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Czech Republic
The Czech Republic, and especially the capital city Prague, is one of the most promising locations for real estate investment in the world. Many indications show that the strength of the market will continue in the coming years. Several factors relating to EU membership will bring further increases to property value. In 2006 or 2007, laws will likely adapt to allow citizens of all EU countries to purchase property as individuals (as opposed to current laws allowing foreigners to purchase property only through an established Czech company). This change will bring an increased demand and with that demand an increase in property value. Similarly, individuals of other EU countries will be able to work in the Czech Republic without special permits, as of 2006 or 2007, resulting in a futher influx of foreigners to Prague, and an increased demand for apartment rentals. In coming years, the Czech Republic will join the EU Schengen area, allowing greater ease for tourists to enter the country. Soon the Czech Republic will also see the conversion to the euro (€) from the Czech crown (CZK). This too will cause a rise in real estate value, as was seen in western Europe at the time of the currency conversion.
Interest in the residential market is strong, due, in addition to EU membership, to the Czech economy compared with neighbors, to growth of the Czech middle class, and to a current lack of quality housing available. Foreigners living in the Czech Republic, as well as a young and growing Czech middle class, have a high demand for modern, mid-range housing. Much of currently available housing is considered technologically and aesthetically inadequate. Because of this, the renovation of existing real estate to current expectations is profitable. Construction is similarly profitable – residential space comprises only 10% of current construction in Prague, compared with a third in western Europe. The Czech statistics office estimates that 50,000 new homes will be needed by 2010. Luxury flats for sale are also in increased demand, bringing annual appreciations from 20% to upwards of 60% in recent years. Analysts estimate that the residential market is in its second or third year of a ten year cycle, resulting in continued growth for seven years, with annual appreciation near 20%.
Real estate investment in commercial and office properties is equally promising in the coming years. Several factors are contributing to growth in these sectors. The tourism industry, retail industry, and hospitality industry are growing in Prague at a rate of near 10%. Increased demand for leased space for each of these industries boosts property valuation. With the GDP growing roughly 3% annually (Czech Statistics Office), the growing middle class, and the increase in living standards, there is an influx of companies in need of retail and office space. Recent trends shows an increasing demand for stand alone office properties, promoting office building development. Gross investment yeilds, calculated as annual gross rental income / purchase price, is 8%. This is indicative of a stable economy and a reduced risk of investing in the Czech Republic. The risk / return ratio in the the Czech property market is significantly better than that of Western European countries.
Poland
Through the past 3 years, real estate in Poland has been going through the throes of market corrections, in some cases drastic. However, this period of unpredictability is now coming to an end, and indications show that Poland will be a good location for real estate investment. During 2004, residential prices in Warsaw increased 30%. While this rate is not likely to be sustained, a steady increase in property value through the next decade is likely. Poland’s recent accession to the EU, budget reforms, and an improving economy should sustain property appreciation. Poland’s budget will be an important factor – there is still a deficit greater than the EU mandated 3%, but Poland is now nearing this mark. Other indications are very promising, including a large migration to urban areas. Similarly, living space in Polish is cities is on average less than half the typical living space in western Europe, and there is an increased demand for larger homes
Hungary
Budapest, Hungary has the advantage of being one of the most popular destinations for foreigners wishing to live in Central or Eastern Europe. Currently there is very small ownership by foreigners in Budapest, only 1.1%, or 8,000 out of 700,000 dwellings. As demand increases for the purchase of flats, prices could rise drastically as they have in Prague. Past years have shown steady growth of greater than 20%. This growth is slowing slightly, but a rate greater than 15% is sustainable for at least several years more. Many analysts see the performance of real estate investment in Hungary as closely related to the performance of investments in Romania and Bulgaria. Difficulties in both those countries make investments there high risk, but if the economies of Romania and Bulgaria stabilize, investment money may be drawn away from Hungary. The appreciation of real estate in Budapest will remain strong due to the prospects for the city as a tourist and residential destination.
Slovakia
Sharing the benefits of new memberships with the above countries, Slovakia has recently joined both the EU and NATO. The Slovakian government is reforming policies in order to improve the business environment, as well as to bring investor’s rights to Western European standards. Within the past year, the Slovakian real estate market was liberalized, and it is now possible for foreigners to purchase real estate. These changes have brought an influx of tourism, foreign citizens, and investment in several sectors. Real Estate in Slovakia is still less expensive than neighboring countries, and is likely to equalize in the coming years.
The strategy of Burnett Capital is to direct real estate investment most heavily to the Czech Republic, where growth, stability and safety are strong. Portions of the real estate investment funds will also fuel purchases and developments, to varying degrees, in the enhanced markets of Poland, Hungary, and Slovakia, where growth is slightly less predictable, but potentially greater. This mutual fund approach will maximize the return to risk ratio for Burnett Capital investors.
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