Having accommodated dozens of foreign investors in the automobile industry, the Czech Republic is now becoming an attractive location for real estate investors. While European Union real estate investments yield an average of about 4.5 percent, some investment yields in Prague have risen to around 7 percent. Karel Durdych, partner in Prague-based real estate firm Professionals, explains why investor interest here is growing and reveals other regions outside of Prague that could soon become attractive to foreign real estate investors.

1. The Czech Republic has been experiencing an influx of foreign investment in its real estate market. What is the reason for the rise?

The Czech Republic and Prague, in particular, are nowadays offering foreign investors a higher yield on their investments than what is usual in Western Europe. The market has been stabilized and [real estate] projects are top quality in terms of the technical and construction point of view. The conditions of rental contracts are more or less standardized and widely accepted by tenants. The advantage of such an environment is its transparency. Investors can better evaluate their plans and lower all related risks. However, it's still essential to differentiate between commercial and residential real estate markets.

2. Why was the interest in Czech real estate lower than expected after the country's EU accession and why has the rise only gotten underway recently?

It seems that it was not the EU accession but joining NATO which significantly affected the Czech Republic. For many investors, this was the first guarantee that their potential investments in the region will be protected. I need to say here that I never shared the optimistic vision of [skyrocketing demand] some real estate experts held as a result of the EU accession. Comparing the Czech Republic [to the boom] in Portugal did not look adequate to me from both an economic and political point of view because many of the significant foreign players were well established in our markets before the country's EU accession.

3. How much of the current foreign-investor interest in the real estate market here was affected by the decline of the real estate industry in Western Europe?

The advantage of the Czech Republic in the eyes of foreign investors is that they are familiar with its history, culture and other aspects of the region. It's a transparent and safe place for landing investments. At a time when investments [in other markets] sink to the level of a mere break-even point, investors are searching for other places to put their money. We can offer one today. Although not everybody is ready to admit it, non-business criteria such as emotions can also play a significant role in directing investments. For example, Prague and its friendly atmosphere can hardly be matched elsewhere in Europe, and many foreign investors selected the city not only as the location of their business but also as their residence. On the other hand, there's still lots to be done to attract conservative investors, especially those from Asia.

4. To what extent is the Czech real estate market represented by development in Prague? What are the other potentially strong regions in this country?

Prague clearly determines the development of the Czech market. As every capital worldwide, Prague attracted the initial interest of investors [after they targeted the country] and the city will be the prime target for foreign investors. I believe that [the north Moravian city of] Ostrava has got the greatest investment potential [out of other towns]. Unfortunately, Brno has a strong competitor in Bratislava. As the [Slovak] capital, Bratislava will always be ahead.

5. The yield on investment in Czech real estate currently is double the average yield on real estate investments in the EU. What do you think the future holds? Is there a danger that foreign investments will soon move further east?

Well, I don't think the yield doubled here against Western Europe, but it's getting more and more interesting. Yield on prime real estate in Prague could reach as high as 7 percent, which would have been hard to imagine a couple of years ago. Setting a general level of a yield on real estate investments in this country is quite difficult — it depends on particular projects and selected assessment models. In my opinion, the level of yield reached in this country will get close to the level in Western Europe. As far as investors moving east, it's logical that this will occur since some investors tend to focus more on speculation and are used to dealing with yields of 11–13 percent. Such yields cannot be reached here, but they'll be able to get them in eastern markets such as the Ukraine, or in the Balkan countries.

6. What is the share of speculative demand on overall demand in the real estate market, especially in residential projects?

It's true that we recently had a good experience with foreign investors buying up a larger number of apartments with the aim they would increase in value, regardless of the fact that the current rental yield amounts to 4.5–5 percent. The experienced investors expect rents to rise in the future and so their investments will gain additional value.

7. Isn't there a danger that the real estate bubble will soon burst, which will bring both demand and prices down?

I'm an optimist and so I do not expect anything like that will happen as far as the Prague market is concerned. The rise in commercial space is not dramatic and developed projects have got a good chance to succeed. We expect a big increase in demand for residential projects next year, which will be related to the planned increase in the value-added tax [on construction work].

8. Is it realistic that more Czech real estate firms will penetrate EU markets as they expand their portfolios by including a wider selection of European real estate?

Certainly, yes. Just look at the example of Ireland, which was the Cinderella of the EU, and now Irish investors are a large group of investors in our country. Most Czech investors may find yields from real estate investments insignificant. Still, there are a few very good Czech developers and investors who already deal with tens of thousands of square meters in their portfolios.

9. The real estate issue became quite hot in Czech politics after politicians were repeatedly unable to show proof of financing for their real estate purchases. Do you think that the real estate factor could affect the general elections next summer?

I don't think that the humorous but inexcusable affairs of our politicians could dramatically affect voters. But they certainly paint a negative picture of the Czech political culture.

10. Is there any better investment opportunity in this country nowadays than an investment in real estate?