Even though prices of real estate are steadily increasing in most segments of the real estate market in the Czech Republic (i.e. residential, commercial, industrial), it is still possible to find opportunities for investments with prospect of solid yields in the following years.
There was a significant increase of investments to commercial real estate on the Czech real estate market in 2021. The sum amounted to approximately 1.1 billion euros throughout the year. That is above 20% increase from the covid-affected 2020. The peak of 2.3 billion euros from 2019 is still far away, however, the market now seems on the right track.
The vacancy rate has risen during the past two years, currently standing at 8%, but it is expected to flatten in 2022. There is currently approximately 172,800 m2 of office space under construction with around 85,000 m2 scheduled for 2022. Stronger demand and relatively low new supply should prevent the vacancy rate against further increases in the following years.
As far as the industrial development is concerned, over 306,000 m2 of warehouse space was newly completed within twenty industrial parks in Q1 2022, with more than 1.4 million m2 planned to be finished by the end of 2022. The industrial stock is thus nearing 10 million m2. The vacancy rate is minimal – standing at 1.6% throughout the country and 0.7% in Prague. The high demand subsequently causes rental growth in all regions. The demand for industrial parks has risen 61% compared to the last year, with this upsurge being the highest throughout the whole Central and Eastern Europe.
As for the residential real estate, year 2021 meant 27.9% increase in prices for newly constructed apartments in Prague with prices in Central Bohemia increasing even more. Similar trends are expected in 2022-2023 with partial slow downs due to the increase in prices of materials as well as the slightly lower demand for mortgages caused by the elevated interest rates.
The Russian invasion of Ukraine is also putting businesses in the Czech real estate market in a somewhat difficult position: especially pushing up inflation and interest rates. The impact of war on the Czech economy might be significant due to a high reliance in the economy on Russian oil and gas, migrant workers in the construction and logistics sector, and further disruptions of the supply chains. In 2022, GDP growth in the Czech Republic is expected to reach 2.6%, the lowest rate in the CEE region, while inflation could exceed historical levels at 13.1%. However, according to the latest forecasts, the negative trends should not continue in 2023. Moreover, the unprecedented situation and the severe economic sanctions can lead to major opportunities in the CEE markets, including the creation of new jobs, additional labour, and consumers.
For a better orientation in the real estate market, we provide you with this brief overview with information on legal aspects related to real estate transactions in the Czech Republic.
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Limitations over acquisition of real estate
There are currently no general limitations on ownership or occupation of real estate by foreign entities or foreign citizens, and this applies to foreign guarantees and security as well.
However, specific limitations could follow from hypothetical economic sanctions imposed by the EU, United Nations or other international organisations of which the Czech Republic is a member. However, such sanctions are extremely rare and very unlikely considering the stability and characteristics of the Czech political and economic situation.
Real Estate market according to the Czech law
The real estate market in the Czech Republic can be quite confusing for a new investor.
As of 1 January 2014, when the new Civil Code came into force, buildings form part of the land on which they are located. This means that buildings are usually owned by the owner of the land. Buildings also cannot be transferred independently from the land (principle “superficies solo cedit”). This applies to the buildings constructed after 1 January 2014 and to the buildings which had the same owner as the land under the building on 31 December 2013. As always, there are some exceptions to this general rule. But let´s focus on the big picture.
Buildings constructed before 1 January 2014 can be considered as a separate real estate itself. Such a building will remain a separate real estate until it is owned by the same entity as the land under the building.
It has to be pointed out, that for the purpose of a merger of a building with the land under the building, both of the owners have a mutual statutory pre-emptive right, which means the owner of the land has a pre-emptive right to the building and vice-versa.
It is also possible to construct a building on another person’s land (without acquiring the land). This can be arranged by a right to build. Right to build is considered as a separate real estate in a legal sense and as such can be transferred or mortgaged. On the other hand, the building itself is not a separate object and only forms part of the right to build.
All of the information on a real estate can be found in the Cadastre of Real Estate administered by the State Administration of Land Surveying and Cadastre.
Basic information on the Cadastre of Real Estate
Real estate in the Czech Republic (again with certain exceptions such as engineering networks) as well as certain rights to it are registered in the Cadastre of Real Estate.
The Cadastre of Real Estate contains descriptive information on real estate, such as:
This information is listed for each cadastral area on separate title deed. Such title deed lists all the information on all the real estate owned by the same person in relevant cadastral area.
Furthermore, the Cadastre of Real Estate includes the Collection of Deeds which contains documents relevant for the registrations in the register (such as past acquisition titles to real estate or geometric plans).
The descriptive information as well as excerpts from the individual title deed can be obtained for a fee electronically via the website of the State Administration of Land Surveying and Cadastre (http://katastr.cuzk.cz).
Selected information can also be obtained on a non-reliance basis for free.
Protection of good faith in records in Real Estate
The Civil Code states that if a person acquires a real estate from the person registered in the Cadastre of Real Estate for a consideration and in good faith, then the ownership of the real estate is acquired even if the registered person has not been the legal owner of the real estate.
If the relevant Cadastral Office makes an error during a registration in the Cadastre of Real Estate, only a compensation for related damages can be claimed.
