The annual digest for 2023 year

Description:

▶ Commercial real estate
▶ Real estate construction
▶ Pricing and sales
▶ Rentals
▶ Mortgages

Today we will present you an overview of the real estate market in the Czech Republic for the whole year of 2023. We will take a look at what happened to the separate segments of the market during this period and also summarize each of them. We have divided this digest into 5 chapters: Commercial real estate, Real estate construction, Pricing and sales, Rentals and Mortgages. In such a way we will be able to make a detailed review of each segment and you – to choose the most interesting for you to read.

Commercial real estate

This year this sector has seen the lowest number of changes. The volume of investments in commercial real estate is at the level of 2013 in the Czech Republic, and this trend is spreading throughout Central and Eastern Europe. In the first half of 2023, interest in the commercial real estate market remained moderate and experts attribute this to the significantly higher cost of financing compared to the past (we are talking about the period before the pandemic) and the price correction that is still going on in Europe. For 2023 experts did not make positive expectations and they have come true. In the last 12 months no office space projects have been started in Prague and companies looking for workspaces for their employees are feeling the pressure on the real estate market.

“Overall unoccupancy in Prague has dropped to 7.3%, and if we look at individual locations, especially the center, there is a real shortage of quality office spaces. Many companies do not have much to choose from,” – says Pavel Novak, head of office rentals at Savills.

Companies looking for new premises are forced to start considering offers within the projects that are just being planned and wait. However, this process may last for years, and in 2024 there is very little chance that the situation will change significantly. Construction of new commercial real estate projects has been postponed by many because of high interest rates and financing that is difficult to obtain. Limiting factors are also the costs of construction works and materials, at which the construction will not pay off. Demand for office rental in the capital is growing. Compared to the five-year average, demand in Prague has increased by 13 percent. The same is happening with prices. However, there is not enough supply on the market and large companies are standing in lines for commercial premises.

Real estate construction

In the commercial space segment, construction has stopped almost completely, and there are not enough finished projects for everyone, but what about residential projects?
The spring showed a trend of rising supply.
Strict conditions from banks forced out small companies, as it was difficult for them to find financing, and large companies stopped construction of new objects.

The 2023 turned out to be challenging for major investors. It is all about the fact that banks began to require a higher percentage of pre-sales (or rentals), on average up to 30 percent of apartments that have not yet been built.

The relatively difficult year for construction in 2023 was for small developers and companies that were dependent on foreign sources and did not have enough own funds to build. Bank financing became difficult to get and the real estate market was flooded with offers of selling projects that owners could not finance on their own.

In April, the government tried to make an effort to improve the situation among developers by adopting an amendment to the Construction Law that would speed up the process of obtaining construction permits. This amendment included the possibility of creating a digital management of the process, this was supposed to simplify and speed up the whole complex system of obtaining building permits.

This was also not the only change in the law, in July the Ministry of Regional Development (MMR) presented a proposal to change the conditions for building of parking spaces in the Czech Republic and this has placed more pressure on private developers as well as making the threat of apartment prices go up. The requirement was to build more parking spaces in residential projects. Even though real estate experts criticized the plan, the Ministry was defending it by explaining that ” The housing issue is not the only problem in our country, it is just as important to solve the parking issue if we don’t want cars everywhere on the streets”. Adoption of this proposal in practice means that for any apartment with an area of more than 70 square meters will have to equip 2 parking spaces.

Sales and issuance of new mortgages increased in the fall, and slowly interest rates began to decline. Only new buildings kept their value. On a year-on-year basis, prices for new apartments in Prague increased by 3.5%. The demand for new buildings in the long term is almost twice as high as the supply and experts have begun to predict that soon there will be only a few of them left, and new ones are not coming to the market yet, which means that real estate prices will rise even more. In addition, people are getting used to the prices and will soon be ready to invest in new housing.

Indicators of the total volume of construction and issuance of building permits at the same time are 9.1% lower than the previous year.

