Czech Republic 2011 Real Estate Review

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2011 ColliERs REal EstatE REviEw » CoUNtRY

Czech Republic

Karel Stransky managing director colliers international czech republic

Address Galerie MyšákVodičkova 710/31Prague 1, 110 00, Czech Republic

Phone +420 226 537 618

Email [email protected]

Dear Colleagues and Friends,

if we would try to sum up the previous year, then – according to most recognized experts – it definitely lagged behind the expectations and hopes that many of us had vested in it. the optimistic prognoses of economists and experts on property markets about their strong revival haven’t proven true.

All the more, the fundamental differences between each market segment broke through. All of them could be easily summed up in a few sentences very similar to a weather forecast. While the office market still struggles with overcast sky, the area of industrial and logistic properties seems to face somewhat cloudy weather. the investment market then goes through kind of a stormy climate where periods of calm and windlessness interchange with huge investment transactions that come up like bolts from the blue.

the new character of the market that we first noticed in 2009 reassured us once more last year that it’s not going on just a momentary change of wind but on a brand new trend. As well as in all other branches, the client – especially tenant – plays the leading role on the property market. this trend that originally started more than a year ago has been enriched by another interesting phenomenon during the past year – almost half of the volume of all the investment transactions has been secured by domestic private and institutional investors. After years of domination of German and other foreign real estate and pension funds, the tune is for the first time being called from someone else.

Despite the fact i truly love my native Czech language; the international term “challenging environment” fits the best to describe the crucial changes facing the commercial property market. Due to the nature of these unforeseen changes, precise analysis, accurate estimations and perfect skills are required to react to these changes on-time and accurately; these are the grass roots from which new challenges emerge. these grass roots, as well as the ability to analyze facts and find mutually beneficial solutions, are more than ever becoming a true merit of our work. the work of real estate consultants.

i’m not going to present any predictions and anticipations about future property market development in the upcoming year. it wouldn’t be serious. instead, i and my team here in Colliers Prague office will try our best to deliver the most accurate market information and know-how you can get in the Czech Republic. You can find them outlined in this market report. With a view to provide you with the necessary advantage and information a step-ahead.

Remember – we were those who predicted future development of both office and industrial markets with admirable accuracy more than a year ago. today, we are those who the others quote and bear up. our deep know-how and courage to tell things frankly paid off to us last year. if you like, it can pay off to you as well!

thanks for your confidence and i look forward to working with you in 2011!

Karel Stransky

P. 44 | CollieRS inteRnAtionAl

CollieRS inteRnAtionAl | P. 45Research: Lenka.OleksiakovaColliers.com

2011 ColliERs REal EstatE REviEw » CZECH REPUBliC

SUMMARY � For the first year since 2000, GDP

declined in the Czech Republic by an unprecedented 4.1% in 2009. In 2010, we have seen a more positive outcome with a recorded growth of 2.1%. Other than Bulgaria, Romania and Hungary, most of the Central and Eastern European countries have witnessed a positive growth of their GDP.

� Following the GDP movements, unemployment in the country reached its peak in 2009 with 9.2%. In 2010, we started to see some improvements and the latest forecasts from Focus Economics show a positive outlook for the next 5 years with an unemployment rate set to reach about 6.0% in 2015.

� After the very strong years of 2007 and 2008, when the CPI inflation rate reached 5.5% and 3.6% respectively, 2009 saw a severe drop to only 1.0%. In 2010, inflation reached a more “stable” rate at 2.0% compared to the previous year. Based on the latest forecasts, we believe inflation in the country will remain stable at around 2.0% over the next 5 years.

� Czech external debt increased to a record 45% of GDP in 2009, although has already started to decrease to 42% at the end of 2010. In comparison to the other Central and Eastern European countries or EU members, the Czech Republic is in a healthier situation: the average for EU members is about 77.4% of GDP and 52% of GDP for other Eastern countries.

PROGNOSIS � As we mentioned last year, 2010 was

the stabilization period for the Czech Republic. The main macro indicators (GDP growth, unemployment, and inflation rate) are showing positive outlooks and are now reaching more stable rate levels. Consequently, we are not expecting any substantial growth or drop in the coming years.

