The Prague property market has and continues to see overwhelming demand from both foreign and local investors. And who wouldn’t like to own a property in this fairytale city that pulls at your heart strings and attracts major foreign investors on the basis of economics.With the Czech economy running red-hot, in fact, at a stunning 6% last year (2005 GDP), there is good reason to consider this beautiful capital as a strong investment choice. Czech Republic’s results far outstripped the average EU GDP growth of 1.6% and those of Hungary (4.1%) and Poland (3.2%). Slovakia alone equaled Czech Republic in terms of growth.Economic Indicator – GDP 2000/3.9%2001/2.6%2002/1.5%2003/3.7%2004/4.0%2005/6.0%Not only was 2005 extraordinary in terms of Czech GDP growth but also with the sheer number of new investment projects and with this, the total foreign investment (FDI). Total FDI in 2005 was more than 263 billion CZK (11 billion USD) which is the highest figure in history in terms of dollars and second highest in terms of CZK.Economic Indicator – FDI (USD billion) 2000/5.02001/5.52002/8.42003/2.62004/4.02005/11.0However, what does all of this mean with regard to the residential property market?Higher GDP usually translates into higher disposable income for the population. Much of this increase is focused on Prague where the average gross monthly wages was 23 000 CZK as compared to the national average of 18 900 (Q3 2005).Also, unemployment is much lower in Prague compared with the rest of Czech Republic. The national average is 9% and Prague’s is 3.25% (Q3 2005).Even the sheer number of tourists in Prague affects property prices as some are purchased for the short-term rental market. Each quarter in 2005 averaged 950 000 tourists. It is rare to find in Prague private accommodation for under 1 400 CZK/night. It only goes up from there. A well-located apartment with a professional marketing and management company can make an excellent return.What other major investment news is there that affects your decision as an investor? Here is a selection from 2005 and newer.Other Investment News (from CzechInvest and other news sources)March 2005: Czech airlines (CSA) is establishing a new repair center in Prague. It will eventually employ up 400 specialized aviation mechanics and other technicians. 1.35 billion CZK will be invested into setting up the facility.”The project for this new repair center is based upon CSA’s long-term strategic plans for developing its technological base camp for airplane and aircraft component maintenance and repair in close proximity to the international Prague – Ruzyne airport,” says CSA president Jaroslav TvrdikApril 2005: Scottish company Incline opened its high-tech centre in Prague-Letnany which services flat LCD notebooks, LCD televisions and plasma screens. 165 new jobs will be created at its new center.”The growing demand of our customers in the European region induced us to increase our capacity and build a repair centre right in Central Europe,” said David McKinney, Executive Director of Incline Global Technology Services, and added: “The Czech Republic was chosen because of its excellent infrastructure and its experienced labour pool. I trust that we will succeed in building a world-class centre here.”April 2005: Toyota Peugeot Citroën Automobile (TPCA) launches production in the Czech Republic. Total investment into their new plant in Kolin amounted to 1.3 billion EURO. An estimated staff of 3 000 will eventually be employed here.”The TPCA launch will be one of the factors behind this year’s national GDP surpassing the four percent mark,” said Martin Jahn, Deputy Prime Minister for Economic Affairs. “However, there are also other aspects of this investment with material importance for our economy, among them the import of modern technology and the transfer of the unique manufacturing know-how that the entire world has tried to copy from Toyota. TPCA has already made contact with the Technical College CVUT in Prague, planning to tap its pool of top-class experts in order to fill key positions in the firm. TPCA is also planning to cooperate with other technical universities.”June 2005: Computer Associates International, Inc. (NYSE: CA) declared its intended creation of the first worldwide Mainframe Centre of Excellence in Prague. The new Centre will focus on software development, maintenance, validation and quality assurance for the mainframe computing environment. This is estimated to be a 36 million EURO investment. More than 200 are expected to be hired and trained for this facility.Guy Harrison, senior vice president, Development Operations at CA said “This Centre of Excellence will provide mainframe users worldwide with a host of innovations, and will help strengthen the Czech Republic’s position as a hub of IT activity.”June 2005: Accenture, a global management consulting held the official grand opening of its new facility in its shared services centre in Prague-Chodov. Accenture, who fourteen years ago entered the Czech market, is expanding rapidly here – employing more than 1,300 people and continues to expand.August 2005: International rating agency Fitch upgraded all its ratings of credit reliability for the Czech Republic. It gave the Czech Republic an A for its long-term foreign currency obligations compared to the previous A-. The short-term currency rating jumped to F1 from F2 and the state’s rating ceiling reached AA- from A+. The rating for long-term debts in Czech crowns was also raised from A to A+.”Strong economic growth, continued real convergence with Western Europe and moderate external financing risks support the upgrade of the Czech Republic’s sovereign ratings,” says David Heslam, Associate Director in Fitch’s Sovereign group.September 2005: SAP AG officially opened its newest shared services center, the SAP Business Services Center Europe (BSCE) in Prague, Czech Republic. As of September 2005, 132 employees worked at the center and they supported 70 countries in 15 different languages.”As a high performance company, it is SAP’s strategy to effectively and efficiently support core internal functions such as HR and F&A throughout the global business. In addition to providing HR and F&A services to SAP employees, the center also offers customers unique insight into how ‘SAP runs SAP’ in performing these services,” said Claus Heinrich, member of the executive board, SAP AG. “The new