2009 Czech Property Forecast Part 2

Will this change in the near future?

Certainly Czech Republic is an economy based largely on exports. As the world economy slows, so will exports. Already companies in Czech Republic are reporting cuts in production, in particular in the automotive industry but also glass makers and some textile companies. This will definitely have an impact on unemployment in 2009 but should not get out of hand.

Overall Economic Health

The Czech economy grew by a record 6.6 percent in 2007.

Second-quarter growth figures in 2008 for the Czech Republic were revised up to 4.6%, year on year, from a previous estimate of 4.5%, which is below the 6.8% growth in the previous quarter. Expectations for the final two quarters are also for contraction in GDP. Expectations for 2008 as a whole are for around 5% GDP.

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 will most likely be reduced in November 2008 from the current 3.6% said Tuma from the Czech central bank (CNB), as reported on Oct. 12th, 2008. Projections range between 3.1 and 3.3%.

"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.

Rents/Housing Prices

If we look at the relationship between property prices and rent, it continues to appear favourable 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 price 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 through 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 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%.

Accession into the EURO

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 this 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. 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 neighbours 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.

Other Factors

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 is not a 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 investment and more potential for a collapse on the market.

Conclusion

Because of all the above factors, our professional opinion is that 2009 will be a year of property growth that does not exceed 6 to 9% overall. Prague and Brno in general we expect to see stagnant or only slight growths of 3 to 5%. Smaller centers which have not seen explosive growth such as Olomouc and Zlin we expect to see continuation of the last few years growth rate in the range of 10 to 12%. 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 gross rental yields to creep up at least 1 to 2% in these areas.