What is your assessment of the current climate for investing in residential property?

The market for residential properties in Prague has gone through quite dramatic changes in the last six years. In 2000, there were considerably fewer residential development projects. Not only were potential investors limited by the scarce supply of projects, but developers were in a strong position to dictate terms, and took full advantage of it. Investors often faced the option of "take it or leave it" without hope of any substantial compromise. It was in every sense a seller's market.

Also, foreign investors could acquire real estate only through a Czech legal entity. This meant additional costs and tax obligations for them.

Thanks to several legislative changes, much has changed. First, the Czech Republic's accession to the European Union has brought a partial, yet significant, liberalization of the real estate market for foreigners. Now, EU member state citizens who hold residency permits in the Czech Republic have the right to acquire residential premises here without complicated legal structures. Unfortunately, the restrictions prohibiting individuals from other countries from acquiring real estate remains; they must still use an established Czech legal entity to purchase property.

Second, laws have been passed that make it easier for banks to provide mortgage loans by giving them fairly simple means of recourse in case the client defaults on the loan — good news for the banks, at least. This, together with low interest rates, means that the mortgage market is developing and, consequently, a growing number of people are investing in real estate, particularly in Prague.

The same is true for developers. Previously, projects were built only by those who were able to finance them primarily with their own resources. Now that banks have the necessary know-how, it has become much easier for developers to find financing.

The residential market is therefore booming. The current selection of residential projects is aimed at a wide range of markets, from first-time buyers to luxury-home owners, and developers are generally more accommodating in meeting buyers' requirements.

But one thing remains the same: Purchasing real estate is not an everyday activity for most people, and due caution is always advisable. The level of developments may vary not only in the quality of construction and furnishings, but also in respect to the legal title or structure of the transaction. Proper legal advice should always be obtained, even in relatively small transactions.

Most new projects are sold on the basis of pre-contracts; that is, even before the property is constructed. The buyer's lawyer must therefore check the developer's ownership title to the land and should subsequently also verify that the construction has been carried out and the occupancy permit (kolaudace) obtained so that the finished building can be properly registered. All too often, this last stage is overlooked, exposing the buyer to considerable risk. For the same reason, the buyer (or his lawyer) should make sure that the purchase contract provides for refund of any prepayment in case things do not turn out as expected.

This is a good time to buy, mainly because the value-added tax of 5 percent still applies to all new or reconstructed residential projects. This figure was agreed on at the time of EU accession, but only for a limited period, which will probably end at the close of 2007 at the latest. After that, the VAT on luxury residential premises will rise to 19 percent.

The 5 percent VAT should then apply only to structures categorized as "social housing." At the moment, it is unclear exactly what that term will mean, as the definition is left up to individual EU member states. In the Czech Republic, this discussion is continuing. But for planning purposes now, social housing may generally be understood to mean apartments with a maximum area of 90 square meters (969 square feet), with no single apartment within a building exceeding this area.