Buying a Property in the Czech Republic

Where are People Buying?

The Czech Republic became ver= y fashionable with foreign buyers, primarily investors, five or six years ago. Since then the interest has waned a= little as prices have risen substantially and the letting market for foreign executives has diminished. Nonetheless, the C= zech Republic remains an= area of considerable interest, particularly for the person who is looking to com= bine an investment with some personal use. This is now a mature market = with, perhaps, slightly lower returns than you would find in some of the more rec= ent and 'aggressive' locations but – because of its superb quality –= ; it remains a market with a lot of potential for continuing future growth.

When we talk of the Czech Republic we are basical= ly talking of Prague<= /st1:City>. Very little activity takes place o= utside Prague,= though this, too, is slowly changing.

The main focus of activity by foreign bu= yers is as follows:

Historic Prague<= /span>

Initially, the investors were attracted = by the spectacularly beautiful nature of the historic Prague. There a was to buy historic property in the city centre on the sound principle that nobody is building any more, that it is in great demand and = that prices are therefore likely to rise. The purchase of these properties proved beneficial because, at that time, there were many expat businessmen working= in Prague and these = were areas where they wanted to be. Rents were high. Yield= s were good.

The business market has diminished somewhat. Many of the expat businessmen have been replaced by local people who require different types = of accommodation.

At roughly the same time the millions of tourists who visit Prague each year discovered the possibility of renting an apartment rather than staying in a hotel.

The main areas of interest, in both case= s, were the classic old city (Pra= gue 1) and the slightly more recent 'New Town', built around the turn of the 19= ^th century (Prague 2).

Inevitably, prices started to rise sharp= ly. This was not just due to foreign buyers. A successful local ec= onomy led also to a boom in domestic buyers.

Buyers are still looking to historic Prague as a place= to invest. It is still outstandi= ngly beautiful. It is still much in demand. Prices will still rise. The large annual rises = of the late 1990s have, however, probably now passed. Prague is now a stable and mature market.

New Prague<= /span>

At the same time as some people were loo= king to old Prague as a destination to invest others were looking at the newly developing areas designed to house the emerging middle classes. After 50 years of communist rule t= here was an enormous pent up demand for better accommodation= . There was also a traditional desir= e to live near the city centre. So= some parts of 'working class' Pragu= e were gentrified. New blocks of yuppie apartments were built. These, too, have grown well in value.

There are how a number of such developme= nts in various parts of the city. So= me are much better located than others and are much more likely than others to do = well in the medium term.

What is available and at what price?

There is always a huge range of prices i= n any property market. This one is = no exception. You need to rememb= er that, by and large, you get what you pay for. That is to say, a more expensive property is usually more expensive because it has some special quality abou= t it and, conversely, a very cheap property is usually very cheap because it has= a very poor location, it is built to a very low standard, it is in a bad stat= e of repair -- or all three!

Prices have been rising rapidly. There is still growth. Some of our clients have seen growth of over 40% over the last three years.

The table below attempts to show some ge= neral indication of prices as at January 2005.

Place & T= ype of Property	Low £	Mid £	High £
Prague 5 – New 1 bedroom apartment 'off plan'		£50,000
Prague 2, Vinohrady – 1 bedroom apartment 55m2 in classic block		£105,000
Prague 2, Vinohrady – 2/3 bedroom apartment 117m2 with lift in restored classic block		£150,000
Prague 6 – Loft apartment – 200m2 – fabulous condition and high specification			£135,000
Prague 1 – 3 minutes from Charles Bridge – Ri= ver views – 2 bedroom = apartment 120m2			£280,000
Prague 1 – 1 bedroom garden apartment – 46m2	£90,000	£125,000
Prague 1 – 1 bedroom apartment, – 77m2, amazing spec, location and v= iews			£500,000

Why are People Buying? – The Czech Republic as a Place to Invest

The main driving force behind the purcha= se of property in Prague= is the investor. Few people are buying a holiday home over there unless they wish also to rent them out as investment property. Fewer still buy to retire. Some are buying in connection with their employment. Overwhelmingly they are investors.

The driving force behind the investor is= the belief that Prague= is still under-priced by comparison with many Western European cities and t= hat there is still, therefore, some room for growth = in values.

