Investment Strategy

Recently, gross investment yields (defined as annual gross rental value / purchase price) on residential housing in general have been squeezed to a typical retail level of 8%. Yields in the city centre are even less and one cannot ignore the high vacancy rates of luxury flats. A year ago yields of 10-12% could be reasonably expected. Falling yields are the natural result of sale prices growing faster than rental rates. Theoretically they are indicative of a maturing and stabilised economy. The lowered rate of return is simply reflecting the lowered risk of investing into the Czech Republic. Still, knowledgeable investors recognise that the risk/return ratio of the Czech property market is far more attractive than that of Western Europe.

It should be emphasised that the 8% gross yield is for investors who buy straight from the first English speaking real estate agent they meet. Those savvy enough to learn enough Czech vocabulary to study the offerings on the Czech-language real estate publications and web-sites (i.e. www.bytyvpraze.cz) will find many diamonds in the rough. I can sum up my own experience by saying “I’ve never seen a GREAT deal in English.” I emphasise word “great” because most of the deals I’ve seen in English are not necessarily “bad” deals, but they are definitely not what I would consider “great.” If one takes the time, 10-15% gross yield properties can be found on a routine basis and do not necessarily have thick strings attached.

For those seeking to employ the leveraged “buy-to-let” strategy of investing into rental properties, my advice is to bet on properties that Czechs can afford as opposed to counting on some big-spending expatriate. This could be typified as smaller 50-75 sq. m. properties outside the Prague city centre leasing for under CZK 15,000. For a given investment of say GBP 100,000 it is better to own several of these smaller flats than a single large expensive one. We know of at least on developer in Prague that recently sold out all of its 50-75 sq. m 1 and 2 bedroom flats and subsequently decided to split up its remaining larger flats into smaller units because they just didn’t sell.

For those intending use bank loans to leverage their investments, it should be mentioned that interest only loans are currently not available in the Czech Republic. Interest on Czech Crown denominated loans is currently available at rates under 5% and financing is typically available on up to 75-80% of the underlying properties value. The fact that principle must be added into the monthly payment means that leveraging over 50-60% of the investment will result in a negative cash flow.