Česká spořitelna will launch a new real estate fund by the end of this year, making it the first bank here to offer the product that should make property a realistic investment opportunity for a much larger group of people.

"Real estate funds will dramatically change the market," said Martin Burda, chairman of the board of the Association of Funds and Asset Management of the Czech Republic (AFAM), adding that this is a safe, yet lucrative financial product.

"The Czechs are rather conservative investors who prefer low-risk investments. Real estate funds could become the right choice for them."

Česká spořitelna's fund will allow people to invest either directly or indirectly into real estate and should be accessible to even small investors.

Until now, smaller players looking to invest in real estate on financial markets could only do so indirectly, through purchasing stock of a development company, for instance.

The new fund will enable them to make direct investments into selected real estate properties, which wasn't an option until now because according to a law that was recently amended, such funds required a minimum investment of 2 million Kč ($90,000).

As a result, there was virtually no interest, which is why no bank or other financial institution introduced them. But a new law on capital investment that went into effect in June removed the 2 million Kč requirement.

The Česká spořitelna fund will still carry a minimum investment threshold, but it should be low enough for small and mid – size investors, according to Karel Kosman, a project manager at the bank.

He would not specify the amount, but AFAM's Burda said lowering the minimum should make real estate funds much more accessible.

Who's next?

So far, Česká spořitelna is the only bank planning to open a real estate fund.

ČSOB is considering whether to launch a similar product but is waiting to see whether it will catch on with small investors, said Jan Bárta, business director for the bank's Asset Management Fund.

Meanwhile, Komerční banka's asset manager Pavel Hoffmann said they would not launch a real estate fund.

"We've carried out an analysis that indicated there would not be much interest in this kind of investment," he said.

Apart from banks, developers can also offer the product, but none of the major developers in this country have announced plans to.

This reluctance probably has to do with the fact that operational costs for a real estate fund are high, Česká spořitelna's Kosman said. That's because maintaining property is more expensive than managing a financial portfolio.

Bright future

Yields from real estate funds in Western Europe reached as high as 6 percent in the past two years. However, analysts here have said they will be as much as two percentage points higher.

This is thanks to the fact that yields from office and industrial space rentals are rising. The average annual return on office space is around 6 percent. This figure is 7 percent for factories and 6.5 percent for large retail space.

Moreover, a recent study by CB Richard Ellis found Prague to be the 71st most expensive city in the world in terms of office rent. The average price is $23.90 a square meter, the same as in downtown Manhattan.

And there's still room for growth. Martin Hanzlík, general manager of AFAM, said the real estate market should increase sharply in the next two years.

"Yields available through real estate funds will still be higher than the interest rate on deposits, so real estate will be more and more attractive for small-size investors," Hanzlík explained.