“Buy in the regions. Prague is not worth it”, says expat property investor
Many foreign visitors and residents of the Czech Republic’s picturesque cities may have felt the urge at some point to buy property in the country. But what does this exactly entail? And is it worth investing in a real estate market where prices have been rising for several years now? To find out, Radio Prague International interviewed several expats and real estate agents who are active in the business. In part one, we speak to American Colin Shea whose investments in Czech properties have led him to become a full-fledged land lord.
I caught up with Colin in Penzion Via Ferrata, a guest house and restaurant in the Northern Bohemian town of Děčín which he owns, and began by asking him how he ended up in the Czech Republic.
“I came here for the first time in 1995. I had just graduated university and a friend of mine had offered me a job. It was CZK 13,000 a month. She told me that this was a lot and that I’d be very rich, but it turned out not to be the case.
“I stayed here for four years before we moved to Holland, where we stayed until 2002,Then we returned to the Czech Republic and started investing in properties together with my wife.”
Were your investments into local real estate already a serious commitment at the time or was it something that you were doing more on the side so to say?
“First we bought a property for ourselves. We bought an apartment in [Prague’s] Vyšehrad in 2003, if I recall correctly, for about CZK 2.7 million. Today, I believe that it would sell for about CZK 12 million. A few years after that, we bought a house in Braník which was significantly bigger.
“I realised that it doesn’t make sense to own property in Prague, because the yields are so low.”
“Then we got divorced, I met my new wife and we basically decided to change strategies and start investing in commercial and residential properties.”
Could you tell us a bit more about this shift in strategy? How did it develop further?
“I realised that it doesn’t make sense to own property in Prague, because the yields are so low. I was living in an apartment in Vinohrady after I started investing and was paying CZK 35,000 a month. That is CZK 400,000 a year and that property would have cost at least CZK 20 million to buy. Maybe CZK 25 million in fact, it was a 150 square meters near Havlíčkovy sady, so the yield was laughable.
“My new wife was from Děčín and we were going there quite a lot thinking about how to invest our money. We realised that the yields were much higher around here, around 8 or 9 percent. That’s when I decided that it was time to switch strategies. I sold my house in Prague, started renting there and, meanwhile, we started buying properties here. We ended up buying two apartment buildings in Děčín. The one that you are in now and then another one.”
Could you just explain what exactly you mean by yields?
“Sure. A yield is the cash that you receive versus the amount that you paid in. For example, we have one apartment building in this town which we bought for CZK 4.8 million. That generates about CZK 500,000 a year in terms of gross return, meaning that this number excludes insurance, tax fees and so on. That means that the yield on this property is around 10 percent.”
Is there any other logic, other than yields, to investing in properties in the regions?
“First of all, if you are a professional investor, you should look for yield. There are two elements [in this regard] – one is the cash yield and the other is appreciation.
“Now, people in Prague are obviously not looking for yield. They are betting on appreciation. However, appreciation cannot go further. The average price per square meter in the middle of Prague [in November 2021] is comparable to Manhattan. Meanwhile, local incomes are 20 or 30 percent of what they are in Manhattan. The idea that this is going to continue to grow at 15 percent year-on-year ad infinitum is ridiculous. It’s just not going to happen. I think that people are putting a lot of bets on property appreciation in Prague which cannot mathematically continue.
“However, here [in Děčín] it can. I have been buying stuff here for around 8,000 to 10,000 crowns per square meter. You cannot build a house for that price these days. Therefore, these properties must appreciate. The appreciation element has gone up by quite a bit here as well. Apartments that were going for 800,000 or 1 million crowns just a few years ago are now selling for 2 or 2.5 million.
“The thing is, there isn’t a lot of competition here. There are not many people in these ‘B cities’ that can put the cash together to buy a building. Meanwhile, if you are in Prague, in Brno [the second largest Czech city], or Karlovy Vary, you have a lot of competition. In Děčín or Teplice it is another story.”
It is interesting that you are saying that, because prices have been rising at record rates in the recent past also in the regions. Praguers themselves are moving out of the capital to buy property. In regards to what you were saying about buying in Prague – that there is no investment value anymore there – the founder of the Czech branch of ReMax, a major real estate agency in the Czech Republic, told news site Aktuálně.cz in 2021 that he does not think it is profitable to buy properties in any part of the Czech Republic anymore. So I am guessing that you would disagree with him? And would you say that it is only profitable to buy in some regions or in all regions in general?