� The local economy, however, remains too dependent on external factors (exports, instability of the Czech Crown compared to the Euro or the Dollar) that could have a negative impact on the economy. Nevertheless, banks have started to be more active and are now lending more than in 2009. The volume of personal mortgages has increased by about 5% in 2010 compared to the previous year, and the decreasing average mortgage rate should help this trend to continue in 2011.

ECONOMIC OVERVIEW

KEY ECONOMIC FIGURES

Metric % ChangeGDP Growth 2.1%

Industrial Production 8.4%

Unemployment 9.0%

Inflation 2.0%

Retail Sales 0.3%

Public Deficit 4.8% of GDP

Source: Focus Economics, Ministry of Finance

|

2003|

2007|

2011F|

2010|

2005|

2006|

2004|

2009|

2008|

2014F|

2013F|

2012F

12

10

8

6

4

2

0

-2

-4

-6

GDP, UNEMPLOYMENT & INFLATION

▬ GDP ▬ Unemployment, % ▬ Inflation, %

Source: Focus Economics

160

120

80

40

0

EXTERNAL DEBT AS % OF GDP

▄ 2010 ▄ 2011

|

CzechRepublic

|

Hungary|

Poland|

Romania|

Slovakia|

EUMembers

Source: Focus Economics



Research: [email protected]

OFFICE MARKET

GENERAL OVERVIEW � Although the GDP growth turned

back to positive numbers in 2010, the net take-up continued to weaken. It declined by 35% compared to the previous year. As a result the vacancy rate increased to almost 14% in the course of 2011.

� Historically the lowest amount of space was delivered to the market in 209 as construction practically stopped.

� On the flip-side, construction of almost 140,000 Sqm of office space commenced, mainly in the second half of 2010. 60% of this space started on a speculative basis. The majority of the space that is currently under construction will be delivered to the submarkets of Prague 4 and 8.

SUPPLY � Only 41,790 Sqm of offices were been

completed during 2010, representing a 70% decline compared to the previous year. 21% of the supplied space has been pre-leased.

� The only significant completion was Filadelfia (28,160 Sqm) by Passerinvest – another building of the BB Centrum in Prague 4, being almost 100% vacant. The other completions include Vaclavske namesti 17 (1,265 Sqm), Parizska 26 (1,200 Sqm) and Havlickova Plaza (2,169 Sqm) in Prague 1 and CEZ building (4,000 Sqm) and Budejovicka 1 (5,000 Sqm) in Prague 4.

� The total modern office stock exceeded 2.69 Mln Sqm as of end of 2010.

� The amount of space offered for sub-lease decreased in the course of the year by 44% to 23,731 Sqm as some of the space was leased up or occupiers stopped offering their space on the market.

DEMAND � Overall take-up reached 214,707 Sqm,

which represents a 13% decline compared to the previous year (245,000 Sqm). However, the take-up figures from 2009 were influenced by two significant transactions comprising 45,000 Sqm.

� Take-up in 2010 was (again) driven mainly by renegotiations and relocations, accounting for 42% and 23% respectively.

� The net take-up continued to weaken during the year and reached less than 75,000 Sqm as a consequence of delayed reaction to the negative GDP growth in 2009. The second half of 2010 saw a slight improvement mainly with the Deutsche Boerse Group expansion in Prague 8.

� The IT sector was the most active during the year generating 22% of the transacted volume, followed by Professional Services (18%) and the Manufacturing (16%) sectors.

� A-class buildings dominated the overall take-up with 81% of the total volume. Moreover, 60% of new leases were closed in A-class buildings and the majority of relocating tenants moved from B-class to A-class schemes. B-class buildings attracted mainly smaller tenants enquiring units of up to 350 Sqm.

KEY OFFICE FIGURES

Metric MeasureTotal Stock 2,697,850 Sqm

Take-Up 214,707 Sqm

Vacancy 13.15%

Prime Headline Rent €20 – 21/Sqm/month

Source: Colliers International, PRF

2,750

2,700

2,650

2,600

2,550

2,500

CHANGE IN STOCK & PIPELINE (SQM, 000)