That growth is encouraged because of the strong performance of the Czech economy (growth of over 4% last year) and because the domestic market is the overwhelming market in Prague, with foreign buyers being only = a very small percentage of the total.

Many people believe that there will also= be a new round of investment by foreign companies in Prague over the next five years as comp= anies change from seeing Prague as a frontier town in an emerging market to a mainstream destination.

The focus is still split between the his= toric centre and the new yuppie areas. The aspiration of every successful person in a Czech republic is to own their own property and so the tenants in the yuppie areas are lik= ely to be tenants only for a year or two until they can afford to buy somewhere= of their own. Tenants in the his= toric city tend to be much shorter duration.&nbs= p; Some will be holidaymakers, some will be film crews, some will be businessmen seconded to Prague for a short period and a few like to be local people who are young enough to value the vibrant nature of the city centre. 10% -15% annual capital growth is likely in these historic areas.

Like many cities, = Prague is one where there is a clear distinction in both price and potential letting value between areas that ap= pear outwardly similar. Much resea= rch is available on this point and taking advantage of it can make a huge differen= ce to the future performance of your investment.

The Climate as a Factor in Investment

Most British people buying abroad are motivated, in large measure, by the thought of a better climate. What is "better" depends= on your personal perspective. Few people would think the climate in Prague to be great!

If the property is for retirement the bu= yers will want a climate that is acceptable all year round. If the property is a holiday home = the buyers will be looking for a climate that appeals to them at the time is wh= en they are most likely to use the property.&= nbsp; If the property is for investment and for letting to the holidaymaker they will be looking for a long rental season.

Needless to say, the climate in Prague is a littl= e cool in winter! In the summer, how= ever, it is nearly as warm as the south of Spain= .

Maximum Temperature - Prague

Minimum Temperature - Prague

Rainfall - Prague

Sunshine - Prague

Growth of Gross Domestic Product as a Factor in Investment

A growing economy will produce more in t= he way of growth in the value of real estate than a stagnant or declining economy. The gross domestic p= roduct is one way of measuring that growth.

The Exchange Rate as a Factor in Investment

For us, one of the key indicators of any country where investment is likely to prove successful is either a stable exchange rate against other major currencies or a rate that is slowly impro= ving against other major currencies.

A common pattern for emerging market cou= ntries is that when they first get their independence the exchange-rate sinks rapi= dly, improves slowly and then stabilises or, if the country is doing well, slowly gains ground.

If the exchange rate is rising against t= he pound or the dollar the effect is that, in addition to benefiting from any increase in the value of the property you have bought, you also benefit from the increase in value of the currency.&nbs= p; The reverse is, of course, also true.

The Czech crown has been rising steadily= in value since 2001.

Tourism as a Factor in Investment

Estate Agents & Property Finders

Estate agents catering to the internatio= nal market are relatively new. The market itself has only really existed in any volume for the last ten years,= so you could not expect anything else. Of course, estate agency as a whole is relatively new in Czech Republic, dating really from Czech<= /st1:PlaceName> Republic's independ= ence from the communist world which started in the 1990s.

There are some good, reliable Czech esta= te agents. There are also some h= ighly disreputable ones. There are = also good, reliable overseas agents operating in the Czech Republic. There are, unfortunately, also a l= arge number of people (though less than in the boom years 3 or 4 years ago) who = have seen the explosion in the volume of sales and who have decided to get into = the business for the quick buck. = Many of them know nothing about either Czech Republic or its real estate market. They are simply salesmen.

You are much better dealing with a reput= able agent. Seek recommendations.<= /span>

As a preliminary step, check out all of = the websites you can find to get an idea for the prices and types of property available. Remember that not = every agent will sell the same property at the same price.

In Prague there are many agents who have on their books only a very small number of properties. I have seen sever= al who have only had five or six properties. Many have only 30 or 40. There are, of course, larger agencies but even a big agency is likely to have only a small number of properties by Western European standards.&= nbsp; Many of the agencies have staff who speak= only very limited English. As a re= sult, the activities of the property finder are more in evidence in Prague there and in many other places.<= span style=3D'mso-spacerun:yes'> They will identify your requiremen= ts, discuss your budget and preferences and then source as many suitable proper= ties as possible from the various agents in the area. They can even pre-filter those properties to eliminate the inevitable junk. Particularly if you are thinki= ng of buying and historic property it is well worth considering using their services. They will typically charge you a fee of about 3% of the property price.