“Well, I mostly specialise in what is going on up here [in Northern Bohemia]. Prices have certainly gone up a lot in Ostrava or Brno, places that were pretty attractive just five years ago. I would be cautious, but I think that in Northern Bohemia there are still opportunities.
“It depends on what you are buying. If you can put together the resources to buy a building, you can still buy it here for between 6 to 10 million crowns, even if an individual apartment may be going on the market for CZK 2.5 million.
“People now have the money to buy a flat, but there are very few investors who can put the cash together to buy a building. This is what I think is the opportunity up here and there certainly still is room for it to grow.”
And what do you mean when you are using the word “investors”? Do you mean small time investors? Because there are of course large firms that are buying up property in Czechia.
“Yes. Largescale investment companies are not really active here yet. The big money is still chasing stuff in Prague, Olomouc or Karlovy Vary. They still haven’t gotten down to this kind of town yet.
“Here, the pool of investors is basically made up of people like me, people who have managed to put some money together. If we are talking about an investment portfolio ranging in the millions to tens of millions there is certainly some activity here.”
In any case, investing in Czech properties has worked out for you? Since you started investing in this country you have been able to live off this income?
“Yes. At this point we have a house here that we live in which is 400 square meters large, has a further 1,500 square meters of land and is next to a national forest, all for the price of a 1+1 apartment in Prague. We also have one long-term and one short-term building. So, all together, this has been a great investment.”
What about upkeep costs? Can you give us an idea of how big they are on average?
“If I take the building where I have long-term renters as an example that costs CZK 4.5 million. It has eight apartments in it. I pay a property manager CZK 200 per apartment per month to fix small stuff around it. Over the past five years, I have probably had to buy a new boiler or water heater in every new apartment I own. There can also be occasional problems with the roof. I have probably spent another CZK 300,000 on repairs over the time. However, this was front loaded. If you take good care of the property and do a proper inspection before you buy it [it should be fine].
“Inspecting the building beforehand is very important.”
“Inspecting the building beforehand is very important. Bring in a professional. You don’t want to buy a property like this guest house and then find out that there is rot in the roof or some problem with the pipes. A couple of times I have been saved by a professional in this regard.”
When I was coming to Děčín to do this interview, I was thinking that you had probably made the decision to invest here also based on Děčín’s location next to one of the country’s most beautiful national parks – Czech Switzerland. There are several popular climbing routes here. Indeed, a Via Ferrata is located right next to your pension here. I am guessing this also played a role?
“Indeed. This is why we bought this building. We saw the Via Ferrata and thought to ourselves that this was obviously a fantastic place for a restaurant and hotel. This was also our initial vision – to transform this place into a restaurant/hotel complex.”
And has that worked out? Has the coronavirus pandemic impacted the number of visitors?
“The hotel opened up in 2020. We were ready to open in April, which was exactly at the time of the first epidemic wave, so it was quite painful of course. The summer was good, it was filled up, and 2021 was also good.
“It is a seasonal business of course, but it pretty full from May to October. Meanwhile, November through to February is pretty weak.”
Děčín is of course also very close to neighbouring Germany, so I am guessing that this is a good target for German tourists? But foreign tourism was low during the coronavirus pandemic.
“Actually, the German and Polish tourist scene is pretty strong here and it remained strong even during the Covid period because people couldn’t fly. Czechs visited a lot too. All of the people who would normally be flying to the Maldives or Costa Rica suddenly couldn’t and were looking for places within driving distance, so they came here.
“This isn’t like Prague, which is very dependent on Russian, American, Japanese and Chinese tourists. The Prague accommodation scene really is in trouble, but over here we were at 95 percent accommodation rates for the whole season.”
Could you tell me a bit more about the Prague accommodation scene being in trouble?
“Well this is part of what has driven up Prague prices a lot – the AirBnB market. You have these people who have bought a 1+1 or 2+kk for some insane price, which you could never make a profit out of in the long-term and it wouldn’t make sense for you personally, but they were counting on it to make a lot of money by renting it out to foreign tourists. Of course, this whole market just disappeared during the last couple of years.
“I think that a lot of those people are in trouble just because of the pandemic. However, further regulation is also coming. The same regulations that have started appearing in Germany or Barcelona are now also coming to Prague, because people are tired of whole central parts of their city being hollowed out by AirBnB ownership.”
“The same regulations that have started appearing in Germany or Barcelona are now also coming to Prague, because people are tired of whole central parts of their city being hollowed out by AirBnB ownership.”
