A sleepy sales season has arrived on Prague’s previously red-hot housing market after a decade of unprecedented construction and price growth far exceeding inflation. Developers will not admit this, but there is now an excess of new homes, which are selling slowly and often at a discount. The cash-starved sector faces some thin years of little new construction, while potential homebuyers can sit back for once as further markdowns could be in the pipeline.
“Prices have declined and I think they will drop further,” says RE/MAX agent Tomáš Růžička. Almost nobody is now buying, he adds, while small rental flats are high in demand as young people postpone homeownership and wait for a full-fledged sale.
A covert sale
The downturn came almost undetected, and its full extent has only begun to appear more than half a year after it began. Advertised prices of Prague homes kept growing for most of 2008, although newspapers reported that some buyers successfully haggled for discounts, something unheard of in previous years.
Speculations about the market losing steam were only confirmed in April, when the Czech Statistical Office reported a 3% drop in home prices countrywide for the first quarter of 2009 – the first decline in years. More recent figures by the King Sturge consultancy show a 5.3% drop for new Prague flats. “Transaction prices actually started ebbing already in the second half of last year, but surveys failed to register this, as they only reflect the asking prices,” King Sturge analyst Ondřej Novotný says.
For 2009, the consultancy predicts prices will decline up to 10% for older brick-built flats and new projects in less-attractive areas, and as much as 15% for flats in old prefab blocks. “Quality projects in attractive locations are unlikely to see a major price correction,” says Novotný. Jaroslava Hašková, a realtor from Pražská realitní kancelář, says luxury homes in Prague’s historical centre are selling well and their prices remain stable, with most customers being well-to-do foreigners.
The average asking price of a Prague flat is now, according to King Sturge figures, just under CZK 60,000 (EUR 2,200) per square metre, down from CZK 65,000 in late 2008, but still way above the CZK 36,000 in 2004. Analysts say that one should always bear in mind that figures reflect advertised prices and that actual transaction prices now tend to be lower.
Developers lick their wounds
The global credit crunch has restricted access to loans for builders and homebuyers alike. Yet, while the latter may benefit from their wait-and-see strategy, the low number of transactions certainly plays against the former. Developers desperately need to raise cash, yet they fear that a blanket price reduction would hurt much-needed revenue and send damaging signals to lenders and stock markets. Instead, most still list their record-high prices from late 2008, but lure clients with bonuses and targeted promotions.
Ekospol discounts flats in one project and pledges to beat competitive offers for homes of comparable quality and location. Finep has put several dozen flats on sale and in some cases allows customers to “save” money by buying flats without parking spaces, floor covering or even some internal walls. The Czech arm of Skanska will offer complimentary vouchers that buyers can use to pay for utilities, insurance or appliances. Most generous of all, Central Group throws in a small car or, for those who have one, furnishes the kitchen or modifies the interior to the customer’s taste. The developer of Central Park Praha, CEE Property Development Portfolio, advertises no such perks, but Jan Domiter, the project’s managing director, says the venture tries to “accommodate customers’ expectations on an individual basis”. Yet other builders, such as Sekyra Group, sneer at the idea of discounts and insist their projects are too unique and hence immune to market fluctuations.
New projects on ice
Analysts interviewed for this article all agree that developers will now finish residential projects already in progress but that few new developments will start this year or next. The builders themselves insist it is too early to say whether they will suspend any plans – a near-certain indication that many will.
A joint report by Jones Lang LaSalle and REAS shows the number of Prague homes completed in 2008 was 33% lower than in 2007. King Sturge’s figures for the first quarter of 2009 indicate a countrywide decline in construction starts. Most analysts expect the trend to continue and hit especially hard in large cities. Novotný says banks will now only fund new projects if developers cover 40% of the cost with their own capital, a condition most firms cannot meet. Banks also want to see 40-50% of flats reserved before the first brick is laid. But paying a deposit for a home that only exists on paper, says Karel Dudych from Jones Lang LaSalle, is increasingly unpalatable for homebuyers.
Realtors say it is not that demand for homeownership has declined but that many potential customers are waiting for better deals. Others can no longer get mortgages as banks have toughened approval policies and now require a 20-30% down payment. Mortgage lending in 2008 was already 20% lower than in 2007 and King Sturge predicts a further decline this year.
Behavioural issues
“The Czech housing sector is after many years becoming a buyer’s market, in which the buyers and their requirements play a key role,” King Sturge wrote in a statement released in April. Developers, realtors and analysts alike say that the media have exaggerated the scale of the economic downturn and created expectations of a major crash of real estate prices. This, market insiders say, has prompted “irrational behaviour” among potential homebuyers, who now wait for better deals and thus further aggravate the downturn.
Novotný says that in the next two years banks will only fund smaller projects with up to 100 flats and the consequent sharp decline in construction may mean new homes will be in short supply, and the housing sector will eventually bounce back on renewed price growth.
It remains unclear when this recovery will ultimately happen. Jones Lang LaSalle/REAS reports a large surplus of unsold new homes in Prague and finds no reason to expect that buyers, developers or banks will change their behaviour any time soon.
In the Making
Central Park Praha
The upmarket housing project featuring 15-storey tower blocks overlooking a popular park in the Žižkov neighbourhood found its credit line severed last September with only 180 of the planned 520 flats completed. Work only resumed in February after the investor, CEE Property Development Portfolio, reassured the bank by throwing in more of its own cash.
Prague Marina
The first phase of the project to redevelop a former port on the Vltava is now finished, featuring three blocks with 340 flats, while an adjacent office complex is still under construction. The second phase with another 300 flats was to kick off this year; the developer, Lighthouse Group, would not say whether work will start as scheduled.
Nuselská mlékárna
Central Group has recently backed away from its planned construction of 200 luxury flats in a defunct dairy in Nusle. E15 reported that concerns about high cleanup costs might have been behind the move. The daily said builders are now staying away from costly brownfield revamps.
Rohanský ostrov
Across the river from Prague Marina, this largest and most precious chunk of undeveloped land in the city centre was acquired last year by Sekyra Group. A company spokesman now says the CZK 15 billion project to turn this riverside area into Prague’s new financial and administrative centre “might take off in six to seven years at the earliest”.
Nádraží Bubny
Last year, Orco Property Group bought this rail yard surrounded by used-car dealerships and repair shops on the left bank of the Vltava with plans for the area’s redevelopment starting in 2010. But two months ago the firm asked for protection from creditors and cut more than 200 staff, including some executives. Orco is now restructuring and looking for an investment partner.
In Comparison
A joint report comparing prices of new homes in central and eastern European capitals for late 2008 by REAS and Jones Lang LaSalle puts Prague roughly on a par with Warsaw, Bratislava and Zagreb, at around EUR 2,200 per square metre of floor space.
Kyiv and Ljubljana were costlier, at EUR 2,600 and EUR 2,800 per sq m, respectively. Bucharest, Budapest, Riga, Sofia, Tallinn and Vilnius were cheaper, at EUR 1,200-1,800 per sq m.
For 2009 the report predicts a moderate price decline in most of these cities; Kyiv and the Baltic capitals should see a steeper decline, while prices in Bratislava and Budapest are to remain flat.
Kryštof Chamonikolas is a journalist and translator living in London. He likes writing about business and politics. You can reach him at [email protected]
