Property Investment International - Newsletters
March 2009 - Prague rentals going bust
Dear Investor,
There has recently been increased focus by the media on Central & Eastern Europe’s economies and how much strain they will put on those in Western Europe. Most commentators have rightly pointed out the differences between the relatively stable Czech, Polish and Slovak economies and the more basket cases of Latvia and Hungary.
Whilst Eastern European countries are being tarnished as unstable economies they have many companies which are owned by corporations in the west who have been receiving huge dividends from their Eastern European subsidiaries. For example, Czech banks have recently sent many billions of Crowns to their Austrian and Italian masters, at a time when these foreign owners are themselves struggling to protect their balance sheets.
I think some of the fuss is a little overdone for the CZ, PL & SK economies – but that is not to say these economies will escape the downturn. Far from it. These economies have not had the same exposure to western toxic debts but at the same time are vulnerable to global forces and falls in their exports. Predicted Czech growth in 2009 has already been revised down into negative figures and I think this will be further revised down during the year. Unemployment in the Czech Republic jumped from 6.8 to 7.4% from January to February 2009 and is now up well over 1% in the last 6 months.
I believe we are still just at the start of the downturn of the economies in Eastern Europe, and most people haven’t woken up to this fact. Though I also still believe that the recessions there will be shorter and less profound than those in the west. For property investors the next year could prove to be a great time to take advantage of overdone negative sentiment and pick up some great deals as medium term these markets offer excellent growth prospects.
Prague rental market
I’ve become a little concerned about the rental market in Prague over the last few months as there seems to be a huge increase in supply of apartments for rent all over the city recently. I expected this to happen in areas such as Prague 7, 8 & 9 where there has been a lot of building, but seemingly it is affecting the whole city – thus rents are being squeezed.
The larger units seem to be the worst affected (studio’s and 2+kk’s are still holding up).
Advertised rentals on 3+kk units River Lofts have dropped from 24,000 to 14,500 CZK since Christmas.
Advertised rentals on 3+kk units Old Brewery have dropped from 25,000 to 17,000 CZK since Christmas.
Other developments (eg River Diamond, Prague Marina) are fairing even worse.
On the plus side, as the Czech economy gets worse (which I’m almost sure it will in the short term) I would hope that this will lead to more people renting and thus some of the supply should be soaked up, at least at the lower end of the market – time will tell if I’m right.
I think this phenomenon of oversupply will be more of a short term blip due to a large number of developments having completed within the last 6 months, I doubt that very much will be built by developers in the next couple of years.
I’ve recently undertaken a study to get some more data on this matter to see if my supply increase hypothesis is correct – I’ll report back in a couple of months.
Rhetorical puzzle
Q: How do you lose 500,000 USD a minute?
A: I’ve no idea. Ask AIG who last quarter lost 60 billion USD.
Last month’s answer was 250km. One could have done an infinite series to calculate the distance, or simply work out how long the trains take to meet and thus how long the fly can travel in that time, simple. Next month I’ll have to make it much harder.
A quick note on the UK property market
Over recent months (not to mention last year) I’ve seen many property companies promoting the UK property market as a great time to buy – before it’s too late! Whilst I acknowledge there will be some good opportunities around (as there are in many markets if you know them well) I still feel it’s just too early to start reinvesting in the UK on any scale. As such companies state the market may be about to turn the corner but I personally think that we’re in for more pain and that risks remain. Hence, my advice is to watch from the sidelines apart from perhaps snapping up the odd unmissable bargain.
Sucker rally
In both the UK and US housing since Christmas there has been some interesting data coming out – such as increasing prices, a rising number of construction starts and an increased number of home sales. This has been mirrored in March in the world’s major stock markets, which have seen quite a rally from their oversold positions and are now back around the same levels as at Christmas. Are these signs of a bottom in the markets?
I’m not so sure. To me this is just a sucker rally – i.e. one in which people think it’s the bottom of the market and pile in only to be hit by an even bigger market drop. Choose carefully whether you agree with this prognosis or not.
QE
I (and many others) mentioned before Christmas that the huge debts western governments were getting themselves into was likely to lead to these governments printing money as they were too lazy to find real solutions to their problems.
So it comes as no surprise that in the last month both the UK and US governments have been pumping new money into the system. What has surprised me is just how soon this has all happened.
I think we’ll see a lot more such action of the next year and consequently get ready for a bout of hefty inflation sometime in the future, which from a property investors point of view will be possibility a once in a lifetime opportunity ... cheap debt, low prices and high inflation ... hmmm I’m salivating already but it’s still too early to pile into any of the world’s major property markets.
Discounted Investments
Last month I mentioned two possible investment opportunities we were looking at in Prague.
The first of which is still hanging in the balance, we’ve pushed for a large discount and the developer is getting cold feet, in today’s market a lot of patience is required.
With the second possible deal the developer is now trying to sell the units by themselves at too high a price. So in this case we have to let them find out how the market is for themselves.
Our search continues!
We do, also, have a number of investors who have bought properties in the Czech Republic & Slovakia around 2 years ago, typically putting down 15% deposits. Now for various reasons these investors need to sell quickly at heavily reduced prices. For anyone interested these same apartments can be bought at far less than the price paid by the said investor 2 years ago! These represent great opportunities for any investor looking to buy at stupidly low prices in the Czech Republic and require very very low cash down (eg only 5-10% of the purchase price).
Going bust ...
I’m sadly hearing about more and more (property) companies struggling to make ends meet in the worldwide recession and many are going bust. These include developers (such as Central Park Praha in Prague), to mortgage brokers and overseas property companies. Some of these property companies simply got too fat in the boom years and have lost focus on providing great deals and customer service. I don’t want to see anyone go bust but some consolidation wouldn’t be a bad thing and will hopefully route out those with more shady practices.
The Prague real estate market is particularly fragmented with many hundreds of small agents around, most of which are not very good at what they do. I recently saw a prediction that 50% of such agents will shut up shop over the next couple of years as the market in the Czech Republic slows. Again this can only be a good thing for the industry and the customer.
We on the other hand actually have the opposite problem and are still hiring and expanding, which is, I suspect, a more interesting challenge. Furthermore, we have some interesting projects underway in the background of which I plan to release details of later in the year.
Now that spring is here I hope the weather will be kind and put some warmth back into all of our property portfolios.
Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com