The residential panel at CEDEM 2019 focused on how the prices for flats in Prague have exploded to such an extent that major developers are now planning build to rent projects for the first time. The birth of a rental market in Prague has long been delayed because of a cultural preference towards ownership as well as concerns over the ability of landlords to deal with nonpaying clients and other issue. But the rapidly rapidly shifting economic reality is that it’s quickly becoming impossible for the average middle class family to afford to buy apartments in the city.
In giving background to this transition, Petr Hana (Deloitte) first mentioned larger forces at work. “We are facing global trends such as globalization, meaning that people are moving to big cities and staying there to live.” Many of these people, especially those in the Generation Z and Millennial generation wan to be be independent. “They’re more mobile and they want to be free.” Underlying this, of course, is the problem that Czechs must now pay the equivalent of 11 annual salaries to buy a new flat. “It means that our apartments our quite expensive and our salaries are quite low.”
Tomáš Pardubický, director of FINEP, challenged the typical explanation for rising apartment prices, which blames them on scarcity of project because of the difficulty in securing planning permits. “Based on our analysis, 50 percent of the price [rise] is driven by the public sector. The largest impact by far is the VAT, which was increased five times in the last ten years. The second is technical norms, because what’s happened in terms of acoustic and thermal insulation. Then all the infrastructure investments that are normally done by the public sector in Western Europe are pushed onto developers. All of this makes up 52 percent. The rest are increasing construction costs and the increased price of land.”
Peter Noack, whose company Zeitgeist Asset Management has been building a portfolio of rental apartment for years, says none of this comes as a surprise. “What’s happening is exactly what we thought would happen a few years back. Because of planning rights and processes that there will be a lack of land so prices will go up because there is cheap money and construction prices will go up. and that the next step will be that people turn to rentals because they can no longer afford to buy their flats. If you need 11 years of your gross salary, that’s just incredible, it’s crazy. So if people want to find a better place to live then rentals are the only way.”
Troy Javaher (Lincoln Property Company) pointed out that there was a great deal of interest from local investors of all kinds for what’s generally seen as a safe, reliable investment like the rental market. “There’s a significant amount of wealth here. A lot of it has been built and earned in other industries and as they look to protect their kids they want a cashflow-resistant type of product and I don’t think that’s going away. There’s a fundamental change in how Millennials in particular use real estate… it’s a very stable income if you get it right.”
