The first quarter of the year, that is the period from January to March 2020, was actually the strongest our market segment has enjoyed in the last 5 years. This was partly caused by transactions negotiated before the end of 2019, but also by new deals. After coronavirus gained media-attention as a threat to the Czech Republic, most deals were suspended. Investors were anxious and waiting for the situation to develop. We successfully sold an apartment building in Nusle and a commercial building in Nové Město. Now, new business opportunities are beginning to appear, some owners are willing to accept lower price offers, on average the market has seen a reduction of 7% from pre-corona asking prices. Lowered prices are motivating hesitant investors to act. In general, however, property owners are waiting for the current situation develop.
Rents for flats in the wider center have maintained their pre-corona prices and are stable. Only the veru center itself and in localities with many vacant flats have noted a reduction in rental prices. We have also seen a decrease in prices for non-residential premises. Some landlords have maintained the original rent prices, some are now coping with tenants defaulting on rent. Some landlords have agreed with tenants on a temporary rent reduction.
It is still too early for price reductions. It is quite possible that the market will recover without any downward price adjustment. Owner’s resistance against investor pressure to lower their offering price is an important factor in maintaining prices stable so far. With the exceptions mentioned above, we have not seen any drop in prices. We are expecting, however, a decline in prices for real estate rentals intended for short-term accommodation. It appears that foreign tourism is temporarily suspended, and if owners have financed such a property with a loan, they may find themselves in a situation where they are forced to sell at a reduced price.
If the owner needs to sell the property, we recommend not delaying the sale. Investors still have the savings they have set aside for real estate investments, but if the economy takes a downturn, and they spend this money elsewhere, savings among investors in the future will diminish. Generally speaking, in times of economic recession, real estate manages to hold its price for 6 to 12 months before beginning to fall.
Since the end of the state of emergency measures, we have seen the market recovering in the form of a significant increase in property viewings. The question remains, however, how many of these are be of a casual nature influenced by the desire to break out of domestic quarantine. There exists the threat that the perceived value of commercial buildings for office, retail or other use may be threatened. Investors may see the profitability and predictability of future rental payments as uncertain, which may ultimately lead to an impact on the prices of commercial properties. It all depends on the effects the crisis will have on the economy and its ability to recovery. Increasing demand for investment property, however, should help lower interest rates, pass bills to abolish property tax and to maintain a five-year property income tax test on purchase until the end of 2020. We will be able to definitively confirm this hypothesis only once these changes have been enacted.
As already mentioned, a reduction in prices is likely to affect localities affected by the absence of foreign tourism. The prices of commercial buildings may also be affected. Apartment buildings outside the immediate center with rents tailored to the local market should be able to withstand price cuts for the longest time. If enacted, we see hope for market recovery in the government’s above-mentioned proposed measures. It is important to note that real estate prices here, compared to those in the West, are still far lower, so it is more desirable for the Czech Republic not to lower their real estate prices than it is for Western countries. And, it remains true that apartment buildings should maintain their price, as they are perceived to be the most reliable real-estate form of protecting one’s investment.
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