Rent deregulation has been receiving a lot of attention recently as property owners, tenants’ groups and government officials go back and forth between negotiating and finger pointing in the ongoing struggle to prepare for the upcoming changes.
From the companies who own thousands of apartments to ordinary landlords, and from municipal officials to lawyers preparing for a wave of court disputes, a lot of perspectives on the issue have been aired. For a residential developer such as Stephen Haigh, country manager for the Czech Republic at Avestus Real Estate in Prague, the consequences could extend as far as the residential sales market.
According to Haigh, the staggered deregulation process in which some rents will be deregulated at the start of 2011 and others not until the end of 2012 will make the overall effect all the more difficult to predict. Another significant factor is the supply situation on the residential market, which due to still stringent bank financing conditions, means there will hardly be any new supply coming between now and 2012.
“Three hundred thousand apartments is a lot of volume to come to the market even under normal circumstances, where there are another 35,000 to 40,000 apartments being added yearly,” Haigh said. Nevertheless, rent-regulated apartments have some particular characteristics that make their effect on competition different and probably will alter how many finally reach the market in the end.Owners of regulated flats will be making a lot of deals with tenants over the coming years because they don’t want to lose them.
“If you look at these apartments they have probably been neglected over the past few years, they probably haven’t had much investment because there’s been no incentive for the owners to invest in them because they’re not getting the returns,” Haigh said. Although the owners will legally be able to ask for market rents they will be obliged to bring their apartments up to market standards, requiring substantial investments.
The exception will be apartments located in historical buildings in the center of Prague. Otherwise landlords will have to consider their options.
“I think the owners of these regulated apartments will be doing a lot of deals with their tenants over the next two to three years because they don’t want to lose them. So what they might do is offset the investment into refurbishing the apartments, which they would have to do to get a market rent, and give them a discount to stay that would be the equivalent of the investment,” Haigh said.
Effects of sales may be limited
Another possibility for owners to consider if they don’t want to invest further in the property is selling to get some liquidity back, a step that would then have consequences for residential sales.
“There will be an impact on the residential sales market, but I only see that impact being at the market’s lower level because you’re talking about the majority of apartments in ‘panelák’ buildings that will be available for Kč 35,000 to Kč 50,000 per sqm. That will have an impact on that segment of the market but I don’t think it will have a rolling impact on other segments,” he said.
Potential sales and renegotiations with tenants will thus alter the number of apartments coming to the market. As deregulation continues and more rent-regulated apartments reach the market, Haigh said he thinks the growing supply will drive prices down. For the owners who invest in improving their properties Haigh sees a one to two-year process, meaning that deregulation’s effect on the sector will be highly diverse.“These apartments are coming to the market, but they are not coming all at the same time or in the same condition,” he said.