In October, experts’ preliminary predictions began to come true and there was a real threat that there would be limited availability of choice to buy in the future. Even though Czech families are already used to higher mortgage interest rates and are more inclined to invest in buying new real estate than before. Also in the fall increased the volume of mortgage loans for the purchase of real estate by 90% compared to the previous year. And not even half of new apartments are being built, as it was in the times of the biggest boom, but much less.

Pricing and sales

At the beginning of the year on the real estate market in the Czech Republic, we saw carefulness not only from developers, but also from buyers. Already then, experts began to warn that fluctuations and slowdown in construction could make rental housing stronger and that such housing on the market has long been significantly less than housing owned by owners.
This has also caused developer interest in financing the construction of rental apartments.

In March, the real estate market was frozen, and the main reason was expensive mortgage loans, rising interest rates and tightened conditions for obtaining loans. Developers were the first to suffer, and then construction companies.

In the first quarter of 2023, the market of new buildings did not move from its place. The only exception was premium properties in good locations. Experts suggested that more active interest from buyers can be expected only in the end of 2023.

In summer, there was a significant price growth in the segment of small-sized apartments with an area of approximately up to 69 m2 in brick houses. Prices approached the level of 2021.

Buyers more often preferred smaller apartments and those that could be financed from their own funds without having to apply for a mortgage. Apartment prices started to rise everywhere in the Czech Republic, except in the south of Morava, where people more often prefer family houses. Overall, during the second quarter of 2023, about half more apartments were sold than in the first quarter and prices were fixed at approximately the same level. The most popular are apartments with 2+kk and 1+kk layouts. The most popular city is Prague. Experts predict a long-term increase in prices for residential real estate and in general the mood of buyers is becoming more optimistic, interest in buying is growing.

The cost of land is also increasing, demand exceeds supply. There is also interest in plots in remote locations from the periphery of large cities.

In autumn, the residential real estate market stabilized, prices remained at their level:

“It seems that the real estate market has left the worst behind, and positive expectations are already beginning to be reflected in prices. As soon as the mortgage market finally revives, owning a home will become affordable again, even for those families who were blocked by high interest rates,” – said Lumir Kunc, Director of FérMakléři.cz.

Prague is slowly reviving in volume of sales and the demand for apartments has increased significantly since the beginning of the year. New construction projects have also started to appear on the market, after a year-long pause caused by the uncertain energy situation, growing construction costs and high inflation. Optimism among the population is growing:

“The Czech National Bank has published a new forecast that predicts a prime rate of 3.4% per annum by the end of next year. Thus, mortgages should already become significantly cheaper next year, which will bring a more significant increase in interest in buying apartments. The only question is if there will be anything to buy. There are many fewer apartments coming on the market mainly because of high construction prices than before,” – concludes Michaela Tomášková, director of Central Group.

According to Hypoteční banky data, Czech citizens are interested in cheaper family houses, as well as modular wooden constructions, container and mobile homes. The popularity of wooden constructions also leads to changes in people’s primary preferences for the type of real estate. According to Ondřej Pondelnik from Easyhomes, it’s common enough that people already have a designed stone house and decide to convert it into a wooden structure.

The graph of sold apartments in Prague by years:

Rentals

In 2023 rental real estate became the most popular trend among both large companies and Czech citizens. While previously the largest part of the rental market was formed by private rentals, now and in the coming years experts predict that more and more institutional investors will enter the market.
Developers, real estate funds, banks have begun to actively invest in projects that offer rental housing.
Demand for rental housing in Prague is statistically 52% higher than in the rest of the country. At the beginning of 2023 there was a slight stagnation of rental prices (after almost 20% increase for 2022) .

In April 2023, the State Investment Promotion Fund presented the Rental Housing Program in the Czech Republic. This program promotes the development of rental apartment projects for people who do not own their own homes and is administered by the State Fund for Promotion of Investments (SFPI), which reports to the Ministry of Regional Development. The Czech Republic sees future opportunities in investments in rental housing:

“In the near future, the share of rented housing is likely to grow to the preference of owning own property. However, this is not an undesirable trend; in Germany, for example, the share of rental housing reaches 50 percent,” – said Jan Sikora, co-owner of Wood&Company.

