rise in housing prices. Had the days of easy credit continued for a couple more years, we most certainly would have seen a much further acceptance of this type of investing and more potential for a collapse on the market.

Because of all the above factors, our professional opinion is that 2009 will be a year of property growth that basically matches GDP growth overall so somewhere in the range of 0 to 3% (excluding older communist construction apartment blocks).  Prague and Brno in general we expect to see stagnant or perhaps small declines. Smaller centers which have not seen explosive growth such as Olomouc and Zlin we expect to see small growth rate in the range of 2 to 4% because they have not seen the explosive growth of other areas. Ostrava growth should fall somewhere in the middle.

On a very positive side, in terms of rent we expect 2009 to break the trend of stagnation in recent years. Less buyers overall with a still healthy job market as well as reverse migration should see an increase in rental yields in all centers but particularly the major centers with a less export-centric and more diversified economy such as Prague and Brno. Expect rents to increase by 5% overall in Czech Republic and up to 10% in the above mentioned areas.