Full of eastern promise

The capital of the Czech Republic has excellent rental property potential - but be quick

Prague is one of the few beacons of light in the emerging east European property arena. While Bulgaria has gluts of cheap resort apartments flooding local markets and driving prices down, and Croatia is risky because of disputes over land ownership, the Czech capital has quickly established a reputation for quality properties producing substantial and quantifiable appreciation for investors.

Prague is one of the few beacons of light in the emerging east European property arena. While Bulgaria has gluts of cheap resort apartments flooding local markets and driving prices down, and Croatia is risky because of disputes over land ownership, the Czech capital has quickly established a reputation for quality properties producing substantial and quantifiable appreciation for investors.

International buy-to-let is buoyant here because of the country's blossoming economy and new-found confidence as a member of the European Union. Latest figures show industrial output, the country's main economic indicator, was up 8.7 per cent in the year to August 2004. Just before Christmas, Prague was named as the 13th preferred business location in Europe - the best placed city from eastern Europe - according to financial consultancy Cushman & Wakefield Healey & Baker.

Czech tenants now pay up to £350 a month for a one-bedroom flat in central Prague, rising to £450 for a two-bed unit. Foreigners based there for business usually pay up to twice that amount in more luxurious apartments. That may sound low compared to London or Berlin, but so are the purchase prices.

Average two-bedroom apartments are £82,000, a four-bed house £169,000 and a six-bed house just under £300,000, according to Red Guides, which monitors east European property markets. Annual capital appreciation has been 10-20 per cent in most of central Prague since 2002.

Large UK property consultancies are now looking to Prague for possible expansion of their international sales. Knight Frank's Jaroslav Kopac, based in the city, says the rental market for lower-priced properties is buoyant because an upwardly mobile middle class wants better homes, ex-pats are returning home, and EU membership is attracting businesses. "The Czech market can be considered stabilised with great potential for further development," he says. There are also plans to gradually phase out the city's massive rent-controlled sector that is likely to further accelerate demand for the "pure" private rented market.

There are two main ways that Britons can buy there. First, there are investment firms such as Letterstone that bulk-buy apartments, normally in a deal directly with a developer, and then sell them on individually to UK investors. The firm is selling apartments for £63,000-£180,000 including transaction costs in The Z Building, a small development due for completion in September this year in Prague 5, an established residential suburb about 3km west of the city's commercial and historic districts.

Second, there are estate agents who may bulk-buy or simply have a deal to market individual units. For example Surrey-based DPS International, which offers two- and three-bedroom flats in a refurbished apartment block in Prague 2, another popular suburb about 10 minutes by tram from Wenceslas Square, starting at £141,500 including local service taxes. Meanwhile a Wimbledon estate agent, Harlon, is selling units from just £50,000 in an apartment block called Mlynarka in Prague 5.

But predictably there are bureaucratic complications to buying in a country that was communist just 15 years ago. Often the buildings and the land beneath them have separate owners. Individuals also have to spend about £1,400 setting up a limited company registered in the Czech Republic before they can complete the purchase of a property, and calculations of potential lettings income are only approximate because Czech tenants traditionally bargain over rent.

An investor who then sells must pay a transfer fee and at least 22 per cent of his capital profit in tax. It is relatively simple for non-Czech residents to get mortgages but most lenders insist on repayment and not interest-only mortgages and it can take up to three months to register a property before it can be lived in.

A lot of companies selling buy-to-let units across Prague to Britons helpfully line up a lender and legal adviser to cut through the red tape, at an apparently discounted fee, but some experts advise investors to pay a little more and seek independent guidance.

"There isn't necessarily anything wrong with having advisers on hand because the agent is providing a service to buyers, but professionally there's a conflict of interest," warns Peter Esders of John Howell & Co, an international solicitors firm in London. "The lawyer's going to think that if something's wrong he'd better skirt around it because otherwise the agent or developer won't send him any more work."

The consultancy Property in Prague also warns that an oversupply of luxury flats in recent years has led rents at the most expensive end of the market to drop by over 20 per cent, but it insists low-priced units will be in greater demand and that there remains an overall shortage of homes throughout the country.

Even so, private rental yields have dropped in recent years as capital prices have risen. Letterstone says in 2002 gross yields were typically 10-12 per cent, but are now 7-8.5 per cent. That remains much higher than in the UK and the prospects for capital growth are better too. "But there are few objective assessments of yield so you must speak to people on the ground. Investors need to use investment firms with knowledge of the market and process," says Letterstone's Simon Hill.

If you want to cash in, be quick. Prague prices have been rising for some years so increases in the next few years are likely to be a more modest 5-10 per cent a year. This is far less than the numbers promised by some estate agents selling elsewhere in eastern Europe but compared to many of these untested locations, Prague's market is gilt-edged. There are business relocations, economic stability and even burgeoning budget airline routes in its favour.

DPS International: 01342 836868; Property in Prague: 00 42 0605 308 463 or www.propertyinprague.com; Harlon Property Management: 020-8944 9538; Letterstone: 020-7348 6060; John Howell & Co: 020-7420 0400