Even though the current high cost of CZK denominated debt combined with rental income typically being paid in local currency have resulted in a slow-down of what was shaping up to be a rapidly growing sector, experts expect that high real estate prices and the declining availability of mortgages will generate increased demand for apartment rentals in the coming years, and thus attract new investments to this market segment.

Institutional investors in Prague currently offer more than 4,700 rental units. The recent growth of the PRS market in Prague is perhaps best highlighted by the fact that 2,153 units have been delivered to the market since 2020, i.e. in the last three years the size of the market almost doubled. In addition, another 1,100 units in the PRS segment are under construction in the capital to be delivered during 2023 and 2024. At least a further 4,500 units are known to be planned with delivery scheduled during the next 5 years.

Fraser Watson, director, Investment advisory at Savills, says: “Czech Republic is a country that international, institutional, investors are interested to gain exposure to. Coupled with a growing PRS sector and some very strong fundamentals to support it, we envisage that this is going to be one of the ‘sectors to watch’ over the next few years. Almost all of the large local developers have either already allocated a portion of their upcoming projects to PRS, or are publicly musing that this is likely to be a strategic direction they will take. We expect that the growth of PRS in Czech will also impact the larger of the regional cities (Brno, Ostrava and Pilsen), as these are facing the same kind of market forces that are pushing people into PRS rather than home ownership. This means that there should be the opportunity to build scale on a country-level too, which is important for investors considering this sector.”

Experts point out that despite the tax issues and value added tax for short-term rentals, as well as the high cost of construction there are three main drivers for PRS - affordability, housing shortage and lifestyle trends.

Taking into account the ratio of average earnings to housing prices, Prague was among the four most expensive capitals in Europe, alongside Warsaw, Bratislava and Paris. As the report shows, the cost of buying a 75-square-meter apartment in Prague is equivalent to over twenty five years of average salary. By comparison, the average value for European Union countries is less than 15 years.

“PRS projects in Prague and across the Czech Republic become more and more popular. In last few years, we have seen that a leading European residential real estate investor and manager acquired over 40,000 apartments in the Czech Republic (in Pilsen, Prague, and Moravian-Silesian region), which they acquired, mostly, as an existing portfolio of rented apartments. On the other hand, the new development projects growing in the capital are usually a combination of built-to-sale and built-to-rent apartments within one project. In such cases, it is necessary to adjust relationships within such condominium of the sold units and the rented units,” says David Padyšák, of counsel and head of the real estate team at DLA Piper's Prague office.

Experts point out that developing new PRS projects is permanently associated with the regulatory risks. “There are many types of risks, which are related to the individual case, therefore due diligence should not be underestimated. The risks discovered during due diligence are then usually reflected in the (asset, or share) transfer agreements under the representations and warranties by the seller, borrower, or current investor when a new investor enters. Despite of uncertain regulatory environment, we expect the institutional rental market to continue to grow rapidly in the Czech Republic,” concludes Padyšák.

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