Super-loose monetary policy and expensive raw materials continue to fuel real estate price growth, which is becoming less and less accessible across the developed world. In the EU, real estate prices grew the fastest since 2007 (over 6%) and in the Czech Republic even at a double-digit rate. Wages are constantly lagging behind price growth, leading to a deterioration in the affordability of rental housing – in the UK households have to pay an average of around seven annual salaries for new real estate (more in London), ten in Austria and the Czech Republic according to the latest company study. Deloitte even fifteen.
All this is leading, in many places in Europe, to a greater inclination, especially among young people, towards rental housing. According to the Financial Times, rental housing is also becoming an increasing hit for large investors – in the UK alone, more than 60,000 new housing units are currently under construction for future leases. And the rental income, despite rapidly rising real estate prices, still averages between 3-5%. Surprisingly, large financial groups are also beginning to be long-term players in this market – the Loyds banking group has announced that it wants to build and lease over 50,000 housing units in the coming decade.
According to the latest Deloitte data, the rental income in Prague is slightly lower and is rather between 2-3% per year. Thus, the Czech market is not so attractive at first glance for investors in “rental projects”, especially when you compare rents with a “safe” ten-year government bond offering a koruna yield of around 1.8%. However, it is true that in the Czech Republic, according to available data, real estate is more overvalued in relation to the income of the population (3 standard deviations above the long-term average) than to rents (two standard deviations from the long-term average). That is why it is probable that after the end of the pandemic, rents will start to grow faster again over time – inaccessible owner-occupied housing will structurally support the demand for rental housing,the construction of new flats will lag behind demand, at least in the coming years, and gradually, with the end of the pandemic, the demand for short-term leases will probably begin to return, so the attractiveness of rent investments may grow over time.
Author: Jan Bureš & Petr Dufek , Patria Finance and ČSOB Finanční trhy