And I am guessing that it was precisely these risks that also kept you from making such an investment?
“Exactly. I think that this sort of short term investment made sense 10 years ago. When I started really doing this investment stuff seriously about 5 years ago, it was clear that this AirBnB thing was both saturated and exposed to regulatory intervention. I thought that it made more sense to buy a pension, play by the rules and not do AirBnB in Prague.
“Furthermore, there was a real shortage of accommodation up here. I mean there was no place to stay when I would come up here. I thought to myself that if I can’t find a room here then nobody can find a room, so let’s build 10 apartments.”
Just to borrow one more insight from ReMax founder David Krajný, he said that before 2005 there wasn’t a real estate agency infrastructure in Czechia before 2005. I guess this had already been established by the time you began buying here, but I wanted to ask you if there is any difference if one wants to buy a property in the regions compered to Prague?
“I think that it’s the same. There are good agencies and bad agencies everywhere. From my experiences of buying and selling, there are plenty of bad agencies in Prague. Here, I actually had a better experience. There is one company here through which I bought both our house and one other building and they are very professional.”
What would be your recommendations for foreigners [or expats] thinking of buying a property in the Czech Republic for investment purposes? You have already said that there is a greater margin of profit in the regions, but what would be your summary in general?
“I think it’s easier to make money in ugly places, that’s kind of my main takeaway.”
“I think it’s easier to make money in ugly places, that’s kind of my main takeaway (laughs). Not that Děčín is ugly, but it’s not Prague, it’s not Karlovy Vary, nor is it Olomouc. People want to invest in places like Malá Strana in Prague and I think that’s so saturated already. You can’t get this kind of property appreciation that people have come to expect. I think that there are many more opportunities out in the regions.
“People cannot afford to live in Prague anymore and they are moving further and further away. This also happened where I am from in the United States. At some point in time, people working in Boston couldn’t afford to live there anymore. My home town in New Hampshire, which is an hour away, became a commuter town for Boston. That’s my theory also about places like this. Ústí nad Labem [which lies very close to Děčín] is 40 minutes by train to Prague and is basically transforming into a commuter feeder town for the Czech capital. Eventually, this is going to happen to Děčín as well.
“I think that in the regions there is less competition, the prices are lower, plus there is going to be this influx of people here of people who want to work remotely or commute into Prague. That will drive the prices up in the long term.”
“People tend to sit on their properties a lot and that in turn reduces the velocity of the market.”
If we take a bit of a “meta” look on the real estate market, do you think it is moving in the wrong direction with this phenomenon of overpriced cities and people moving further and further away to commute?
“It is much harder for young people to get onto the property ladder than it was for me in my 20s. That is sad in many ways.
“I think that there is also an issue specific to the Czech Republic. Namely, the lack of property taxes. This means that people tend to sit on their properties a lot and that in turn reduces the velocity of the market. In the United States, property taxes are high and if you are not doing something productive with the property you need to sell it, because you can’t afford to pay these taxes. Here, the supply is artificially restricted by the lack of taxes and people just sitting on their properties.
“Secondly, there are no capital gains on this. So, again, people have every incentive to just hold on to their properties because the returns from any gain that you get are not taxed. I cannot think of any other country that is the same in this regard. It is not in my interest for that to happen, but I think that, if the relevant tax regime changed, it could be fixed pretty easily.
“More generally, I think that work has changed thanks to the pandemic and people are not going to go back into offices in the same way that was the case before. I think that you will see less need for people to live in Prague and physically go to the office, so there should be a wider distribution of the population outside of the big cities.”
Thank you. Was there anything else that you feel that I didn’t ask but is worth mentioning on this topic?
“Maybe two more things related to people considering investing into property here. First of all, do not be afraid of the Roma minority. A lot of Czechs do not want to buy buildings that Romani people live in. Honestly, I found that they are fine in many cases and often much better than [ethnic] Czechs. They are cleanly, they have jobs and they take care of their place. They do not meet the [negative] reputation [spread about them] at all. You can buy an apartment building where the tenants live of social support for 20 percent less when it is occupied by Romani people and they also take much better care of it.
“Focusing on the segment of low-income tenants can be an interesting investment.”
“Also, when it comes to renting out property to people on social support, people are often quite nervous about doing that. However, you get the rent directly from the city. They pay. Meanwhile, tenants who are not on social support sometimes disappear overnight owing you three months’ rent. Focusing on the segment of low-income tenants can be in interesting investment.”
