A difficult year is now behind us. We experienced economic troubles caused by the energy crisis, the central bank grappled with runaway inflation (over 15% in the last two quarters) compounded by soaring housing costs, and the Czech economy eventually fell into recession, all of which are factors that have a significant impact on the real estate market.
The atmosphere today is reminiscent of the tension just before the iconic shootouts in Sergio Leone’s westerns—actors stand stiffly, waiting for the next move, their nerves twitching... Who will emerge as the victor and who will go down?
Although data from the last quarter of the last year indicates a cooling down in the demand for properties for sale, all of us at Svoboda & Williams are optimistic about the future. Each era generates winners who want to live their success in the here and now. At the end of the year, we concluded several important transactions that reinforced our belief in quality real estate as a stable base for investors during times of high inflation.
This is why we’re not alarmed by the voices from the market opportunistically announcing a double-digit drop in prices, no doubt motivated by efforts to energize the stagnant business situation. Although in certain regions or segments such a decline may have very real consequences, premium properties, which Svoboda & Williams has been monitoring for a long time, aren’t affected by steep drops in prices. A significant correction will occur in properties that had price tags well above realistic valuations carried over from the real estate boom.
Especially when it comes to premium new builds, prices may decline even further this year, due in part to the unprecedented growth in key output costs, including construction materials, utilities, or even land. Moreover, the stock of exclusive properties in Prague and Brno remains insufficient. This could send a strong message to successful developers with capital to maintain a stable price level. However, we must also expect pressure from the market to offer discounts. In any case, we’ll have to wait until next year to see who will win this battle of nerves and who will still be around.
One thing is clear: it won’t be easy. People will be less and less able to afford to live in properties they own. In the period ahead, the real estate market will be shaped by rental housing. In the past year, this segment saw record-breaking growth, but rents in Prague and Brno are starting to run up against the new economic reality—a decline in expats from multinational corporations relocating to these cities due to cost cutting during the recession on the one hand, and on the other weakened purchasing power, which, according to the Czech Statistical Office, fell by a tenth in the second half of last year. We can therefore expect that the rental housing bubble will be corrected in 2023.
The commercial property segment must also prepare for the turbulent months ahead. These will reveal how the corporate market can absorb inflation and the steeply rising energy and office fit-out costs. Both will likely slow down company relocations this year and sharply increase the market share of flexible office leases.