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Print articleAttractive Real Estate Business in the Czech Republic
July, 2015 - Alica Stegmannová
Attractive Real Estate Business in the Czech Republic
The Czech property market has developed considerably in recent decades and this optimistic trend continues. According to statistical figures, the volume of commercial investment during the last twelve months to Q1 2015 in the Czech Republic reached EUR 2.6 billion, representing 90.8 % increase. The most significant deals were made mainly in the retail sector, headed by the acquisition of Palladium shopping centre for EUR 570 million. Attraction to the Czech real estate market was evidenced also by the sale of VGP’s portfolio of prime logistics assets and development land to PointPark Properties (P3) for EUR 523 million, which was the largest single logistics transaction by value in Europe in the past decade. Our law firm has been providing long-term legal services to VGP, mainly on acquisitions, development, construction, leases and operations and helped build the large property portfolio that was sold.
Investors are mainly attracted by the significant potential and price stability, as for example, the average rent for office premises on the edge of Prague is continually between EUR 13.00 – 14.50/sqm/month. Additionally, the Czech real estate market is easily accessible for foreign entities as there are in principle no restrictions on real estate acquisitions or disposals. Investors also benefit from the Czech legal and tax system, which maintains international standards and significant transactional freedom. Relevant public authorities, such as the Cadastral Register, are becoming more predictable and their approach to applicants is getting better as well. Generally, the whole process of green field development from land acquisition to the final stage of permitting takes from 1 to 3 years, depending on the complexity of the project.
When structuring a transaction, it can be said that some mechanisms are used more frequently than others. Generally, the most common deal structure is a share deal, whereby the companies’ structure and acquisition options enable parties to do business effectively and to minimize the transaction costs (e.g. having a one-person statutory body). Additionally, share deals are not subject to real estate transfer tax. On the other hand, an asset deal might be interesting for investors for accounting and tax depreciation aspects and the possibility to substantially adjust the transaction based on their needs.
Real estate transactions are usually subject to bank financing. Czech law enables a variety of securities instruments that might be used in this regard. The most usual one is a bank mortgage, whereby the security may be any asset which is tradable, including movable, immovable, intellectual property, enterprise, rights (dividend), receivables (bank, insurance, business), share or floating charge. Moreover, a security provider may use the asset as a security even before owning it. Additionally, in the case of immovables, agreements between various parties may be enforceable against third parties when registered in the Cadastral Register. Examples include a negative pledge or future pledge, conversion of mortgage or reservation of the position for a new mortgagee.
Czech law complies with the European understanding of real estate property in the way that the land includes underground and surface areas, as well as the buildings erected thereon. However, investors should keep in mind that it will take a couple of years until this principle becomes fully applicable, because it was introduced into the Czech system in 2014. At the moment, it is possible that a purchase of land may not include the building, which is a separate asset owned by another entity. In such a case, it should be taken into account that the owner of the building has the right of first refusal in respect of the land and this right may not be waived or contractually excluded.
Legal certainty is significantly reflected in the practical aspects of real estate transactions. Investors reap the benefits of the fact that the Cadastral Register is continuously updated, publicly available (for information purposes also online), and treated as a reliable source of information about registered real estate. This means that the records are in principle considered to be true and the right of those who rely thereon are protected. For example, if an investor purchases real estate in good faith from a seller who is registered as the owner in the Cadastral Register, the investor will become the owner even if the seller turns out not to be the actual owner due to some failures in the previous transaction chain. Because the longest period in which a real owner may claim that the registered data are incorrect is three years, the review of title deeds during due diligence may be confined to such a time frame. Obviously, this protection puts more pressure on the real owners. The Cadastral Register informs them about all relevant changes regarding their registration, but it is necessary to react promptly within the strict statutory deadlines.
Regarding the prognosis and future business deals, the Czech real estate market still has huge potential. Certain regions outside Prague remain undeveloped and the demand for new premises is expected particularly in the logistic sector. Investors might also benefit from the fact that after six years the construction industry in Czech Republic reached positive figures and exceeded the annual increase by more than 4.3 %. This can partly be attributed to the fact that a significant number of projects are about to be completed this year, offering for example more than 150,000 sqm of new office space to be completed between 2015/Q2 - Q4.