|

Q12009

|

Q22009

|

Q32009

|

Q42009

|

Q12010

|

Q22010

|

Q32010

|

Q42010

Source: Colliers International, PRF

TAKE-UP STRUCTURE

27%Relocation within stock

23%New leases

6%Expansions

44%Renegociation

KEY LEASE TRANSACTIONS

Tenant Size (Sqm) Project TypeOracle 9,831 The Park Renegotiation

Deutsche Boerse Group 7,524 Futurama

Business ParkRelocation + expansion

Computer Associates 7,201 The Park Renegotiation +

expansionFinanci urad Praha 4 5,000 Budejovicka 1 Relocation

Interoute 3,922 City West Relocation

CollieRS inteRnAtionAl | P. 47


Research: Lenka.OleksiakovaColliers.com

OFFICE MARKET

VACANCY / AVAILABILITY � The vacancy rate rose to 13.2% as of

the end of 2010, which equals more than 354,000 Sqm of vacant space. This is a y-o-y increase of 1.35 b.p. compared to the previous year.

� In the first half of 2010, the vacancy rate grew to 13.8% mostly due to the delivery of BB Centrum Filadelfia and the vacation of some buildings by anchor tenants (Siemens, Ceska Sporitelna). As a consequence of improving net take-up and low deliveries in the second half of the year, the vacancy rate started to decline.

� A significant vacancy rate increase occurred in Prague 6 (from 16.4% to 25.2%) as a result of the relocation of anchor tenants to other districts (Siemens, Citibank). On the contrary, a major decrease was recorded in Prague 8 (to 15.9%) thanks to recently closed transactions (e.g. Deutsche Boerse Group, Parexel International). A high vacancy rate remained in Prague 7 (28.0%) followed by Prague 9 (21.5%).

RENTS � Prime office headline rents remained

unchanged in the city centre, where they range between €20.00 to €21.00 Sqm/pcm and in the inner city where they range from €15.00 to €17.50 Sqm/pcm. In outer outer city locations rents increased slightly from €13.00 to €14.50 Sqm/pcm.

� As landlords and developers continued to provide incentives (rent free periods and fit-out contributions) to both prospective and current tenants, the effective rents stayed on average 10% to 15% below the actual headline rent.

PROGNOSIS � 95,329 Sqm will be delivered to the

market in the course of 2011, 46% of which is already pre-leased.

� Based on the positive GDP growth which started in 2010, and the positive prognosis for 2011, net take-up is expected to rise again. New leases from UniCredit Bank, Komercni Banka or Seznam.cz have already been announced and are expected to be closed in the first half of 2011.

� As the Prague office market is now mature, renegotiations and relocations will continue to comprise a significant proportion of the overall take-up.

� Taking into consideration the delivery of the first phase of Harfa Office Park – Building Amadeus (19,600 Sqm) without any pre-leases, the overall vacancy rate may slightly increase in the short-term.

� We expect the vacancy rate to peak in the first half of 2011 and then start to decline as a consequence of improvements in net take-up (and absorption of the vacant space).

� The vacancy rate in Prague 4, Prague 6 and Prague 8 in particular should decline as the recently completed or vacated space is being/will be leased up.

� Vacancy in B-class buildings is expected to grow as tenants continue relocating to A-class schemes where they are able to achieve favourable terms for higher quality.

� Prime headline rents are expected to remain at current levels with effective rents still being up to 15% lower than headline, based on size and terms of the lease contract.

BUILDINGS UNDER CONSTRUCTION IN PRAGUE

Project Size Developer DeliveryHarfa Office Park 19,600 Lighthouse Group Q1 2011

VN 9 Offices 2,263 MTK Q2 2011

Main Point 25,700 PSJ Invest Q3 2011

Futurama A3, A4 16,032 Immorent Q4 2011

Lyra Office Building 6,506 Immorent Q4 2011

Budejovicka 3 10,346 Pankrac a.s. Q4 2011

Qubix 11,722 S+B Q4 2011

Rivergardens West 19,400 HB Reavis Q1 2012

Rohan Business Centre 8,500 Karimpol Q1 2012

Keystone 5,650 Karlin Group Q1 2012

City Green Court 16,876 Skanska Property Q2 2012

Palac Krizik II 6,000 Cecopra Q2 2012

City West A2 15,236 Finep Q2 2012

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

16%

14%

12%

10%

8%

6%

4%

2%

0%

VACANCY

▄ Vacant space (sqm) ▬ Vacancy (%)

|Q1

2009

|Q3

2009

|Q1

2010

|Q3

2010

|Q2

2009

|Q4

2009

|Q2

2010

|Q4

2010

€24

€23

€22

€21

€20

€19

€18

€17

€16

€15

RENTS

|Q1

2009

|Q3

2009

|Q1

2010

|Q3

2010

|Q2

2009

|Q4

2009

|Q2

2010

|Q4

2010

▬ Prime Headline Rent ▬ Prime Net Effective ▬ Average Headline

Source: Colliers, PRF



INDUSTRIAL MARKET

OVERVIEW � The preliminary market data suggest

another record breaking year for the industrial property market in the Czech Republic.