Mortgages

Mortgages to buy property in the Czech Republic are increasingly available from banks and from developers themselves. They are available for both houses= and apartments.

Loan to value ratios of up to 70% are available. The mortgage is on= ly paid to you once the house has been completed. This means that you will have to f= und any stage payments yourself. Normal interest rates are about 4.5%. The maximum term is usually 15 years. Mortgages are only ava= ilable on a repayment basis (i.e. where both capital and interest are repaid by the end of the mortgage term) and they must normally be paid off by the time you are 70. Obviously, the precise offerings vary from bank to bank.

Eligibility for mortgages is calculated = on the "affordability" basis, as described in the main section of this book. Generally banks will al= low you to have overall mortgage and long term commitments amounting to 30 to 3= 3% of your available income.

You need to make sure that the funds wil= l be available in time for the signing of the final contract. If you are unable to pay the money= at that stage you will lose the deposit that you have paid.

See the main section of this book as to whether a Czech mortgage or a mortgage in the UK is more likely to meet your needs.

The Process of Buying

The most important thing to stress about buying a property in Czec= h Republic is that th= ere is a lot more risk associated with it than buying in say, Spain or England. There is a lot of property with ei= ther bad title, defective planning consent or subject to dispute. Legal advice is essential.<= /span>

Freedom to Buy

As a foreigner you can only buy land, bu= ildings or apartments in the Czec= h Republic through th= e medium of a Czech limited company. T= he company can be 100% foreign owned. <= /span>This will remain so despite the fact that the Czech Republic is now in the European Union. Such a provis= ion that would normally be illegal under European law but the Czechs negotiated= an opt-out to permit the continuance of this arrangement for several years to come. This requirement, whilst a nuisance and giving rise to some additional expenditu= re, can in some cases prove very tax efficient.

Initial Steps

Once you have found a property that you = want to party you will be expected to sign some form of contract. This will generally either be a Reservation Contract or a Preliminary Purchase Contract. See the main section of the book f= or an explanation of these concepts.

Note that the title Preliminary Purchase= Contract is misleading. It is actually= a full binding purchase contract.

We recommend that, wherever possible, you insist on signing a Reservation Contract rather than a Preliminary Purchase Contract at this stage if at all possible.

Searches and Enquiries

Once you have signed a Reservation Contr= act your lawyer should make various enquiries.= He should check that the contract is fair, that the seller has good title and the right to sell to you, that the area is zoned for residential building and that the building being undertaken enjoys all of the necessary planning and building consents. Depending on the circumstances of your case there could well be other inquiries that also need to be made.

In the Czech Republic it is quite common for work to be started, illegally, before all of these s= teps are in place. It is also quite common for property to have a title that is defective. Sometimes these problems are fatal= and should put you off having any involvement in the purchase. On other occasions the risks are m= inimal and, provided you go into the transaction with your eyes open, might not put you off buying if you really like the property.

New Property – Structural Guarantees

These, generally, benefit from a 10 year guarantee.

New Property – Guarantees of Completion

If you are buying a new property there is always the risk that the builder can go bust before you complete the transaction and that you will lose your money. There are various ways of safeguar= ding against this risk. Some devel= opers will provide a bank guarantee. Others will pay the money into escrow. See the main section of this book = for a fuller explanation of these concepts.

Declared Values

It is common for the value to be declare= d in the title to be less than the true value.&= nbsp; This is technically illegal but almost universal practice. The reason for this is, of course,= that the declared value is the value used by the tax office to determine the tax= es payable in respect of the purchase. You should avoid this if possible.&= nbsp; The main benefit under declaration accrues to the seller. He will avoid paying capital gains tax. You will be removing a b= urden from the seller and landing yourself with a potential problem later on if you ma= ke a significant under declaration.

See the main section of this book for mo= re details as to the issues arising out of under declarations.

The Other Main Dangers

The main problems that we come across in= the Czech Republic are defective title and defective planning consents. Other difficulties included the fa= ct that a substantial number of properties in Prague are subject to disputes a= nd that there have been instances of foreigners being duped into paying money = for property that either did not exist or that had already been sold to somebody else. This, however, it is le= ss common than it was a few years ago.

