Securing funding for development projects in the Czech Republic has historically presented challenges, but the most significant trial is currently unfolding. The recent surge in popularity of euro loans, which offered notably lower interest rates than their Czech counterparts, facilitating reasonable profitability even when yields would otherwise be negligible, has come to an end. Banks are reverting their stance and tightening their criteria for financing extensive ventures. This shift is affecting even major market players who possess their own capital and have been extending loans on a smaller scale.
Previously, financing in the Czech Republic typically came with interest rates of approximately 10%. The adoption of the euro, supported by Euribor, allowed for interest rates around 5%, sometimes even more advantageous. With the potential withdrawal of this financing avenue, numerous developers engaged in large-scale projects could face a loss in profitability, potentially reaching millions of crowns. Their potential recourse might involve halting, selling, or mothballing their projects until more favorable conditions arise.
Collapse of Major Players
This scenario is already unfolding, and it’s likely that most prominent market players with capital will adopt similar strategies. The initial sign emerged when Central Group postponed the construction of 700 apartments in lucrative Prague locations for a year. Should one of the top ten developers follow suit, the market would naturally respond.
Banks are also reacting accordingly. Drawing parallels with London’s real estate market devaluation, a comparable trend could emerge in the Czech Republic. Parameters such as Loan-to-Value (LTV) and Loan-to-Cost (LTC) are tightening at an alarming pace, resembling conditions from 15 years ago. This implies that project financing might only extend up to 65% of the total. Moreover, the impact of developments in the US, although pending, is expected to further influence the local market. Yet, it’s evident that obtaining financing through banking entities will become an exclusive privilege in the near term.
Meanwhile, material costs remain elevated due to ongoing conflicts in Europe, further exacerbating the already exorbitant housing prices. As a result, an inevitable shift is anticipated: a pivot towards a higher proportion of cooperative and rental housing as the market’s orientation changes.
Even prominent developers are likely to adjust to extended profitability timelines. Roughly 50-60% of the top market contenders continue construction. However, it’s evident that these players will have to pivot towards different housing styles, such as housing associations or future rental projects.
Banks are expected to persist in offering financing for rental properties in euros. Extended loan durations of up to 35 years will elevate LTV ratios to 80%. Developers can enjoy the benefit of bypassing apartment pre-sales requirements but must also accept that quick profits might not materialize as they once did.
Smaller developers, who only a few years ago anticipated modest profitability and didn’t foresee the tumultuous interest rate fluctuations brought about by COVID-19 and conflicts, may now find themselves dealing with projects that yield no margin. For them, a prudent move would be to divest such projects swiftly to prevent losses and offload them to larger counterparts.