� Until now, the market experienced the highest level of leasing activity in 2007 when the total take-up reached 904,000 Sqm. The overall 2010 figures imply that the take-up is likely to exceed 980,000 Sqm.

� Demand remains driven by logistic services providers, retailers and the automotive industry.

� The overall rate of vacancy keeps falling, however, the reduction of immediately available space is not being countervailed by new construction.

SUPPLY � At least 152,000 Sqm was supplied to

the industrial property market in the course of 2010, with a vast majority of the space being pre-let.

� The largest completions include the Logistic Terminal in Lovosice developed by HB Reavis (43,000 Sqm) and a 28,000 Sqm hall at CTPark Ostrava.

� Speculative construction was undertaken but mostly only as a part of formerly pre-let space. Some of the local developers have built warehouse space on speculative basis in 2010 but this was mostly in regions with low level of existing industrial stock and low vacancy. At least 10,000 Sqm was developed speculatively in Eastern Bohemia.

� At the end of 2010 the total modern industrial stock in the entire Czech Republic stood at 3.69 Mln Sqm.

� Most of the major developers are willing to offer a build-to-suit solution in new locations, provided that the tenant is a reputable company and ready to sign a lease for at least 5 years (while 7 – 10 year leases are preferred).

DEMAND � In 2010 leasing activity grew

gradually each quarter amounting up to over 980,000 Sqm at the end of the year. This represents an increase of more than 100% over take-up recorded in 2009.

� The total take-up figures of 2010 have been significantly influenced by the amount of large transactions. There were 15 transactions exceeding 15,000 Sqm closed in 2010, accounting for almost 330,000 Sqm of the total take up (compared to only 4 such deals signed in 2009). Furthermore, over 80% of this space was absorbed within the existing vacant premises.

� 67% of the total take-up was based on new demand only, taking into account all new leases, pre-lets or space expansions. Renewals formed around 28% of the total activity and the remaining 5% went to companies that decided to upgrade their space and move from older premises to modern A-class space.

� Most demand traditionally came from logistic services provides who accounted for over 40% of the total takeup. The logistics sector contributed almost 28% to total new demand for industrial space and also generated over 70% to all renewals.


KEY INDUSTRIAL FIGURES

Metric MeasureTotal Stock 3,691,000 Sqm

Take-Up 980,000 Sqm

Vacancy 10.4%

Prime Headline Rent €3.60 – 4.00/Sqm/month

Source: Colliers International

3,800

3,600

3,400

3,200

3,000

2,800

CHANGE IN STOCK OVER TIME (SQM, 000)

|

Q42008

|

Q12009

|

Q22009

|

Q32009

|

Q42009

|

Q12010

|

Q22010

|

Q32010

|

Q42010


TAKE-UP STRUCTURE

28%Renewals &

Renegociations

12%Expansions

4%Relocations from

B to A Class56%New demand

INDUSTRIAL LEASE TRANSACTIONS

Tenant Size (Sqm) Project Type

HOPI s.r.o. 45,800 PointPark Prague D1 renewal

CEVA Logistics 26,595 CTPark Bor u Tachova new lease

Brembo 25,553 CTPark Ostrava new lease

€OGATE Warehousing & Distribution Czech

23,482 ProLogis Park Štěnovice new lease

TROST Auto Service Technik 23,365 Orange Park new lease




INDUSTRIAL MARKET

VACANCY / AVAILABILITY � Since the beginning of 2010, the

overall vacancy has declined from 19.5% to the current level of just over 10%. The decline has been mainly caused by lack of new supply combined with high demand for immediately available premises.