BSCE here in Prague, with its highly skilled team, is a key milestone in executing to this strategy.”November 2005: Pan-European telecommunications company Interoute moves their key customer center from Great Britain to Prague. Over 100 specialists will eventually be employed here over a period of 3 years.”Our customer centre is based on a different concept than usual. Its foundation is not administrative workers but technical personnel, which allows us to provide highly specialized and individual service,” said Vladimir Hendrych, Country Manager of Interoute for Central and Eastern Europe.December 2005: DHL continues to see success for their investment in Czech Republic. DHL has invested over 500 million EURO over 5 years into their IT center in Prague. DHL currently employs over 900 at their center. About three quarters of these are Czech and the rest from 46 other countries.”We made the decision to come here in 2003, and since then it has become even more desirable,” says McGuckin, Prague-based managing director of IT services. He cited Prague’s numerous air links to the rest of Europe, its good infrastructure, a business-friendly climate, low wages and low salary inflation for this statement.December 2005: Changhong, a leading Chinese consumer electronics manufacturer announced it decision to build its new television-assembly plant in the town of Nymburk (around 50 km from Prague). This is historic since it represents the first major Chinese investment into Czech Republic. In it’s first phase the manufacturer will invest a total of 10 million USD into the new factory and employ some 300 people.”After a thorough screening of the CEE region, we chose the most convenient country for our investment – this being the Czech Republic. The main reason is the central location with respect to our European customers as well as the availability of a skilled workforce,” stated Zhao Yong, Chairman of the Board of Changhong, adding: “The initial investment is a part of our first-phase plan, and other expansion plans are being discussed. This means that a substantial increase in investment and the number of employees is possible in coming years.”December 2005: The Czech branch of software company Microsoft together with the government agency CzechInvest will open a new software development center in the Czech Republic early next year known as SoftInvest. 150 to 200 IT specialists will work on demanding projects in cooperation with local universities to develop new software and innovative solutions. Microsoft in addition is still considering building another, this time European, technical support center in the Czech Republic.”By the end of the year we want to put our intent into the form of an fully concrete project. Barring any obstacles we will set up such a center as early as January,” stated CEO of Microsoft CR and SR Jiri Devat, and added: “The future of the center will be in teaming up technical universities on one side and local partners from the software industry on the other side.”March 2006: Sun Microsystems has officially opened it’s development center and the new headquarters of its Czech branch in the Chodov district of Prague. Microsystems total investment will equal 21.5 million USD in development specialists and high-tech equipment. By 2008 the current number of developers (400) is expected to double.”We are very pleased that Sun chose to locate its development center in the Czech Republic over other attractive locations around the world,” said Zdenek Pilz, general manager of Sun Microsystems’ Czech branch, on the occasion of the new development center’s opening. “Prague was chosen especially thanks to its abundance of software-development specialists, excellent infrastructure, stable economic and political environment, and-of no less importance-the helpful attitude of the government as represented by the agency CzechInvest.”Prague Property Figures Property Sale Figures These are the figures as of March 27 2006.68 m2 apartment with 40% wear Average Price 1 986 000 CZK Increase over last month 6.36% Average Rental 8 972 CZK or 132 CZK/m2 Increase over last month 0.15%Apartment Rental FiguresThese are the figures (CZK/m2) as of November 15 2005.Please click here to view the chart.Working with the sale prices per square meter that we can find for Prague properties versus the average rental above we can see that rental yields of 5 to 7% are currently possible. With well-chosen properties it is even possible to go marginally higher.The chart also demonstrates that with rent/m2 being higher for smaller flats it is also possible to get higher yields. Currently the market is flooded with luxury type flats that are for rent. Investors are being forced to lower their rates in order to attract tenants.Because of the above factors we recommend investors buying flats where the rent would not exceed 12 000 CZK/month. Properties for rent in this range are in high demand and an investor will face less chance of vacancy.Other Investment FactorsMortgages are becoming more and more accessible to Czech citizens. Many of the younger generation are going from being cash oriented to facilitating their purchase with mortgages.The Prague suburbs have seen an increased demand for family houses in the last year.At the end of 2007 VAT is projected to go from the current 5% on new build and newly renovated properties to 19%. When this change goes into effect it is sure to have an impact on the market. It will likely be spread between increased costs to the consumer and decreased profits for the developer.With regard to the VAT change please be aware that any purchases of projects which finish and receive occupation permission from the local authorities after the end of the year 2007 will be susceptible to 19% on the COMPLETE purchase price. This is a very important factor to be protected from in your contract in case projects due to be completed in the end of 2007 actually run over schedule (an often occurrence with developers) into 2008.As we’ve emphasized before, at Czech Point 101 we are not going to over-inflate figures or try to sell you on hyped up facts. Our goal is to inform you to make the best investment decisions possible.The sources for this newsletter include the iDnes.cz, IRI and CzechInvest.For the most update information on the Prague property market please visit our page devoted to Prague property and what is happening on the market.