UniCredit: The profitability of buying residential real estate has further dropped significantly

The profitability of investments in residential real estate further decreased significantly in September. This follows from the indicator provided from UniCredit Bank. In September, the index fell 35 points month on month to minus 0.8 percent, further narrowing the opportunity to capitalize on the difference between relatively expensive rents and low interest rates.

The gross annual rental yield in the Czech Republic fell by eight points month-on-month to 3.65 percent. After taking into account the assumed fixed rate of real estate wear and tear (two percent), the estimated net annual return was 1.65 percent.

"The opportunity to make money on the difference between relatively expensive rents and low interest rates disappeared in May, but the continuing rise in interest rates and relatively slow rent growth due to rapidly rising real estate prices make real estate less and less profitable investment," said bank analyst Jiří Pour. According to him, the current demand for real estate is fueled mainly by the belief in their continuing rise in price, resp. concerns about the continuing deterioration in housing affordability.

He expects mortgage rates to continue to rise following the increase in the CNB's rates, which in the light of unexpectedly strong inflation will probably increase rates by another 0.75 points for the rest of this year. The rise in interest rates will continue to be reflected in government bond yields. Rising interest rates will thus make residential real estate an increasingly less advantageous investment, which should lead to a slowdown in real estate price growth in the Czech Republic in the longer term, Pour pointed out.

Differences between individual regional cities decreased again in October, but remain significant. Relatively high rents relative to prices will continue to feed demand for real estate in Ostrava, Ústí nad Labem and Jihlava. In most of the remaining regional cities, the purchase of an apartment for investors is already disadvantageous, especially in Prague, Brno and České Budějovice.

In the Czech Republic, it is still possible to find areas that are attractive to investors in terms of profitability. Investment demand will therefore shift there and generate increased upward pressure on residential property prices. "This is probably already happening in some areas and will therefore not surprise the extreme year-on-year growth in real estate prices in Ostrava (41.5 percent) and Ústí nad Labem (by a record 51.5 percent)," Pour added.

Source: CTK