Recession relief

The recession has manifested itself in every part of the Czech economy, including the real estate market. While the market in the Czech Republic has fared much better than neighboring countries such as Hungary, real estate companies are still dealing with lowered and shifting demand. Gavlas, established in 1990, is currently one of the largest commercial and residential real estate agencies in the Czech Republic, with branches in Prague, Brno and Ostrava. The company's managing director and founder, Ivo Gavlas, recently spoke to The Prague Post about riding out another dip in the market and why the Czech Republic is in a better position than the United States and other EU countries.

The Prague Post: You're running a real estate company in one of the worst markets in recent history. How do you survive, and how have you adapted?

Ivo Gavlas: We want to take advantage of the current situation to strengthen our firm. In the past year, it was almost impossible to find a quality broker, and we believe that we will be able to add more quality brokers to the staff. Our company has already existed on this market for 19 years, and this is not the first crisis that we have experienced and lived through. We successfully survived the crisis in the late '90s, and there is no reason why we shouldn't survive this one. We don't have any loans, and we don't need to take any loans out to do our business. At the very inception of our company, we swore to ourselves that we would never buy real estate from clients who come to us with the belief that we will sell their apartment or house for the highest possible price. We also decided that we won't ever go into our own development projects. As a result of this, we are not in the situation that some other real estate firms find themselves in, that bought apartments from clients and relied on the increase of prices and, instead, are faced with today's drops.

TPP: Do you think the market has hit the bottom, or do you think it will continue to get worse before it gets better?

IG: So far, the worst was in January and February, when business nearly came to a halt. In my opinion, it happened because people completely postponed their purchases following the menacing news about the economic drop. Since then, people have gotten used to the situation, though. On top of that, some of them must deal with their housing anyway, and they can't postpone the purchase of a property endlessly. So, lately, we are noticing an improvement on the real estate market. Nonetheless, it's still far off from the market situation of last year and the year before.

TPP: Bank lending has nearly frozen. How has that affected your own business when you try to sell to customers?

IG: The impact has, of course, been dramatic. Most real estate deals take place with the help of bank financing - particularly now, when those who have cash are waiting for another drop in prices. At present, we have a couple large real estate deals that have already been settled, but the problem is that the financing banks are demanding more and more guarantees. In this regard, I consider the growing state debt as a big problem. For banks, it's better to finance a state debt than to lend to entrepreneurs and citizens. For this very reason, banks are comfortable with all the so-called stimulation programs of the scrap-subsidy type. But the 3 billion Kč that the bank lends for the scrap subsidy is 3 billion Kč that the banks won't lend to entrepreneurs and citizens.

TPP: What is the typical profile of a household buyer right now? Are they paying large down payments, and are they first-time buyers?

IG: Small and midsize investors buying a flat for the purpose of investment or for children are not on the market right now. Only those who urgently need to sort out their living situation are buying houses and flats these days. When it comes to deposits, the situation hasn't changed. But the buyers need a larger capital, because they won't get as much through mortgage as in the past.

TPP: You work throughout the Czech Republic. What regions have done better and why? Which ones are worse and why?

IG: As always, Prague is the most well off. Prague residents have the highest incomes and the lowest unemployment - and the biggest confidence that the crisis won't hit them. After all, objectively, they are doing better than last year. Their incomes increased 10 percent; expenses haven't changed or even decreased: gas, cars [and] now also energy. Traditionally, the regions with the highest unemployment are doing worse, as, for instance, northern regions. But these regions have the best prospect for the future. Foreign investors, who totally stopped looking at the Czech Republic in 2008, have begun to monitor the situation again.

TPP: Compare the residential and commercial real estate markets right now. Which one has fared better?

IG: The residential market is doing better. It's logical, because people need to live somewhere, whether there's a crisis or not. Commercial development, however, has practically stopped. Besides tightening financing requirements, banks have also tightened financing of construction. They lend to developers happily but demand that developers invest at least 40 percent of their own capital and that they have sold 40 percent of the project beforehand. In other words, they're willing to lend only a fifth of the needed capital.

TPP: How will the real estate market and industry be changed after the recession is over? Will there be a slight change to the way business is done?

IG: It's necessary to realize that the current recession in the Czech Republic has no systematic causes. It was brought in from abroad. Here, the rules for doing business and loans were standard, so there's no reason for bigger changes. ? For the past 20 years, most people regarded the price tag - be it on a product, a car, or an ad for a flat - as holy. Now, however, there's no buyer who wouldn't ask about a discount during negotiations. Also, people's approach toward their own trade of property is changing. I am noticing that more of them consider which real estate company to trust. I would say that hundreds of garage firms, which aren't able to provide minimum standards of service, are disappearing from the market. The real estate companies who guarantee a professional approach will get all their business.

TPP: Why was the Czech Republic able to avoid the mortgage and housing crises that other countries have dealt with?

IG: After the bank crisis at the end of the '90s, banks retained relatively conservative rules for loans, in contrast to American mortgage institutions, which lent to everyone. Later on, the increase of property prices didn't resemble a bubble, and the decrease we are now experiencing isn't dramatic, either. Importantly, it hasn't yet erased the price increase from the past two years. As a result, there are only a few high-risk mortgages where the market price wouldn't cover the loan. It's also key that Czechs didn't take out foreign currency loans for their mortgages. So, today, we're not in a position like, for instance, Hungarians who borrowed in Swiss francs en masse. They speculated over the never-ending strengthening of the forint, and now they have big problems.

TPP: Are you seeing a trend toward rentals rather than sales? Are people more likely to rent right now until they can afford to buy, or are the patterns still the same?

IG: The offer of flats for rent is on the rise. Those who want to sell but can't come to terms with the decline of prices are looking to pass this time by renting. On the supply front, those who can't reach as high as ownership must solve their situation by renting. Conversely, there's been a decrease in the number of people coming to Prague for work.

TPP: What are the advantages of buying a house right now? What would be the ideal investment?

IG: Unlike recently, when the demand for residential real estate was high, buyers now have more choices and more time to look for and buy exactly what they wish for. Nowadays, there is no stress or pressure that, if you don't reserve an apartment right away, someone else will take it. In addition, they have a chance to negotiate a number of perks and discounts with the buyer. But, what's most important, in my opinion: Do not ever mix your own living with investment.

- Martina Čermáková contributed to this report.

Claire Compton can be reached at
ccompton@praguepost.com