As foreign money continues to flow into the Czech Republic's real estate market, local investors and advisory firms are pointing to a need to fill loopholes in the country's legislation regulating domestic real estate investments.

"Changes in the law are necessary in order to enable further growth of investment in the Czech real estate market," said Daniel Rosický, a lawyer with the Prague-based law firm Procházka Randl Kubr.

Rosický stressed that an amendment to the law on real estate investment funds is imminent.

"If the legislation goes through, new funds will enter the market and it will spur the market on," said Rosický. "Funds will be available for new projects in other parts of this country, not just Prague."

The absence of efficient laws governing real estate investment funds has caused Czech investors to trail behind their foreign counterparts. While the Czech Republic has seen an influx of foreign real estate investment funds in the first half of 2005, no Czech fund has entered the market.

Over the first six months of this year, foreign real estate investment funds totaling about 16 billion Kč ($680 million) were invested in properties in this country, a growth of 75 percent over the same period last year. Business experts, including Karel Durdych of the Professionals real estate firm, said the high interest in Czech real estate stems from the current recession in the Western European real estate market, and also the higher yields on investment in this country.

Foreign investment has been focused mostly on shopping malls and business centers in Prague. Brno and České Budějovice have also been popular, according to Tomáš Chrobák, director of Companies Online, a firm that specializes in selling ready-made companies to foreign investors who can use them to buy property.

An expanding market

Real estate investment funds were officially recognized by law in this country after the Czech Republic's EU accession in May 2004. However, the strict demands of the law, which include a restriction that fund loans cannot be higher than 10 percent of the total value of their assets, have put potential Czech real estate investors at a disadvantage against foreign competitors.

As a result, the government has put together an amendment to the law on real estate investment funds that should equalize conditions for Czech investors, according to Deputy Finance Minister Tomáš Prouza.

Freeing up Czech real estate investment funds will increase competition and is likely to spread investments to other parts of the country, said lawyer Rosický. "Foreign funds have already purchased most of the attractive real estate projects in Prague," he explained. "So there will be a demand for other regions after some Czech funds enter the market."

The new law on real estate investment funds should also help expand investment opportunities for individuals, Rosický said.

"It's not only about investing in real estate but also about expanding the opportunities for individuals who want to place their money somewhere other than bank accounts," Rosický said. "The new law should ensure that the risk related to investing in real estate is somewhere between investing on Dow Jones and putting the money in a bank account here."

Still hard to buy

Another factor fueling foreign real estate investment is the change in ownership laws that came with EU accession. Before, only Czech citizens were allowed to buy property directly; all foreigners had to buy through companies, mostly paper entities established specifically for that purpose. Now, all EU citizens need to buy property in the Czech Republic is a residency permit. (Non-EU citizens still need to establish a company in order to buy Czech real estate.)

Still, the current legislation causes obstacles even for EU citizens, according to Vladimír Jašek, a lawyer at Nocarová Jašek & Partners law firm.

"The problem is that the current law stipulates that a [EU] foreigner in this country needs to declare a reason for his stay in the Czech Republic in order to receive a residency permit," Jašek said. "And the only reasons accepted are studying, doing business or joining a family in this country."

As an example, Jašek cites a certification his firm had to seek from a language school to legalize a client's residency permit.