Karel Dudych Head of residential Jones Lang Lasalle, Prague, Czech Republic

Maximilian Mendel Senior consultand, REAS, Warsaw, Poland

One integral factor lies in the VAT increase which started to apply as of Jan 1st 2008 – from 5% to 9% in the case of apartments up to 120 sqm as well as houses up to 350 sqm and to 19% in the case of larger units. The tax prospects resulted in a higher sales activity in the end of 2007, followed by a deep decrease in transactions in 2008. Another factor was the changing climate in the mortgage market. In 2007, the accessibility to low-priced mortgages – with an average interest rate of 4% p.a. – was a main market driver. Credits with an LTV of 100% were more than common. In addition, prices for residential property managed to sustain on a certain growth level and thanks to the overall favorable economic situation, a large portion of the population invested in housing, with the goal to achieve high price appreciations, partly through letting.
Yet, not only local demand drove the market – there was a large share of foreign speculative investments during 2007, too. For these reasons, the market in 2007 was extremely successful. On the other hand, the situation was very specific and, hence, it would be false to understand it as a market standard. In 2008, the economic crisis added to sales drawback caused by the unfavorable VAT developments by a more restrictive approach towards lending and serious liquidity problems in the banking sector. The credit crunch was also well exploited by the media advertising the housing market’s calamity and falling prices, which further impacted on potential buyers’ investment behavior.

New residential developments
In March, the Czech Statistical Office revealed preliminary results of the housing construction in Prague in 2008. According to official releases, a total of 6,328 dwellings was completed. Essentially, this means a drawback compared to 2007 when 9,422 residential units were built, setting an over ten year record. That year, the Czech Republic’s capital city was responsible for almost one fourth of the country’s supply of new housing, while the respective share in 2008 of 14% was at a more modest level. Being one of the most important cities in the CEE region, Prague’s 2008 indicator of 5.2 dwellings per 1,000 inhabitants does not impress much – particularly given that Bratislava and Warsaw reached 13 and 11 units per 1,000, respectively. Nevertheless, the reduction of the offer might proof to be just in time, as sales and demand levels slumped due to global downturn and the  beforehand described local factors.
Regarding geographical distribution, it is important to bear in mind that there is almost no place for new residential developments in Prague’s city centre – which again contrasts the situation in Poland’s and Slovakia’s capital cities. The main expansion areas in Prague are located outside the inner districts of Prague 1, 2, 3 and 7. During the recent years, construction typically took place in the outer areas – as can be observed in the map giving the example of construction distribution in the year 2007. However, centre-close districts like Prague 5, 9 or 10 also experienced quite high numbers of new supply.


Pricing
The Prague residential market has seen property prices growing in a continual manner since the 1990s, with the price growth always managing to surpass the level of inflation. Today, the capital market faces for the first time stagnating and declining price levels for residential property. Nevertheless,  there are not many projects that directly decrease their prices. Developers preferably try to hide price drops by offering certain incentives for selected units. Besides a (at least so far) limited number of direct price discounts, in these times of crisis marketing strategies may include above standard décor or even gratis cars when buying a home. Up to now, such bargains were not known on Prague’s residential market. However, it is most likely that they will become a standard on the housing market, as is already the case in commercial leasing. Developers planning to commence new projects will need to factor in these extra cost positions.
At the end of 2008, the average gross price level for new  apartments in Prague reached some CZK 55,000 per sqm (~EUR 2,250 per sqm) and, due to the mentioned hidden discounts, it may be assumed that the price level has so far not dropped. However, it should be borne in mind that this price relates to the price listing and it very likely that declines in the genuine transaction prices have already been recorded. What are the forecasts regarding pricing? At the moment, it is difficult to reliably predict the road developers will embark on in the future concerning their price strategy, or which way they will be forced to go. There is a lot of speculation on possible bankruptcies, which might force developers to drastically reduce prices in order to guarantee cash-flow. However, in case of other investors with residential developments built on cheap land, bought in the recent years before the price boom, and/or with secured financing, price drops may be far more modest. In this market, the quality of a project is definitely of integral importance for price developments, too. 


It will certainly be more challenging to create a truly successful product. For this reason, there will be room for advisory services aimed at supporting developers to create meaningful and qualitative residential projects. More sustainable projects shall be targeted for specific customer groups and their uniqueness shall be more visibly reflected in architecture, construction techniques and  materials as well as themes, such as ecological orientation towards future living. One market segment that may become more significant for the local market is affordable housing. Apartments in this market segment are directed at local households and, thus, based on solid fundamental demand factors – in comparison to middle and up-market segments  which strongly targeted foreign speculative investment buyers and the expatriate community. Demand in the middle-market will, however, very much depend on the economic situation in which Prague’s population will find itself and on the willingness of the banks to make new housing available.
In general terms, the apartment supply is made of three main products segmented towards low, middle and high-income groups. The middle market segment has so far assembling the majority of the offer provided by developers. The middle class is currently suffering the most from the crisis and lack of access to mortgage products, thus, affecting the success of many residential development. Compared to the middle market offer, the low-end market has been modestly served by developers in the recent years, as higher yields could be achieved in the middle- and high-end market segments. The luxury market is quite shallow, correspondingly to the number of potential buyers. Nevertheless, it may be expected that a certain share of the high-end market shall remain even in crisis times, as this buyer group is not affected by the banks’ mortgage policies. Though, they tend to be very selective and are waiting with their investment decisions. In terms of products, the single-family market should be mentioned, too, though its number is very limited within Prague’s city boundaries.