We are talking primarily about long-term rentals, and as for short-term rentals, in 2023 the state began making efforts to regulate this sector of the real estate market. According to the methodology of the Ministry of Regional Development, construction authorities can now check whether the provision of short-term housing does not violate the Construction Law. Those who violate the law face a fine of up to half a million euros.

In addition, the authorities may reduce the number of hotel apartments, for example, by collecting signatures confirming the consent of neighbors to allow the owner of an apartment in an apartment building to rent it out. Such a measure has already been introduced in many European cities to control and limit the provision of short-term rental services through such platforms as AirBnb, Booking, Exploria и TripAdvisor.

“The methodology released by the Ministry of Regional Development for construction authorities, and its application, will help effectively prevent the transformation of a large number of apartments, especially in the center of Prague, into hotel apartments, which negatively affects housing prices and also provokes the outflow of population from the city center, constantly bothering the residents living in these buildings,” commented Hana Cordova Marvanova, a Prague advisor on legislation, public administration, and housing support. Thus, the state is trying to return apartments to the long-term rental market and also control financial flows in the short-term rental market.

“The aforementioned method of renting is one of the main reasons for the rise in housing prices. Especially in the city center,” said Prague City Council member Matej Stropnický (Zeleni), who deals with this issue. “The city also loses significant amounts of money in tourist taxes that Prague collects from visitors staying in hotels,” – Stropnický added.

At the “Future Rental Housing” conference in the summer of 2023, participants unanimously agreed that the housing market is changing. Rental housing is interesting both as an investment and as a more affordable alternative to owning a home. This segment has come into the spotlight of major investors, and it has become apparent that, apart from private individuals, an institutional rental housing market is rapidly forming. Developers have started entering the market as investors in such projects. For example, the development and investment group Crestyl presented a four-billion project in Prague.

“Rental housing turned out to be the most reliable form of investment during the housing crisis. But current interest rates complicate the situation. However, we believe that by 2024, the situation will change, and the rental of apartments will return to normal. We plan to build our own rental housing fund. This means that we will manage apartments rented out,” – said Simon Johnson, Chief Operating Officer of Crestyl.

Another trend has emerged in the Czech rental property market – coliving. Coliving, or communal living, is a concept of shared living. This means that a group of people collectively pays for utilities and the living space and enjoys flexible rental terms for an apartment or house. At the same time, each of them has their own personal space. Lithuanian investment company Baltic Asset Management intends to invest over 112 million euros in the Czech Republic and is selecting hotels that did not suffer from the COVID crisis as investment objects. One of them is the Vitkov Hotel in Prague. The company will offer approximately 100 coliving units as early as the beginning of 2024.

The largest banks in the Czech Republic have started financing the construction of rental housing: Česká spořitelna, Kooperativa, Komerční banka, and almost every major developer announced their intentions to invest a significant part of the company’s budget in such projects by the beginning of autumn. Over the next 5 years, approximately 1000 new rental apartments are expected to be added in Prague annually.

The ratio of rented housing compared to private ownership is growing, and in July, according to the Videobydleni.cz platform, the trend of shifting demand from buying to renting reached 87%. According to experts, this trend will persist in the coming years, and until mortgage interest rates decrease, the influx of interest in buying residential real estate will not recover.

In the autumn, the Ministry of Finance created the initial drafts of a ‘price map,’ which will enable them to have a clearer understanding of the actual cost of renting housing throughout the Czech Republic. In the future, this will help in determining rental rates for vacant housing and in allocating housing subsidies. According to the advisor to the Minister of Finance and co-author of the price maps, Martina Ziber, the project is currently in the testing phase. The Ministry of Finance plans to update the data on the price map twice a year, and they should be based on data from real estate portals displaying rental price offers.