Real Estate transactions
Real estate is typically acquired via:
In the past, acquisition of shares was often preferred due to tax reasons, as direct transfers of real estate were subject to the real estate transfer tax of 4%. However, in September 2020 the real estate transfer tax was dropped and currently the asset deal transfer is no longer subject to specific taxation. Still there are a few advantages when it comes to share deal – mainly provision of functioning company with capital to the buyer. This can be a bonus where the buyer/investor is a developer and would need these tools either way.
The disadvantage of share deals is that the investor acquires not only the relevant assets, but all the company’s liabilities as well. This is sometimes mitigated by corporate demerger, where the relevant asset is demerged to a newly established clean company that is subsequently the subject of the share deal.
With an asset deal the registration in the cadastral register is performed based on an application signed by each party to the purchase agreement, accompanied by an original or certified copy of the purchase agreement. The registration is subject to a fee, currently CZK 2,000. The registration proceedings take about one month, provided that the ownership is then transferred retroactively from the date of the filing of the application.
Because of an over 40-year period of communism in the Czech Republic, a kind of settlement of injustices made during these times has been implemented into the Czech law. The so-called restitution of Real Estate property in the Czech Republic is bound to the property unlawfully escheated by the Communist regime in the 1945-1989 period. Restitutions are mainly governed by the so-called restitution acts.
Due to the various restitutions, it is advisable for investors to check thoroughly the legal status of the intended acquisition from the point of being potentially the object of restitution at the Czech State Land Office, even though the risks relating to the restitutions are smaller every passing year.
Real Estate taxation
Asset deals
In the past, real estate transfer tax was payable on the transfer of real estate in an asset deal. The rate of tax was 4 % from the agreed purchase price. This transfer tax is no longer in force since September 2020 and therefore, the transfer is not subject to special taxation.
However, in cases where no exemption (of which there are many, mainly the 5/10 year time test) can be used, the income tax still applies. The rates can be found in the Share Deals section of this material.
Share deals
The cancelled real estate transfer tax never applied to share deals. Instead, the income of the seller from the sale of the shares may be subject to:
- 19% corporate income tax rate (if the seller is a legal entity)
- 15% personal income tax rate (if the seller is a natural person)
- 5% corporate income tax rate (if the seller is a licensed real estate investment fund)
As with asset deals, there are several exemptions to income tax, which are targeted mostly towards natural persons. An advantage is that share deal is not subject to VAT.
VAT in relation to Real Estate transactions
The following real estates are exempt from VAT:
- Land that does not form a functional unit with a construction firmly connected to the ground;
- Land that is not a building site;
- Other real estate after lapse of 5 year after issuance of:
- first occupancy permit, or
- occupancy permit after a substantial change in the real estate
Realization of new constructions
The most important public regulation for preparation and realization of constructions in the Czech Republic is the Czech Building Act and its associated and implementing legislation. For realization of a construction, a permit from the Building Office shall be obtained; for simple constructions only a notification to the Building Office is needed.
The permitting procedure, basically, consists of two phases. Firstly, a developer is obliged to obtain a land-use permit containing conditions on location of the building. The land-use permit is issued by the Building Office if the location of construction meets general criteria stipulated by law and specific criteria specified in the land-use plan issued by the municipality. After obtaining the land-use permit, the developer submits an application to the Building Office for a building permit.
Applications for both the land-use and building permit contain, apart from general essentials, the basic data on the required project and the grounds’ and building objects’ identification data. The developer has to attach documents proving its rights to the land entitling it to realize the construction, project documentation, control plan, binding assessments requested by a special regulation, e.g. environmental and health protection, fire protection, and opinion of owners of the public transportation infrastructure and utilities if the construction is connected to the infrastructure. For larger projects, the environmental impact assessment procedure (EIA) is needed. The Building Office is obliged to issue a land-use permit as well as a building permit without undue delay.
After successful realization of the construction, the developer shall obtain a Final Inspection Approval. The Final Inspection Approval is issued by the Building Office after fulfilment of the criteria set for the building by the Building Act, Building Permit and other stipulated criteria, e.g. environmental and health protection, fire protection, etc. Operating a construction is possible only after obtaining relevant environmental permits.
Described procedure is currently applicable, however, it is very likely that the process will be changed substantially in the near future. The goal is to simplify and speed up the proceedings, which are currently amongst the slowest in Europe. Such change could result in a dramatic expansion of investment opportunities. New Building Act has already been passed, however, its effect is still being pushed further into future (currently July 2023 – July 2024) and consequently its wording still faces noticeable uncertainty.
Summary
- There are currently no general limitations on ownership or occupation of real estate by foreign entities or foreign citizens and this applies to foreign guarantees and security as well.
- The Czech real estate market is undergoing a dynamic activity nowadays, which is characterised, in particular, by high demand and low supply in most segments that keeps the prices increasing. Increase in rents especially is expected in near future.
- Buildings cannot be transferred independently from the land (principle “superficies solo cedit”). This applies to the buildings constructed after 1 January 2014 and to the buildings which had the same owner as the land under the building on 31 December 2013.
- Real estate is typically acquired via direct purchase (asset deal) or acquisition of shares in the company holding the real estate (share deal).
- Taxation of real estate transaction might differ based on whether the transaction is an asset deal or share deal.
