Overview of investing in the Czech Republic

The most ‘western’ country of the east

Of all the former communist states of eastern Europe, the Czech Republic is the one which has come furthest in adopting the ‘western’ economic model. Not only has the country’s economic growth been phenomenal. It’s also – just as important – been achieved against a background of rock-solid stability. With its market-friendly democracy, its rocketing living standards, and its courteous (frequently English-speaking) people, the Czech Republic is a place where even the most cautious investor can feel that his money is secure.

Booming demand

And there’s a real sense of the best of both worlds. Why? On the one hand, you can still find property, even in Prague, at bargain prices by western standards. On the other, the Czechs have done better than most other ex-communist states in developing the infrastructure of a western property market. Credit facilities and mortgage products, for example, are not far behind those of Britain, France or Germany. These facilities are in hot demand to serve a market which is ever more hungry for quality real estate. Low interest rates, combined with the fact that 100% mortgages are now on offer, makes the property-buying process easier than ever before.

Why is the Czech Republic doing so well? Even more than its neighbours, the Czech government has pursued a consistent policy of market-friendly reforms: reducing taxation (yet again in 2006), privatising state monopolies and opening its borders to foreign investment.

This last factor, in particular, is crucial. Per head of population, the Czech Republic receives more western investment than any other east European country. Foreign companies are attracted by the cheapness of the country and by its well-educated labour force. About 70% of the country’s trade is with western Europe, and Czech unemployment stands at 8.8% (March 2006) and is falling fast. In Prague, the country’s economic hotspot, unemployment is virtually non-existent. The government hopes to bring national wealth (GDP per capita) up to the west European average by 2013.

Knowing the local market

The key to successful investment in the Czech Republic is targeting the local population. Although Prague does have a thriving tourist sector, foreign tourism is almost unknown outside the capital. Moreover, Prague, Brno and other large cities have witnessed a boom in the number of employed, upwardly-mobile Czechs, seeking to translate their improved salaries into a better standard of living.

The problem for these wealthier Czechs, and the opportunity for you, the investor, is that the supply of quality housing is still far behind demand. A large amount of housing stock still consists of the crumbling ‘panelaky’ (prefab apartments) of the communist era. For many Czechs today, incomparably richer than the last generation, such accommodation is simply not acceptable. Consequently, if you offer them a quality rental property, in or near a major city, well-constructed and with western-style fixtures and fittings, you’re liable to be swamped with offers. Since Czechs have no problem with commuting a reasonable distance, properties within 50km of major cities are highly attractive. And crucially, with the economy and salaries growing so fast, the financial clout of the average Czech is also set to grow and grow.

High yield forecasts

In the medium term, most experts agree that the price of quality accommodation is set to grow by 15% per year in or near major cities, and anything up to a whopping 20-30% for Prague. (Property prices overall are set to rise by about 12% pa.) That represents staggering potential for capital growth. Gross rental yields for quality buy-to-let property in or near major cities are set to rise by 7.5-8.5% per annum. So, how do you enter this ever more tempting property market?

Fortunately, the Czech Republic is well-supplied with reliable, well-trained estate agents and solicitors. This doesn’t mean that fly-by-night operations don’t exist, so we’ll help you to find someone reliable, with a proven track record. Normally, you should allow 8% of the total purchase price to cover associated taxes and fees.

How to buy

First you need to find your property. (Your Czech estate agent can help you, and so can we.) On current market trends, the properties most in demand are apartments of 40 – 60 square metres, well-equipped, with access to public transport, shopping and leisure facilities. You can generally pick up properties like this for between two and four million Czech crowns – though naturally, there’s also a definite market for larger and more expensive properties.

It’s advisable, though not essential, to set up a Czech company, or SRO, to buy your property. These companies act as a tax and liability shelter, and only take a couple of days to establish. The cost is included within the 8% of purchase price already noted. It’s fairly normal to pay a deposit of 10% once you’ve identified the property you want. This is then set aside in an escrow account until the necessary paperwork is completed, and ownership is formally transferred. As in much of eastern Europe, this final stage of purchase can be a bit slow, but it’s highly reliable, and ‘gazumping’ and other irregularities are very rare.

Big yields, secure environment

All in all, this most ‘western’ country of eastern Europe, whose economy seems to go from strength to strength, has a wonderful array of investment opportunities to offer you. This is, after all, a country that can offer you the best of both worlds: high investment yields, and one of the safest, most secure financial environments in Europe.