Prague’s housing glut: legacy of 2008

Financial Times

With a glut of new apartments saturating Prague’s residential market, you might think the city’s developers would be exercising their marketing skills to sell existing stock, some of which has been languishing unsold for nearly two years. But according to recent research by Ekospol, a developer, the Czech capital could see another 20,000 new residences built over the next few years.

“Right now, there’s about 6,700 apartments offered for sale on the Prague market with about 2,500 of those already completed and ready for immediate move-in,” says Milan Jankovsky of Ekospol’s marketing department. “There’s quite a paradox. On one hand, there’s about 2,500 completed apartments for sale; on the other hand, still new projects are being announced and constructed.”

By monitoring the Czech environment ministry’s database of Environmental Impact Analysis (EIA) for new construction projects as well as competitors, Ekospol estimates that about 20,765 apartments are in various stages of planning, although it is unlikely all will be built.

“In 2012, we expect about 2,200 to 2,300 apartments to start construction in Prague. Estimations for 2013 and beyond would be a lottery now,” Jankovsky says.

Even so, that still leaves the question of why so many apartments would be built when so many remain unsold.

Jankovsky says the situation came about because after the global crisis of 2008-09 construction prices fell by 15 per cent to 25 per cent and, in a well-prepared residential project, construction costs make up 75 per cent to 85 per cent of the total. This means newly offered residential projects are on average 15 per cent to 20 per cent cheaper than those built before the crisis – and people would rather buy an unfinished apartment that’s cheaper than one that has been stuck on the market with a pre-crisis price.

While some unsold apartments have been discounted and sold, experts say that many developers can’t lower their prices due to uncontrollable conditions like bank loan terms. That means price are unlikely to change much, either up or down.

“If a developer had leeway in a project’s business plan to allow it to offer customers reduced prices, it would have already done so in 2011,” says Ondrej Svaton, marketing manager at Skanska Reality.

Skanska has been monitoring the residential market in Prague since 2005 and Svaton says at that time the average price per square metre was around Kc50,000 ($2,665) per square metre. Prices increased by almost 25 per cent to approximately Kc64,000 per sqm until the third quarter of 2008, when he says prices began to decline gradually through 2009 to an average price of Kc57,403 per sqm at the end of last year.

The result is that analysts expect another difficult few years for the residential market as the Czech and Europe’s economies stagnate.

“It looks as though the next two years should remain a difficult real estate market due to what is going on in the European and Czech economy,” Svaton says. “Because of the number of development projects which are currently under construction and no real growth in residential demand, we are expecting to see an increase in the total number of unsold new units sitting on the market.”