The current state of the Czech real estate market: Insights from Martin Kubanek
In a recent CIJ EUROPE discussion with Martin Kubanek, a partner at Schoenherr law firm, shared his expertise on the challenges and trends shaping the real estate market in the Czech Republic.
High interest rates are currently the most significant challenge facing the transaction area. Buyers are struggling with elevated bank financing costs, prompting them to seek discounts on properties. However, sellers so far have remained hesitant to lower their asking prices, often relying on outdated valuations. This discrepancy has created a considerable gap between offered prices and selling prices. Kubanek expressed hope that central banks will continue gradually reducing interest rates, which could lead to a revival in transaction activity in the first half of the next year if rates normalize.
The new Building Act, which took effect in July, poses considerable hurdles for developers. Kubanek described the situation as a critical citing failures in digitalization efforts and the overwhelming workload facing local building authorities. Many investors rushed to submit applications under the old regime before the new legislation was implemented, leading to a challenging interim period for both authorities and investors awaiting the outcomes of the new regulations.
While post-M&A disputes regarding earn-outs and purchase prices are still common, Kubanek noted that the rate of disputes appears stable, without a significant increase or decrease in percentage.
The new Building Act has shifted the focus towards structuring some transactions for closing at a time when a detailed project documentation is finalized and a building permit (which includes a zoning approval) is issued whereas under the old regime a zoning permit was sufficient. . Kubanek also acknowledged that most transactions are structured as share deals rather than asset deals , the specific details often require clarification from tax advisors.
Foreign investors are not facing significant legal barriers in property purchases. The Czech Republic remains welcoming to foreign investment compared to other regional countries. However, the market is becoming increasingly domestic, with many foreign investors shifting their attention to markets in Poland and Western Europe instead.
Developers continue to face legal challenges regarding zoning permits under the old regime.. Recently, the Czech government has tightened regulations on converting agricultural land to building land, complicating what was previously considered a formality. This added complexity has resulted in delays and disputes that can halt projects, as developers must now navigate the stricter rules around land requalification.
In terms of urban development, Prague still lacks a comprehensive metropolitan plan, leading to fragmented discussions between local authorities and developers. Each district is navigating its own development priorities, resulting in inconsistencies in urban planning.
Kubanek highlighted historical easements as a common complication in real estate contracts, particularly in due diligence reviews. Many easements related to state-owned companies are unregistered, which can lead to issues, especially in brownfield projects. Environmental pollution concerns are also significant, requiring thorough due diligence and indemnity agreements from sellers.
Looking ahead, Kubanek anticipates that advancements in artificial intelligence and digitalization will streamline planning and property management processes. He believes these developments will enhance efficiency in real estate development and management, with automated systems playing a larger role under human oversight.
For those navigating the evolving real estate market, Kubanek emphasizes the importance of assembling a competent team. A combination of skilled real estate agents, legal advisors, tax consultants, and technical advisors is crucial to ensuring smooth transactions and minimizing surprises.
The permitting process in the Czech Republic currently lags behind countries like Poland, largely due to bureaucratic complications and political pressure to preserve agricultural land. Many clients focus solely on Prague, overlooking potential opportunities in other regional cities like Brno and Ostrava. Kubanek suggests that a more diversified approach to investment could yield fruitful results.
Finally, the market for hotel assets in Prague has seen a surge of interest following the COVID-19 pandemic. Major hotel properties in Prague are currently for sale, attracting both domestic and international buyers. However, pricing remains a critical factor, as current high occupancy rates might lead sellers to believe they can secure peak prices. The sustainability of these occupancy levels, however, is uncertain.
As the Czech real estate market continues to evolve, Martin Kubanek’s insights reveal a landscape marked by both challenges and opportunities, with stakeholders navigating legal complexities and changing market dynamics.
© CIJ EUROPE
