Assessing the residential market boom

The Prague Post

Growth is solid in all areas, but local buyers are still reluctant to take on mortgages

Hardly a week goes by, it seems, without an announcement of a new residential development in or around Prague. The boom in the market recently led Stavební fórum (www.stavebni-forum.cz), an Internet journal focusing on real estate and related areas such as development and architecture, to hold a conference assessing the market in conjunction with the Association for Real Estate Market Development. The Prague Post subsequently caught up with a few of the participants for more in-depth discussions on the subject.

The first stop was INCOMA Research, a marketing research and consultancy company specializing in retail and real estate development.

“Currently, there are about 200 residential projects being built in Prague,” says Tomáš Drtina, one of the founders and managing director of INCOMA. “Fifty-four of these projects have more than 150 apartments; eight have more than 500. Five years ago, maybe one project had more than 500.”

That’s just one example of the evolving market profiled in INCOMA’s latest survey, “Prague Residential Potential 2006.” Done every two years, the survey looks at who is buying, what they’re buying, price expectations and locations.

“One of the biggest changes [between this survey and the previous one] is that people have become more realistic,” Drtina says. “How much they are willing to spend per square meter on a new apartment is closer to reality than in previous years. However, they are willing to compromise on a smaller apartment or a different location rather than on price.”

Another trend Drtina’s survey found was in regard to size. Not long ago, most new apartment buyers were happy with a 1+1. Now most want a 2+1; the second most-popular choice is a 3+1.

“When they have to compromise, they will choose a smaller apartment,” says Drtina. “They will decide on a 75-square meter instead of a 90-square meter, but keep the same number of rooms.”

When it comes to popular areas, however, there’s been no significant change. Basically, most people want to stay in their neighborhood.

“Whether because they have children in school, or they work or have friends there, they want to stay in the district they currently live in or move to a neighboring one,” Drtina says.

For people looking for single-family homes, the trends are a bit different, by necessity. “There isn’t a lot of space in the city for single-family homes, so almost everyone is looking to go outside the city,” notes Drtina. “Plus, many people are looking for green areas.”

Areas east of the city are more popular than areas west of the city, for obvious reasons. “Most of the green spaces are on that side of town,” Drtina says. “Plus, two-thirds of the population already live on the east side of the river, so they want to stay close to their current neighborhoods.”

Still, price remains the primary consideration for the majority of buyers.

“Two-thirds of the respondents say price is the number-one criterion,” says Drtina. “Then location, then green spaces.”

Room to grow

The trends that INCOMA charts are important indicators for developers, many of whom are competing fiercely on similar projects.

Real Estate Karlín Group, a commercial and residential developer focusing on projects in Prague 8, sees the wisdom in following the numbers. But it has its own plans, according to Milorad Miškovič, the company’s sales and marketing director.

“The [current] demand is in the mid-low market segment, and it will probably stay that way,” he says. “But more people will be looking for luxury and a good location.”

That belief is what’s driving Real Estate Karlín Group’s current project in Prague 8, River Diamond, billed as Prague’s first new-built luxury waterfront residential development in the past 50 years. It’s scheduled to be completed in about three months, and will boast 230 luxury apartments, 1,500 square meters of retail space and more than 350 underground parking spaces. And River Diamond is only the first phase in the company’s River Gardens development, which when finished will have 170,000 square meters of combined residential and commercial space.

“Last year, only 2.8 percent of new-built residential units were luxury,” says Miškovič. “It’s a small market, but we believe we can take it up to ten percent in ten years.”

That may sound like an ambitious goal, but Miškovič believes it’s realistic. “Not even two percent of the people in Prague and the Czech Republic have mortgages,” he says. “That’s why the market still has room to grow. The second-most important consideration is that 30 percent of people still live in paneláks. They will soon be able to afford and demand better living.”

Drtina notes another trend fueling growth in the luxury market. “We are seeing a new group of customers, those buying for investments,” he says. “And foreigners continuing to buy in Prague is helping the luxury market.”

Currently, Real Estate Karlín Groups’ client mix is 70 percent foreign and 30 percent Czech. But Miškovič says the mix matters less than the total. “By combining Czech, foreign and investment customers, you have enough potential buyers for luxury products,” he maintains.

A saturated market

Whether Czechs will embrace mortgages as readily as their Western counterparts remains to be seen. In INCOMA’s latest survey, 37 percent of the respondents say they don’t want a mortgage. That’s a drop from the number who rejected monthly bank payments two years ago — 42 percent — but not much.

Petra Horáková, manager of the Association for Real Estate Market Development, an association of real estate professionals, believes that other factors will determine the popularity of mortgages.

“I think the interest rate will grow slightly,” she says. “[Real estate] prices are going to stagnate, and the European market will have an effect as well.”

Another possible consideration: According to the INCOMA survey, more people who are planning to move to an apartment in the next two years will be purchasing an existing apartment (44 percent) rather than a new one (36 percent.)

Given the explosive growth of the residential real estate market, there’s also a chance that supply will outstrip demand.

“Many projects are competing on price,” notes Drtina. “In previous years, development of supply wasn’t as fast. Some projects sell quickly, but the market is going to be tough.”

Horáková agrees. “The supply is growing too fast when we compare it to the demand in the residential market,” she believes.

What will be the winning strategy in an oversupplied market? Real Estate Karlín Group is focusing on aesthetic amenities. “We are architectural and design maniacs,” says Miškovič. “We spend more time on these elements than other developers. If you have a good location, anyone can develop a project. However, other elements will make your reputation.”

Drtina agrees, and believes the competition will have a positive effect on the market. “There will be a bigger variety on offer, many projects, so developers will be pushed to be creative,” he predicts. “Choices will be bigger, customers will benefit, and even the price-conscious ones will have options.”

That will call for some strategic thinking on the part of developers.

“Developers will have to evaluate very carefully their target group for the future, families with children, luxury properties,” says Drtina. “Projects will have to have a clear profile, and on average it will take more time to sell a apartment.”

Still, the basics are unlikely to change.

“There are three conditions for developers to fulfill,” Drtina believes. “Location, concept and creative and efficient marketing.”