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PII Newsletter May 09 - Prague sales & rental supply

Dear Investor,

The world seems to have avoided Armageddon for now, property markets are starting to bottom out, stock markets have rallied, oil prices have almost doubled, banks want to pay back government money and so the list of more positive news goes on. The future is far from certain but there is at least more certainty than in the months gone by and there is no doubt that it’s a great time to invest, despite negatives such as rising unemployment. But before we get carried away with ourselves let’s take a quick look at the Prague market.

Prague property market data

As mentioned in previous newsletters since March I’ve been collecting some indicative data about the supply of properties for both rent and sale in Prague to give me an indication whether my theory of property oversupply is affecting prices is valid or not.

Note the data does not represent actual supply on the market but is the approx supply taken from the largest property portal in the Czech Republic around the same time of day every week. Thus the below data can only be used to indicate the market trends and not specify absolute values – despite this I still feel it is a useful exercise.

Rental Supply

Date	Praha	Praha 1	Praha 2	Praha 3	Praha 4	Praha 5	Praha 6	Praha 7	Praha 8	Praha 9	Praha 10
10/03/2009	13,618	1,996	1,721	890	1,570	2,118	1,446	796	759	1,037	1,284
18/03/2009	13,945	2,000	1,780	970	1,648	2,144	1,437	792	784	1,056	1,339
25/03/2009	14,327	2,032	1,802	1,018	1,675	2,180	1,474	843	820	1,085	1,398
01/04/2009	14,588	2,067	1,857	1,050	1,669	2,213	1,543	877	856	1,061	1,394
08/04/2009	14,900	2,060	1,895	1,135	1,720	2,304	1,576	874	863	1,034	1,438
15/04/2009	14,993	2,068	1,907	1,191	1,685	2,291	1,624	885	858	1,035	1,447
22/04/2009	15,555	2,048	2,022	1,224	1,866	2,346	1,631	933	886	1,081	1,517
29/04/2009	15,514	2,016	2,011	1,261	1,836	2,239	1,619	922	875	1,103	1,513
06/05/2009	15,528	1,985	2,023	1,247	1,857	2,319	1,591	892	869	1,137	1,591
13/05/2009	15,447	1,960	2,004	1,227	1,816	2,286	1,658	880	868	1,125	1,622
20/05/2009	15,911	1,947	2,130	1,292	1,835	2,358	1,681	893	895	1,196	1,683
27/05/2009	16,381	2,028	2,148	1,316	1,967	2,394	1,708	981	914	1,218	1,706

In just the last 2.5 months rental supply in Prague has increased by around 20%, which is considerable. It is a shame I do not have the same data from the end of last year as my own feeling is that since Christmas rental property supply has increased significantly and is having a huge impact on prices in the market. This is hardly surprising when you look at just how many developments have completed in Prague in just the last 6 months, the list is almost as long as my arm.

Correspondingly rents in Prague have dropped around 20-30% since last year, this is naturally putting many investors in a tight spot cashflow wise many of whom are choosing to cut their losses and sell up (which is keeping us very busy).

For those who are able to take a longer term view I believe that the rental market will pick up again. The short term oversupply will gradually get absorbed in to the market, many foreign investors will liquidate their investments and the economy and wages will again rebound, putting the supply/demand equation back in balance. Many developers we’re speaking to at the moment are not starting planned developments or have completely stopped building if not near completion, this will have a restricting effect on supply in the market further down the line and is a tap that cannot be quickly turned on again.

This supply restriction is very healthy for the market and medium term will help both sales and rental prices to grow again, I believe.

Sales supply

Date	Praha	Praha 1	Praha 2	Praha 3	Praha 4	Praha 5	Praha 6	Praha 7	Praha 8	Praha 9	Praha 10
11/03/2009	18,351	860	1,008	1,366	3,565	2,681	1,469	1,058	1,407	2,566	2,368
18/03/2009	18,488	889	985	1,385	3,631	2,671	1,494	1,082	1,451	2,564	2,333
25/03/2009	18,575	909	1,010	1,361	3,648	2,721	1,496	1,078	1,461	2,603	2,285
01/04/2009	18,575	895	996	1,371	3,637	2,700	1,512	1,113	1,501	2,578	2,271
08/04/2009	18,542	922	970	1,352	3,573	2,683	1,493	1,125	1,491	2,630	2,302
15/04/2009	18,369	909	967	1,364	3,499	2,697	1,482	1,135	1,483	2,596	2,236
22/04/2009	18,505	917	933	1,402	3,544	2,718	1,491	1,114	1,448	2,648	2,289
29/04/2009	18,478	919	914	1,404	3,460	2,705	1,546	1,125	1,407	2,634	2,349
06/05/2009	18,205	944	884	1,356	3,336	2,690	1,530	1,091	1,416	2,614	2,332
13/05/2009	17,979	967	862	1,377	3,286	2,718	1,528	1,066	1,345	2,521	2,295
20/05/2009	18,306	965	895	1,348	3,238	2,774	1,622	1,108	1,370	2,530	2,442
27/05/2009	17,991	940	885	1,324	3,152	2,670	1,621	1,078	1,385	2,537	2,387