� The current existing available stock still offer fairly wide choice of solutions for tenants searching for units of up to 5,000 Sqm. However, companies wanting to quickly lease a space of 5,000 – 9,999 Sqm have only around 15 alternatives across the entire country. The situation is much worse for requirements exceeding 10,000 Sqm as those can currently be accommodated only in 9 halls. Other than that, users may consider B-class properties or wait for a build-to-suit solution.

� The largest decrease in vacancy has been recorded in modern industrial projects in western Bohemia where the rate of vacancy declined from 32.1% to 8.8% in the course of 2010. Another significant change occurred in Ostrava with the vacancy going down from 26% to the rate of 13.4%.

RENTS � In general, the rents have remained

stable throughout the year. Slight increase has been recorded in areas where the vacancy has decreased dramatically – such as Pilsen and the D5 highway corridor.

� Headline rents for requirements below 5,000 Sqm range between €3.20 and €4.50, in Prague such space can be leased at around €3.50 - €4.30.

� Units of over 10,000 Sqm are generally offered at headline rents of around €3.10 - €4.20 depending on whether the solution is offered within existing premises or as a new construction.

� The effective rents remain 10% - 15% lower than the headline rental rates.

� Rent levels for the mezzanine office space have been in general offered for €7.90 - €8.50 per Sqm and month. However, office space within build-to-suit solutions and premises build on demand the office rent can go up to €9.50 per Sqm and month.

PROGNOSIS � New demand for industrial space has

been growing continuously for the past six quarters, supported by relatively high volume of immediately available modern space offered at lower rental rates.

� For 2011, it is expected the demand would remain at similar levels. However, the lack of immediately available space may to some extent limit the real take-up figures. Companies requiring the space immediately may also look at B-class properties instead of waiting for a new construction.

� On the other hand larger requirements are likely to initiate new developments, although these are still not likely to be undertaken on speculative basis.

� Delivery of at least 250,000 Sqm is expected in 2011 with approx. 95,000 Sqm being already under active construction.

� As CTP proceeds with the development of their newly acquired land in Cernovicka Terasa a short-term increase in vacancy rates is likely to occur in Brno at the end of 2011. The construction of new larger facilities at CTPark Brno II., which should accommodate the consolidation of CTP’s existing tenants, will result in the existing space being vacated and offered to new users.

Research: Lenka.OleksiakovaColliers.com

770,000700,000630,000560,000490,000420,000350,000280,000210,000140,00070,000

0

22%20%18%16%14%12%10%8%6%4%2%0%

VACANCY

▄ Vacant space (sqm) ▬ Vacancy (%)

|Q4

2008

|Q1

2009

|Q3

2009

|Q1

2010

|Q3

2010

|Q2

2009

|Q4

2009

|Q2

2010

|Q4

2010

|

Brno|

Prague|

Pilsen|

Ostrava

€5.00

€4.50

€4.00

€3.50

€3.00

€2.50

€2.00

RENTS


|

2008|

2007|

2006|

2005|

2009|

2010

1,200

1,000

800

600

400

200

0

TOTAL TAKE-UP (SQM, 000)Source: Colliers International



INVESTMENT MARKET

SUMMARY � The investor’s profile has changed

over the past two years. As we started to witness in 2009, Czech investors started to invest more in actual real estate than foreign investment funds. Those local investors are focusing on office or retail properties with a strong income profile in established locations (i.e. City Empiria).

� About €550 Mln were invested in 2010 compared to €400 Mln in 2009. The number of transactions also increased from 10 in 2009 to 16 in 2010. Another factor that is helping the market to improve is the fact that some banks have started to lend on new acquisitions again at more reasonable levels (about 60 to 70% Loan-To-Value).

� CPI investments was the most active player in the market. During 2010 they closed eight transactions totalling around €246 Mln. Their largest transaction was the acquisition of the Siemens headquarters in the City West office development by Finep. CPI acquired the property in December 2010 for a net initial yield of about 7.1% and a total lot size of around €70 Mln. In November 2010, the group also acquired the main shopping centre in Ceske Budejovice for a reported net initial yield of about 7.00% and a total lot size of around €41 Mln. The property also includes about 7,000 Sqm of office space, which at present suffers from a high level of vacancy. In Prague 2, CPI acquired the Longin Business Centre from Invesco for €29.5 Mln representing a net initial yield of 7.80%. Finally they acquired the Continental warehouse facility in Brandys nad Labem (close to Prague) for €14 Mln and a retail park in Mlada Boleslav for €25 Mln.