The Contract

As already explained, the first stage is normally the signing of a reservation contract securing your desired proper= ty for, say, one month. When you sign a reservation contract you will normally pay ov= er a small deposit -- perhaps €3000, perhaps 0 5% of the value of the property.<= /span> These funds will often be paid int= o an escrow account.

Once your lawyer has checked out the pro= perty and found that everything is in order you are ready to sign the Preliminary= Purchase Contract. This is also known = as the Contract of Future Purchase. = This commits you and the seller to signing the full contract transferring owners= hip shortly afterwards or, if the property is still in construction, once the property has been fully built.

The Preliminary Purchase Contract contai= ns most of the clauses you would expect to see in an English contract. These will include a description o= f the property, a statement of the legal title to the property, the price to be p= aid, how it is to be paid, the deadline for payment and any other deadlines applicable, what should happen in the event of breach of contract etc. Many Czech contracts are badly drafted. The problem is exacerbated by the fact that many contracts are drafted in English, which is clearly not the first language of the person doing the drafting. As a result they are unclear or muddled. Specifications tend = to be very "thin". Some, however, are incredibly detailed.

At this point you will normally pay a de= posit 10% of the price of the property. In the case of a property under construction ("off plan") you will s= tart to make stage payments. The s= ize and number of these payments will vary from property to property. A typical scheme would provide for= an initial payment of 30% followed by two further payments of 30% as construct= ion progressed and followed by a final payment of 10% upon delivery. Occasionally schemes are found whe= re there is only one preliminary payment of, say, 30% with the balance being p= aid on delivery. This is obviousl= y very useful if you are taking a mortgage.

Signing the Contract of Transfer of Title

Once you are ready to take delivery of t= he house you will sign the Final Purchase Contract. This is signed when the property is ready for delivery to you including, in the case of a new property, when the seller has secured the necessary licence to occupy the property. It is at this point that the balan= ce of the money is paid across to the seller.

You do not need to be present in the Czech Republic to sign this document as your lawyer can prepare a Power of Attorney under which you can appoint somebody else to sign on your behalf. This is a sensible thing to do as = it saves the need for you to go to the Czech Republic, often at = short notice, to sign the final title.

Registration of Title

Once you have paid the balance of the pr= ice the seller will authorise the registration of your ownership of the propert= y in the local title register. Onc= e this has been done the local Czech company that you have set up to own the prope= rty will be the full legal owner of the property in much the same way as you would b= e in Britain<= /st1:country-region>.

This will take several months.

Ideally, you should not release the mone= y to the seller until the title has been registered. It should be kept in escrow. Unfortunately, this is seldom acceptable to the seller and so, in practice, the price is in most instances released to the seller upon signing of the Final Contract and presentation of the contract for registration.

The Expenses of Buying

The main expenses of buying are as follo= ws:

Transfer Tax -- the equivalent of stamp = duty – is 3% of the taxable value of the property. This is generally paid by the selle= r.

The VAT on a new property is paid by the= buyer at a rate of 5% if you are buying a house or an apartment. Commercial premises, garages, park= ing spaces etc carry VAT at 19%. The amount of the VAT may or may not be includ= ed in the price of the property as quoted to you. As the sum is huge, you should alw= ays check this out.

Estate agents' fees, if these are not pa= id by the seller, -- typically 5% of the price if you are using a local Czech age= nt.

Notary's fees. These will vary from case to= case but will typically not exceed £200.

Legal fees. They will range from about 1%= to 2% of the price of the property.

Fees to set up a com= pany. You will need to set up a Czech company. This is likely to co= st £1,500.

Conversions & Renovations

There are many properties on sale in the= Czech Republic, particularly in the rural areas, that need huge amounts of work. As yet there= is not much of a market for these properties.= The problems associated with the renovation project can be huge. Not least will be your probable inability to speak C= zech. If you are contemplating a renovat= ion project it is vital to get good advice right at the outset.

