Value versus Profit when Buying an Apartment in the Czech Republic.

The Austro-Hungarian Empire left a significant impression on the Czech Republic property market. Their grandiose high ceilings and superfluous apartments are the most demanded apartments in Prague today. However, one must present caution with agents selling apartments with such calibre, as there has been a movement amongst profit motivated developers to optimize space thereby extracting implicit value. Apartments with ceilings of 13 feet (4 meters) appear to be grand but many developers realize that the typical measurement for an apartment in Prague is price per meter squared (P/M^2) and this measure is a two dimensional measurement that focuses on living space but does not take ceiling space into consideration. Height is generally not accounted for in price measurements and apartments with high ceilings generally have more intrinsic value than more modern buildings. One way to account for this is volume, (m^3) but it is difficult as most sellers do not account state ceiling height and this information is usually embedded into the age of the building where it is more common knowledge amongst locals. . Developers have realized that in older buildings, ceiling are significantly higher and they have discovered creative ways to increase the profit by extracting this implicit value by adding a false or unusable floors, either for storage or for guest sleep quarters. In all instances, the apartment value does not change but the total sale price does. In essence, developers are extracting real wealth from the future buyer thereby reducing the ability of the investor to gain from their investment financially. The perceived size of an apartment is falsely higher than realization within this scheme. For instance, an apartment that has an internal size of 70 m^2 can be reconstructed and sell for an average price of 50,000 Kc/m2, but when the ceilings are lowered to create another floor the apartment apartment’s internal size increases by 30%. Hence the price will appear to be lower for the apartment with the added floor, say 47,000 Kc/m2 as the apartment is now 90 m2. Once one turns a 70 m^2 apartment into a 90 m^2 apartment, the total price goes from 3,500,000 Kc to 4,230,000 Kc, but in essence, the apartment value has not changed. So in essence, you have the same apartment but with a much higher price.

A first time foreign buyer may presume that the apartment is much larger than it really is and that it is less expensive to comparable properties and purchase the apartment. Due to this profit scheme, a developer can charge a lower perceived price per meter squared (P/M^2) thereby giving the impression that a first time observer is buying a larger apartment with a below average market price (P/M^2), but in reality, the internal size has not changed and hence the realization price, per meter squared (M2), is a higher than the comparable average market price. In many instances people may discover that it may not even be possible for an adult to walk or store much on the newly created top floor and when I asked an agent about this dilemma in one of the apartment photos below they suggested to ‘bend over, it is not that hard to walk’ or use this space as ‘storage but don’t store large objects’. I was perplexed to see the agent give me a demonstration, showing how one could live on this floor if one either crawled or walked with a hunch back.

A strong note of caution should be exercised when looking at an apartment where developers create multiple layers. By creating multiple layers developer are taking implicit value out these historic buildings and in many cases foreign first time buyers are the one’s that will lose out in the long term.

Appendix:

Photo 1: As you will see in the two photos below, both apartments are very beautiful and sell for about 5% below the market price (1 standard deviation from the average). What you will noticed in photo one, on the top right hand corner is a small internal balcony that can be used to store something or perhaps a chair to read, but a 5 foot 9 inch person can not stand up directly.

Photo 1

Photo 2

Photo 2:

Apartment 2 is a very nice and attractive apartment with a unique design. You will notice that the top left corner of the photo is another floor. There appears to be plenty of room, however, one has to crawl in the space in order to actually maneuver. This is fair if one is not paying the average market price. So in effect, you are paying a multiple layered price for this apartment, where a portion of the space is unusable. I.e. you are effectively paying for the same space twice. Storage space or unusable space should sell for at least 1/3 to 1/2 the average market price and not the full average market price.