Prague’s residential glut grows

Business New Europe

With a glut of new apartments saturating Prague’s residential market, one might assume that 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 a recent research report by Ekospol, the Czech capital could see 20,000 new residences built in the coming 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 situation on the market in Prague. On one hand, there’s about 2,500 completed apartments for sale; on the other hand, still new projects are being announced and constructed.”

Ekospol does quarterly research reports on the market, tracking all new residential projects in Prague with at least 50 apartments. By monitoring the Ministry of the Environment’s database of Environmental Impact Analysis (EIA) for new construction projects as well as competitors, they are able to estimate the approximate future residential development activity. “Our figures show the total sum of apartments that are either in the process of getting all required approvals or have already received them but haven’t started sales yet… rose from 13,405 to 20,765 in the last 2 1/2 years,” says Jankovsky.

He adds, however, that the numbers can be a bit deceiving. “The figure of 20,765 planned apartments doesn’t necessarily mean that the full amount of apartments will really be built; the residential market in Prague is quite concentrated and four main players control about 50% of all apartments sold,” he says. “In 2012, we at Ekospol expect about 2,200 to 2,300 apartments to start construction in Prague. Estimations for 2013 and beyond would be a lottery now.”

Ekospol currently has six projects throughout Prague with apartments for sale. Jankovsky says the company’s goals for 2012 are to sell 350-400 flats, a slight improvement over the 301 they sold in 2011.

So how did Prague end up with this overabundance of apartments?

Stuck on the market

Jankovsky says the situation came about because after the crisis hit in 2008 construction prices fell by 15-25%, and in a well-prepared residential project construction costs comprise about 75-85% of the total. This means that newly offered residential projects are on average 15-20% 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, many developers can’t lower their prices due to uncontrollable conditions like bank loan terms. And though the EIA filings indicate some optimism growing in the market, reality still has a foothold. “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,” says Ondrej Svaton, marketing manager for Skanska Reality.

Svaton says out of Skanska Reality’s seven projects, one in Liberec and six in Prague, the company currently has 408 apartments available and plans to build 102 this year. “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, and the increase in VAT,” Svaton says. “We think the stronger players in the Czech real estate market, who have been around for a while and have strong financial backing, will find their position on the market only getting better.”

In terms of price changes, Skanska doesn’t expect to see any movements – either up or down. “If a developer had the leeway in a project’s business plan to allow it to offer customers reduced prices, it would have already done so in 2011,” he concludes.

That prediction of lacklustre demand is echoed by others, exacerbated by the poor locations of many projects. Stanislav Zidek, executive director of Real Development, which has three projects in Prague and plans to start a new one in Prague 4 with 113 apartments, already sees the Prague market slowing. “In the first half of the year we expect a slowdown in sales, but we do expect a recovery in the second half,” he says. “For the residential market, location of the project is critical, but currently few of the large projects boast a good location. Projects in a poorly chosen location will have difficulties in 2012.”

Ekospol’s Jankovsky sees demand for newly built flats slowing by a maximum of about 10% compared with 2011. “We anticipate about 3,100 to 3,300 newly built apartments to be sold in 2012.”