The Czech property market has developed considerably in recent decades and this optimistic trend continues. According to statistical figures, the volume of commercial investment during the last twelve months to Q1 2015 in the Czech Republic reached EUR 2.6 billion, representing 90.8 % increase. The most significant deals were made mainly in the retail sector, headed by the acquisition of Palladium shopping centre for EUR 570 million. Attraction to the Czech real estate market was evidenced also by the sale of VGP’s portfolio of prime logistics assets and development land to PointPark Properties (P3) for EUR 523 million, which was the largest single logistics transaction by value in Europe in the past decade. Our law firm has been providing long-term legal services to VGP, mainly on acquisitions, development, construction, leases and operations and helped build the large property portfolio that was sold.
Investors are mainly attracted by the significant potential and price stability, as for example, the average rent for office premises on the edge of Prague is continually between EUR 13.00 – 14.50/sqm/month. Additionally, the Czech real estate market is easily accessible for foreign entities as there are in principle no restrictions on real estate acquisitions or disposals. Investors also benefit from the Czech legal and tax system, which maintains international standards and significant transactional freedom. Relevant public authorities, such as the Cadastral Register, are becoming more predictable and their approach to applicants is getting better as well. Generally, the whole process of green field development from land acquisition to the final stage of permitting takes from 1 to 3 years, depending on the complexity of the project.
When structuring a transaction, it can be said that some mechanisms are used more frequently than others. Generally, the most common deal structure is a share deal, whereby the companies’ structure and acquisition options enable parties to do business effectively and to minimize the transaction costs (e.g. having a one-person statutory body). Additionally, share deals are not subject to real estate transfer tax. On the other hand, an asset deal might be interesting for investors for accounting and tax depreciation aspects and the possibility to substantially adjust the transaction based on their needs.
Real estate transactions are usually subject to bank financing. Czech law enables a variety of securities instruments that might be used in this regard. The most usual one is a bank mortgage, whereby the security may be any asset which is tradable, including movable, immovable, intellectual property, enterprise, rights (dividend), receivables (bank, insurance, business), share or floating charge. Moreover, a security provider may use the asset as a security even before owning it. Additionally, in the case of immovables, agreements between various parties may be enforceable against third parties when registered in the Cadastral Register. Examples include a negative pledge or future pledge, conversion of mortgage or reservation of the position for a new mortgagee.
Czech law complies with the European understanding of real estate property in the way that the land includes underground and surface areas, as well as the buildings erected thereon. However, investors should keep in mind that it will take a couple of years until this principle becomes fully applicable, because it was introduced into the Czech system in 2014. At the moment, it is possible that a purchase of land may not include the building, which is a separate asset owned by another entity. In such a case, it should be taken into account that the owner of the building has the right of first refusal in respect of the land and this right may not be waived or contractually excluded.
Legal certainty is significantly reflected in the practical aspects of real estate transactions. Investors reap the benefits of the fact that the Cadastral Register is continuously updated, publicly available (for information purposes also online), and treated as a reliable source of information about registered real estate. This means that the records are in principle considered to be true and the right of those who rely thereon are protected. For example, if an investor purchases real estate in good faith from a seller who is registered as the owner in the Cadastral Register, the investor will become the owner even if the seller turns out not to be the actual owner due to some failures in the previous transaction chain. Because the longest period in which a real owner may claim that the registered data are incorrect is three years, the review of title deeds during due diligence may be confined to such a time frame. Obviously, this protection puts more pressure on the real owners. The Cadastral Register informs them about all relevant changes regarding their registration, but it is necessary to react promptly within the strict statutory deadlines.
Regarding the prognosis and future business deals, the Czech real estate market still has huge potential. Certain regions outside Prague remain undeveloped and the demand for new premises is expected particularly in the logistic sector. Investors might also benefit from the fact that after six years the construction industry in Czech Republic reached positive figures and exceeded the annual increase by more than 4.3 %. This can partly be attributed to the fact that a significant number of projects are about to be completed this year, offering for example more than 150,000 sqm of new office space to be completed between 2015/Q2 - Q4.