Building costs are low. A full restoration project is like= ly to cost about £300 per square metre.&nb= sp; If simple repair is necessary you might end up paying about £3= per hour for a skilled labourer, though more if you employ a contractor.=

As is the case with many countries, it i= s very easy to find that once you have finished your project the cost of buying the property and the work you have undertaken is more than the value of the property as it stands. Keep c= ontrol

Renting out your Property

If you are renting out your property you should make sure that you use a proper rental contract. Your lawyer will be able to supply= you with a draft that you can change as necessary.

Although renting property in the Czech Republic is largely unregulated, renting on short term lets to tourists produces the least problems in terms of what you can do if the tenant does = not pay the rent or refuses to leave.

Rental yields in <= st1:place w:st=3D"on">Prague are, at the moment, about 5% net= .

At the moment, we would expect to see a = net rental yield (i.e. net of all expenses apart from your finance costs and personal taxation) of about 5% on the coast and perhaps 8% in a popular ski area. In the longer term I ex= pect to see demand increase but also supply to increase. These may well cancel each other o= ut leaving yields more or less as they stand today. The one factor that it is likely to spoil this picture is the rapidly rising price of property. A person who bought an apartment f= or £200,000 and who rented out for £250 per week will be much happ= ier than the same person who spent £300,000 on the same property and will also rented out for £250 per week.&n= bsp; When thinking of your rental yield we always suggest that you work it out on the basis of current value, not purchase value as that will allow yo= u to compare the performance of your investment with opportunities elsewhere.

At the moment, and with the substantial qualification that there are huge variations in the marketplace, we would expect to see you rent a good one-bedroom apartment in Prague 1 for about £200 per week and a similar apartment further out, but in a place with reasonable access to the city, for about £100 per week. Two bedroom apartments will, gener= ally, produce a slightly lower return in terms of their rental income but, often,= a higher return in terms of their potential capital growth.

Visas and Residence Permits

The Czech Republic is in the European Union. As a result, = you enjoy the same freedom to come and go as you would enjoy when going to, say= , France. When the Czech Republic joined the European Union there were one or two transitional arrangements, lasting for up to seven years, that qualify your rights as a fellow European Union citizen to a slight extent.=

As is the case with most countries, if y= ou wish to remain in the Cze= ch Republic for more than three months you = will need to obtain a residence card. The formalities for this are relatively straightforward. You will need proof that you can s= upport yourself, proof of health insurance and a document stating the purpose of y= our stay.

Taxes for Non-Resident Property Owners

Local Property Taxes

These are the equivalent of your English Council Tax or our old rates.

An annual Real Estate Tax is levied on land and buildings. The = tax on land depends on the quality of particular land, its location and use. The t= ax on buildings is not based on market value but, usually, on their physical characteristics. It is small.= Local property taxes = in Prague are very l= ow. They are normally CZK20 per square= metre per year (about £20 per year for a 100m2 apartment). This is not enough to get excited = about.

Management Charges

Management charges are not taxes but thi= s is a convenient point to think about them. If you live in an apartment complex or in a group of buildings that share a common facility (such as a swimming pool) you will have to pay a management charge to cover the cost of providing those common facilities. In the case of a block of apartmen= ts, those facilities will include the cleaning and electricity for the general areas, any gardening, the maintenance of pools, lifts, car parking areas et= c. Obviously the cost of the management charge will vary dramatically dependent upon the quality and number of facilities provided for you.

Income & Capital Gains Taxes

Corporate income tax is paid at a rate of 28% on your prof= its. There are lower rates for investment funds and investment companies. Legal bodies make prepayments followed by a settlement in the next year. There is= a special incentive: 10% of a newly purchased investment may be deducted from= the tax base. There is possibility to obtain tax holidays of up to ten years for large new investments.

Capital Gains Taxes

These are treated as part of your income= .

Wealth Taxes

None

Inheritance Taxes

The rates of inheritance t= ax and gift tax range from 0.5% to 40%. These depend on the relation between inheritor/donor and acquirer (heir/donee).

Taxes for Resident Foreigners

This is beyond the scope of this book.

Double Taxation Treaty

The Double Taxation Treaty determines wh= at happens if, under local tax law and UK tax law, you are deemed to= be liable to pay tax in both countries.

The general principle behind all Double Taxation Treaties is that it is unfair that you have to pay the same tax tw= ice, so the rules are designed to help the two countries decide which of them sh= ould get what.

The treaties are long and complex. Seek advice as to their effe= ct in your case.