The price of apartment rents in the Czech Republic has been steadily rising for the past two years, rising by roughly eight percent year-on-year. But the value of the real estate itself is stagnating, because the entire real estate market has slowed down significantly due to the uncertain economic situation and high interest rates. The investment bonanza of past years is gone, at least for the time being. After all, anyone who wants to buy an investment apartment now should look elsewhere in Europe. “The Czech Republic is ranked 16th out of 26 countries in the imaginary ranking of attractiveness,” writes Martin Benroth from the investment company Silverline Real Estate in his commentary.
The days when the Czech Republic was an investment golden opportunity are over, although perhaps not forever. In any case, the prospects here are currently obscured by high interest rates, poor availability of housing and also by no means bright rental yields. More interesting opportunities are currently found in other parts of Central and Eastern Europe, says Martin Benroth. In its text, it draws on the EuroEstate Investment Index 2023 ranking of the investment potential of European countries.
Central and Eastern European countries have been popular destinations for real estate investment in recent years, mainly due to expectations of economic convergence with their Western counterparts and the associated rapid growth in real estate prices. And he came too. Over the past four years, countries in the region have seen price growth of 12 percent per year, almost twice as fast as in Western Europe. But is the investment potential already exhausted? An analysis of European countries tells us that it is not. And that some of the best destinations for investment in residential real estate are still located right in Central Europe.
An investor looking for a suitable location for the purchase of an investment apartment is typically interested in the return on equity, i.e. how much the invested funds will appreciate each year. If we create a model example of an investment in an apartment of the same size and attractiveness in different countries, the return is mainly determined by the local rental yield, the growth of the property value and the cost of financing. If you’re already picking up a calculator, hold on a moment. We have compared the returns across twenty-six European countries for you.
In previous years, the common standard of European countries was double-digit appreciation, often even hitting the 20 percent mark per year. However, the end of the era of cheap money and worsened expectations of further growth in real estate prices have had a strong impact on the appreciation, and we are already predicting double-digit values for only four countries in the ranking. The time for speculative purchases is over and investors can be expected to prefer new acquisitions in countries with high rental yields that help keep the operating income of the investment in positive numbers despite relatively high interest rates.
From the point of view of expected appreciation, the most attractive destinations for buying an investment apartment are now Bulgaria and Ireland, where the appreciation is above 14 percent per year. Both countries offer, by European standards, a unique combination of high rental yields above five percent, interest rates below four percent and expected growth in real estate prices above three percent per year. However, investments in both of these countries are generally considered riskier within Europe due to the higher volatility of real estate prices.
The majority of investors will probably lean towards the other countries of the imaginary ranking of investment potential, which are Poland, Romania, Slovakia, Spain or Portugal. In these countries, the investment can be expected to appreciate in the range of eight to eleven percent per year. Poland and Romania benefit mainly from the high expected growth in real estate prices of over three percent, but they are held back by high interest rates. The investment potential of Slovakia, Spain and Portugal is helped by a combination of above-average rental yields, positive expectations regarding the future development of real estate prices and lower interest rates.
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The Czech Republic is in 16th place in the ranking with an expected investment appreciation of less than five percent. The worse position of the Czech Republic is caused by very low rental yields and current high interest rates. The Czech Republic also belongs to the top five European countries with the lowest housing availability, which reduces expectations of future growth in real estate prices.
At the same time, the comparison shows that the countries of Western Europe still offer a relatively lower investment potential than their counterparts in Central and Eastern Europe. The double-digit appreciations needed for the top spots in the rankings are almost unattainable for Western countries. Investments in Western Europe are nevertheless perceived as less risky, mainly due to the relative stability and size of the markets. In addition, Western countries show significantly better housing affordability, which limits the possibility of significant market declines and may support their growth beyond current expectations in the future.
Over the next year, we are sure to see dynamic changes in investment expectations in connection with how interest rates will change across Europe. Some countries, including the Czech Republic, which are not part of the eurozone, have set a more restrictive monetary policy than the European Central Bank, which has had a negative effect on their current investment potential. In these countries, however, there will likely be a faster reduction of interest rates, which may also be reflected in their rapid progress to the higher ranks of the ranking. Already in the middle of next year, the Czech Republic can become one of the third European countries with the highest investment potential.