� The largest transaction that was announced in 2010 was the sale of the Intercontinental hotel to Westmont Hospitality for a reported price of €110 Mln, which equates to about €300,000 per room and a net initial yield of about 4.80% on the EBITDA. According to the

press release, the purchase price is said to reimburse only the debt and interest costs currently in place.

PROGNOSIS � The main reason for the drop in

activity over the past two years is the lack of available prime product in the Czech Republic. Prior to the credit crunch, a lot of investors were focusing on secondary products, which were trading at more attractive yields and had more upside potential. However, as we previously mentioned, investor’s interest has since shifted to prime or sub-prime products, not necessarily providing high returns but providing more secured long term income. Also, with prime yields increasing to 6.75%-7.00%, landlords are not willing to put their prime assets back on the market, as most of these properties were acquired for lower yields during the boom times (2006 – 2008).

� We do expect investment volumes to remain stable in 2011 compared to 2010 and the focus of investors to remain on secured income producing properties, with a preference for offices in Prague. Banks will continue to lend on new acquisitions, however, they are now much more selective in terms of properties and borrowers’ profile.

� Prime yields for well let, centrally located office stock are stable at around 6.75% to 7.00% while yields for secondary stock continue to increase due to a current lack of liquidity and limited interest in what is considered as riskier product. With the current lack of transactions in the retail and logistic market, we believe yields for those assets to remain stable compared to last year.


KEY INVESTMENT FIGURES

Metric MeasureInvestment Turnover €550 Mln

Prime Office Yield 6.75% - 7.00%

Prime Retail Yield 6.75%

Prime Industrial Yield 9.50%


KEY INVESTMENT TRANSACTIONS

Deal Value Vendor PurchaserContinental plant in Brandys nad Labem €14 Mln N/A CPI

Siemens - City West, Prague office space €70 Mln Finep CPI

IGY, retail in Ceske Budejovice €40 Mln GERE CPI

City Empiria, Prague office space €72.5 Mln ECM REI Unnamed

InvestorMB Retail park, Mlada Boleslav €25.3 Mln MB

Property CPI

|

Q12009

|

Q22009

|

Q32009

|

Q42009

|

Q12010

|

Q22010

|

Q32010

|

Q42011

300

225

150

75

0

INVESTMENT VOLUMES (€ MLN)


12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

PRIME YIELDS

▬ Office ▬ Retail ▬ Industrial

|

H12006

|

H22006

|

H12007

|

H22007

|

H12008

|

H22008

|

H12009

|

H22009

|

H12010

|

H22010



BASIC FORMS OF TITLE � In the Czech Republic, the most

common title to real estate is full ownership (“vlastnické právo”), which is similar to a “freehold” title and entitles the owner to a full range of perpetual rights to use and enjoy real property. It is also possible to use real estate based on (i) an easement (“věcné břemeno”) or (ii) a lease (“nájemní právo”), which can be either a long-term lease or a lease for an indefinite period of time.

ACqUISITION OF REAL ESTATE BY FOREIGNERS

� Foreigners who are EU nationals may acquire commercial real estate directly. The acquisition of residential and commercial property by non-EU foreigners is only possibly in the case of holders of a permanent residency permit or, indirectly, through the establishment of a Czech legal entity such as a limited liability company (“společnost s ručením omezeným”). A foreigner can own 100% of such legal entity.

REGISTRATION SYSTEM � In the Czech Republic, there is a

so-called Cadastral Register (“Katastr nemovitostí”). This register shows the owner of the property in question and also indicates the extent to which the land is encumbered by mortgages and other servitudes. Any rights in rem become effective through registration in the Cadastral Register as of the day on which the application to register a right in rem is filed. As a general rule, “good faith” purchasers of land are entitled to rely upon information contained in the Cadastral Register, provided that the registration was made after January 1, 1993. The Cadastral Register system is accessible online.

TRANSFER TAxES � Presently, there is a 3% transfer tax

for which the seller is generally liable and for which the purchaser is the guarantor by law. Value Added Tax may also be payable in certain cases upon the transfer of real property.