The most rapid growth in residential rental rates in recent months has occurred in Brno (10.8%), Pardubice (7.3%), Liberec Region (6.5%), and České Budějovice (6.1%). The most expensive rental payments are still in Prague, where the average cost per square meter of rented apartments was 388 crowns, which is 4.3% higher compared to the previous quarter, according to the real estate portal Sreality. According to František Brož, press secretary of Bezrealitky.cz, the number of people transitioning to rental housing will continue to grow, so in the future, a significant decrease in the cost of rent per square meter cannot be expected; rather, the trend might be the opposite.

Mortgages

“We can see a growing interest from the population in loans from construction funds, precisely due to the energy crisis. Czechs are starting to use loans from construction funds not only for regular repairs but also for financing energy-efficient housing – every third loan application from construction funds is now intended for reconstruction aimed at reducing housing energy consumption and saving on electricity,” – says Martin Vashek, CEO of ČSOB stavební spořitelna.

In March 2023, the Czech National Bank (CNB) left the key interest rates unchanged at its meeting. The two-week repo rate remained at 7% since 22 of June 2022 year. This was bad news for almost 90,000 people who had to undergo refinancing this year, as just a few years ago, the interest rate was around 2%, but now it’s around 6%. As a result, extremely expensive mortgage loans continued to pull down the entire real estate market. By the beginning of 2023, inflation remained very high, and bankers reiterated that there were no possibilities to lower the CNB’s basic interest rates this year. Moreover, there’s a possibility of an increase in May.

“The Bank’s Board is still ready to raise rates, especially if there is an increased risk of a spiral of wage inflation. From this point of view, the market’s expectations that rates have already reached their peak might not be justified. We consider the market’s expectations regarding the timing of the CNB’s first rate cut as premature,” stated the CNB. The Board did not hide that it did not want to raise rates and then lower them again. It announced that in the fight against inflation, it was banking on a strong crown.

In April, mortgage loan rates practically froze. Although two banks still lowered mortgage rates, mainly rates did not return to the level seen at the beginning of the year. This affects customers’ desire to take out long-term mortgage loans, hoping that rates will decrease. Some banks, such as Air Bank, decided to expand their mortgage offering by including loans with shorter fixed-rate terms, for example, reducing from 5 years to 2 or 3 years.
In the summer, representatives of the central bank began negotiations on relaxing requirements for loan applicants. However, at the June meeting, the Czech National Bank (CNB) again left the key interest rate at seven percent.

“At the same time, the Bank’s Board decided that the CNB will continue to prevent excessive fluctuations in the exchange rate of the crown,” – further stated the central bank.

Starting from July, mortgage applicants received some relief, namely, the debt service-to-income ratio (DSTI) parameter was abolished. This was a somewhat unexpected decision by the CNB. It was assumed that this might increase demand for real estate, as potential buyers would have more opportunities to obtain a mortgage loan. Additionally, this might lead to increased competition among buyers and a rise in housing prices.

As the result – the volume of issued mortgage loans increased by 16%.

In September, the Central Bank Council kept the base rates unchanged, but in terms of year-on-year dynamics, the volume of granted mortgage loans was nearly 90% higher, with a significant acceleration in year-on-year dynamics. These data were provided by Hypomonitor of the Czech National Bank. There was noted an increase in customer demand for housing loans, signaling that people were starting to adapt to the current economic situation, and perhaps, the buying interest began to recover.

In December, at the regular meeting, the Banking Council of the Czech National Bank made the decision to reduce interest rates for the first time in more than 3.5 years. The main rate from which banks earn interest decreased by a quarter of a percentage point to 6.75 percent. The head of the central bank, Ales Michl, stated that the decision to lower the rate was unanimous.

Conditions for reducing interest rates exist – inflation is steadily slowing down, last recorded at 7.3% in November, and therefore, it can be expected that in the first half of next year, it will approach the central bank’s target level of 2%. The CNB also has a “range of acceptable values” where inflation is already acceptable for it, namely one percentage point on both sides of the target value. “The Bank’s Board expects inflation to significantly decrease next year,” Michl said at the press conference.

“We still see the risk that it might not be two but around three percent, hence the logic of cautiously lowering the interest rate. We are looking beyond January, looking a year or more ahead, where we see very low inflation on the horizon but more likely at the upper end of the allowable range,” Michl added.