Interesting sales supply has been quite static recently, yet prices have been falling month on month since summer 2008 due to falling demand. There is still a lot of softness in the market but people are still buying if the prices are right and over the last month I have not seen any significant drop in either prices or demand, so things may be starting to turn a little, that said many people are still very cautious and waiting to see what happens to the market before committing. I think prices can still fall a little further but unless the economy goes through a sustained downward period or mortgage financing is significantly restricted I don’t see further large price falls and medium term prices will rebound.

I will continue to monitor the supply side of the Prague market and report back periodically.


Czech mortgage rates

Despite the fall in the Czech National Bank base rate during the year mortgage rates offer by banks have not dropped, that is until this month when finally mortgage rates have started to ease. At this moment in time foreign investors can typically obtain an 80-85% LTV mortgage at around 5.5% interest rate, for example, I recently got a rate of 5.14%.

The current outlook for Czech base rates is stable with the outside chance they may be reduced further depending on how the economy develops.

For any mortgage queries please contact mortgages@propertyinvestmentinternational.com

Puzzle

There were a couple of possible answers to last month’s puzzle: (1) 177 – 77 = 100 (2) (7+7) × [7+(1 ÷ 7)] = 100


The Russians are coming …

… or should that be the Russians are already here? Russians still make up a large portion of buyers in the Czech Republic and have done for some time. They still constitute the second largest (after Czechs) portion of our clients on the Czech real estate agency side of our business, so much so that soon we will translate our website in Russian.

The mindset of the Russian buyer is somewhat different, in my experience, from western clients. Typically the price whilst being important is not so toughly negotiated, however, when it comes to the contracts our Russian clients are extremely concerned about having their rights and money protected during the purchase/sale process. Which is sometimes the opposite to investors from the west. I’m sure both sides could learn something from one another.


Bratislava

In many ways Bratislava mirrors the Prague property market but on a smaller scale. The perennial problem in Bratislava is that it’s a small city and it quickly gets oversupplied and this is, like Prague, indeed the case today.

There has simply been too much building too quickly this (along with an economic slowdown) has led to falling prices and falling rents.

Not only is the market a little oversupplied but too much of the new building has been targeting the upper end of the market. For example, typical studios are around 60 sqm (which normally I expect for a good sized 1 bed unit) and typical 1 beds sizes of around 80 sqm, which is again far too high particularly for your average buy-to-let tenant.

That said the economic transformation of Slovakia is impressive and medium term I’m sure it will continue to do well so long as the forward thinking government stays in power.

I was in Bratislava again recently and toured a number of developments, many of which had good standards and good locations. I feel that there is still some way to go before the market bottoms out and deals are at their ripest, but their time will come.


Recession?

Perhaps I live in a bubble but apparently there has been one of the worst global recessions in history taking place recently, but somehow I just don’t see it. Whilst I’m a heavy consumer of economic/company data everywhere I go in Europe the shops and restaurants still seem pretty busy and people spending like crazy.

Many economists are predicting a new type of world economy where people save more, spend less, borrow less and that consumer demand won’t be the main driver of future world growth, but again I just don’t see it. I think peoples spending habits won’t have changed significantly over the last couple of years and furthermore consumers in many populous Asian countries are only just getting started.

With this in mind I see a world where demand for basic resources (whether it be oil, food, metals etc) continues to grow (oil has already reached back up to 68 USD per barrel) with probable high inflation in the pipeline.

So how to take advantage of this as an investor?

Well, to align yourself with future trends you need to invest in, or derivatives of, basic resources / commodities, finance / banking which will rebound rapidly and technology which again will become a high growth industry creating jobs and solutions to the worlds problem.

At the moment I see many opportunities for growth in the stock market in companies in the sectors aforementioned.

From a property point of view one needs to look at locations that will also benefit from such trends, whether it be SE England (finance/technology), Norway, Australia and Canada (resources), properties that are situated near transport links (such as metro/rail) and good demographics. Perhaps also low energy housing will show higher capital growth rates in the future?

I will expand on these points in more detail in future newsletters.


There are a lot of open questions as to how the world (and property markets) will look in the future and how future trends will develop. Investors need to keep their eye on the ball in the next few years, as if high inflation kicks in (e.g. due to a huge spike in oil prices) then it could put another massive damper on world growth and things (including property price growth) could quickly come to a grinding halt. Hence you need to think about your investment strategy carefully and review regularly to keep it on track in this rapidly changing world.

Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com