ASK AN EXPERT: Is Czech real estate still a strong investment?

Amid a surge in house prices, we asked a wealth manager whether now is a good time to invest in real estate.

William Nattrass

Written by William Nattrass Published on 23.09.2024 16:55:00 (updated on 16.09.2024) Reading time: 3 minutes

i This article was written in partnership with WOOD & Company Read our policy

The Czech real estate market has faced significant turbulence in recent years. Following a spike in interest rates which led to temporary stagnation in house prices, property prices are shooting skywards as rates fall and economic stability returns.

Given this growth and the traditional “safe bet” nature of real estate as an asset class, investing in property in Czechia has long appeared a no-brainer. We asked Jan Stránský, Wealth Manager at Wood & Co., about the factors to consider for real estate investment opportunities.

High demand, low supply

“The high demand for commercial real estate and office space combined with the lack of new projects has caused the vacancy rate in Prague offices to fall, currently standing just above 7 percent. Additionally, the volume of new construction and refurbishment has stagnated due to high interest rates and the increased cost of development for new buildings,” says Stránský in describing why real estate remains a good investment option.

“The marginal increase in rentable space combined with increased demand for that space results in high occupancy and stable cash flow.”

Local vs. foreign investors

“Foreign investors are always the first to leave regional markets when problems arise. This also applies to the commercial real estate market,” Stránský continues.

Following the Russian aggression against Ukraine, in central and eastern European markets “local capital and local investors are gradually replacing global capital. In terms of value, local capital accounted for more than 70 percent of all transactions in the Czech commercial real estate market in 2023.”

“This is a positive trend, because local capital is more loyal and creates more stability in the market,” Stránský adds.

Tenant Diversification

According to Stránský, a wise approach to investing in real estate funds involves ensuring a wide range of tenants.

“We do not buy single tenant buildings into our portfolios, but rather have buildings with a broadly diversified portfolio of tenants. While such an approach means more work in management and leasing, it greatly reduces the risk of cash flow shortfalls and improves the economics of the buildings.”

Active Management

Effective property management is, according to Stránský, “another pillar of long-term success.”  Property managers are “responsible for the successful operation of the entire project and the guarantor of the implementation of the plan for their building.”

They also ensure that buildings have high occupancy levels and generate stable cash flow, while taking responsibility for the satisfaction of tenants. Stránský explains the benefits of active versus passive management: “By actively managing our real estate funds, we avoid the additional expense of having to pay a third-party property manager, which would dig into the profits of our investors.”

Selectivity

Stránský describes how an effective approach to real estate investing must be selective when considering relative risks and returns.

“We do not buy the most expensive buildings in the best locations, because they cannot provide our investors with the desired returns and are likely susceptible to a drop in value in the event of a rise in yields. Yields represent a property’s annual return, calculated by dividing the net operating income by the market value.”

Valuation

Finally, it’s important to ensure that the real estate you’re looking to invest in is accurately valued. Wood & Co.’s appraisers are “independent top professionals in their field, and their valuations are conducted in line with best practice and the highest possible standards,” Stránský says.

He concludes by noting the importance of such reliable valuations to any investor in real estate. “This ensures that fund valuations are accurate and fair to protect investors from inflated valuations and subsequent increased volatility.”

Should you want to reach out to Jan Stránský at WOOD & Company directly for a free consultation, he can be reached at jan.stransky@wood.cz.

Disclaimer: Trading financial instruments carries risks. Always ensure that you understand these risks before trading.

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