LEASES � Leases in the Czech Republic are

freely negotiable but are subject to certain mandatory provisions of the Civil Code and the Act on the Lease and Sublease of Non-Residential Premises. These mandatory provisions may not be varied by contract. The most important restrictions concern the commencement of the lease. Recent amendments have increased contractual freedom in respect of leasing non-residential premises.

PRIVATISATION CLAIMS � There is a comprehensive re-

privatisation law in the Czech Republic and all deadlines for claiming possession have expired. However, certain proceedings may still be pending. These should be registered in the Cadastral Register.

NOTARIES AND NOTARIAL FEES � Legal agreements for the sale of real

estate and the transfer of perpetual usufruct rights to real estate do not need to be in notarial form in order to be enforceable in the Czech Republic. It is, however, common practice for a notary, attorney or local municipalities to verify the signatures on such agreement/letter.

LANGUAGE � In order to be enforceable in the

Czech Republic, most legal agreements to be filed with the Cadastral Register, Commercial Register or other authority must be translated into Czech. However, it is common for English or other languages to be used as a second language for checking purposes.

Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in the Czech Republic and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in the Czech Republic.

CZECH REPUBLIC LEGAL OVERVIEW

P. 52 | CollieRS inteRnAtionAl Contact: [email protected]


CZECH REPUBLIC TAX SUMMARY

GENERAL � As of 1 January 2011, a number of

significant changes to the tax administration system following the introduction of the new Tax Code were made. Further changes are anticipated in respect of VAT as of 1 April 2011.

CORPORATE INCOME TAx AND CAPITAL GAINS

� Corporate income tax is levied on profit from all activities (including rental incomes) and from the management of all types of property, although there are some exceptions to this rule defined in the tax law. The corporate income tax rate is 19% in 2011 (with the exception of pension and investment funds where it is 5%).

� Capital gains are generally included in income and taxed at the same rate, including income from the transfer of shares in Czech companies or co-operatives. However, if at least 10 per cent of the shares of a company is held by a parent company for 12 months, income from sale of the shares is tax exempt if the parent company is a Czech tax resident, an EU resident company or a resident of Norway or Iceland and the subsidiary is tax resident in an EU Member State or a non EU Member State with which the Czech Republic has concluded Double Tax Treaty (subject to certain conditions).

� As of 1 January 2011, the Czech Republic has 77 bilateral double tax treaties. As a rule, the right to tax capital gains is conferred on the state of residence of the seller. However, number of double tax treaties provides special regime for the capital gains if the shares being sold derive more than 50% of their value directly or indirectly from real estate (e.g. those with Australia, China, Cyprus, Egypt, Finland, France, Ireland, Canada, Sweden, USA). In such cases, the taxing right belongs to the state where the real estate is located. In other cases the taxing right belongs to the state of residence of the company whose shares are being sold (e.g. those with Germany and Israel).

� There are no corporate tax grouping provisions in the Czech Republic.

TAx DEPRECIATION � For tax purposes, either straight-line or

reducing balance depreciation can be used. The tax depreciation period for buildings is generally 30 years except for administrative buildings, shopping centers and hotels where the depreciation period is 50 years. Special rates apply in the year of acquisition. Land is not depreciated for tax purposes. Certain assets attached to a building can be treated as separate movable assets for tax purposes and therefore can be depreciated over a shorter period.

� Special provisions apply for the assets of solar power plants. These fixed assets must be depreciated over 240 months and the depreciation must be claimed (unlike depreciation on most other assets). A special adjustments are made for similar assets acquired under finance leases.

TAx LOSSES � Tax losses can be carried forward for five

years.

� Losses may not be carried forward on a substantial change in the ownership of a company unless it can be shown that at least 80 per cent of the company’s revenues are derived from the same activities as those carried on in the period when the loss arose. A change of at least 25 per cent in the ownership of the registered capital or the voting rights, or a change resulting in a person obtaining a controlling influence in the company, is always a substantial change.

� Tax losses are available after a merger or de-merger, although they only can be offset against profit on the same activity as was carried on in the year when the tax loss arose.

THIN CAPITALIZATION � The thin capitalization provisions act to

restrict the deductibility of interest where the borrower has insufficient equity.

� The following financial costs are non-deductible:

— Financial expenses on loans and credits received from related parties which are more than four times the equity (or more

than six times the equity in the case of banks and insurance companies);

— Financial expenses incurred on credits and loans with interest rates or other returns dependent on the debtor’s profit.

� Interest on loans and credits received from unrelated parties, or those secured by a related party, is fully deductible on general principles, except for interest on “back-to-back” loans (i.e. where a related party provides a loan, credit or deposit to an unrelated party, which then provides the funds to the borrower) which is treated as interest on related party debt.

� Any interest or other expenses relating to a non EU or EEA resident lender disallowed under the capitalization rules may be treated as a dividend, i.e. is subject to dividend withholding tax, as reduced by the provisions of any applicable double taxation agreement.

WITHHOLDING TAx � The standard Czech withholding tax rate is

15%. However, the rate can be reduced by double tax treaties.

DIVIDENDS � Withholding tax applies on all dividends

paid by Czech companies.

� Under the EU Parent/Subsidiary Directive, a dividend paid by a Czech subsidiary to a parent company that is tax resident in an EU member state may be exempt from withholding tax. These provisions also apply to dividends paid between Czech companies and paid to Switzerland, Norway and Iceland. A parent and subsidiary qualify for this exemption if a minimum shareholding of 10% is maintained for an uninterrupted period of 12 months.

INTEREST AND ROYALTIES � Withholding tax applies on interest,

royalties and lease payments paid abroad; although the rate is reduced to 5% for finance lease payments.

� Under the EU Interest and Royalties Directive, qualifying interest and royalty payments between associated enterprises which are tax resident in the EU member



CZECH REPUBLIC TAX SUMMARY

states may be exempt from withholding tax. This also applies to recipients in Switzerland, Norway and Iceland.

� Residents of other EU and EEA countries have the option to file a tax return in respect of income subject to withholding tax (e.g. interest payments, royalties, income from freelance work), and to claim a deduction of the related expenses. This may result in a reduction in the tax burden as withholding tax is calculated on a gross basis.

REAL ESTATE TAx � Real estate tax comprises land tax and

building tax. The property must be located in the Czech Republic and recorded in the Land Register. The real estate tax is calculated on the area multiplied by the tax rate.

� The rate varies according to the type and location of the property. The basic rates may be increased depending on the number of floors and the location.

� Starting from 2009, the basic rates of real estate tax doubled for buildings and land, except for arable land, hop fields, vineyards, gardens, grassland and fishponds for intensive fish farming. Municipalities can also issue a decree increasing the basic tax rate or coefficient.

REAL ESTATE TRANSFER TAx � 3% real estate transfer tax is payable on

the transfer of ownership to real estate for consideration. Generally the tax is paid by the transferor (seller), with the buyer guaranteeing the tax.

� The tax base is higher of the market value (according to the Valuation Act) or the sales price.

� The contribution of real estate to share capital is exempt from the tax unless the contributor sells all shares received within 5 years.

VALUE ADDED TAx � The reduced VAT rate is 10% and the

standard rate is 20%.

� The sale of residential property which

qualifies as social housing is subject to the reduced VAT rate. To qualify as social housing, an apartment should have a floor area of 120 Sqm or less and houses should not exceed 350 Sqm.

� The VAT rate on the sale of buildings is generally 20%. The transfer of buildings is exempt from VAT three years after the first approval for use of the premises or after the first use of the building.

� If the acquisition of a building is subject to VAT, this can be recovered if the building will be used to generate VATable sales. The recovery will be limited if it is used to wholly or partly make VAT exempt sales. A change in the level of exempt sales within 5 years of acquisition may lead to a claw back of previously recovered input VAT. It is expected that the claw back period will be extended to 10 years.

� The transfer of land is VAT exempt except for the transfer of building land which is subject to 20% VAT. The lease of buildings and land is generally VAT exempt but the lessor can opt to charge 20% VAT on a lease with a tenant which is registered for VAT.

� Groups of related companies can form a VAT group.

ADMINISTRATION OF TAxES � Tax administration is governed mainly by

the Tax Code with specific procedures provided by other acts. The Tax Code replaced the Administration of Taxes Act from 2011 and introduces wide range of changes, such as:

— different rules for deadlines for tax assessments;

— penalties for late filing of a tax return; — filing additional tax returns with a lower tax liability or a higher tax loss is only allowed under limited circumstances;

— new rules for tax audits.

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Czech Republic 2011 Real Estate Review

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