This article is for landlords in Prague. Please read.

(Prague, April 12, 2020) The current situation around coronavirus brings a lot of fast and fundamental changes for landlords renting out real estate in Prague. In this article, I discuss what´s currently happening, what the probable future development of the rental market in Prague will be like, what measures you, as landlords, should adopt promptly and finally I describe the measures in our real estate agency practice.

What is currently happening

We´re experiencing an immediate and substantial vacating of rental real estate compared to the usual situation on the Prague market.

It concerns apartments for short-term rentals via the AirBnB platform which can´t be currently used and probably won´t be used for a long time as it will take much time for tourism to pick up, regardless of the regulation of this type of rental which was to come within 2 years, and therefore planning to relaunch this business doesn´t make any sense. Just to illustrate, in Prague 13 – 14 thousand apartments were rented out to tourists via this platform, while the offer of long-term rental accounted for approximately  4 500 apartments (according to the offer on the portal).

Additional free capacities are created after foreign students have left. For example last year, 21 200 Slovaks, 5 800 Russians, 2 600 Americans, 1 300 French etc. studied in Prague. At this time, a large part of foreign students, especially those from more distant countries, will prefer staying in their home environment and will terminate their rentals.

Substantial vacation of rental apartments will occur after employees in the most affected sectors such as hotels and restaurants leave because it´s better to be unemployed in the countryside staying at your parents´ than in Prague.

Furthermore, it is possible to expect a lower number of foreign managers, the same will happen here like with the students. In critical times, it is more pleasant to be in your home environment.

The corporate world, which is the largest employer in Prague, will now be going through an economic recession. A large section of companies will have to be careful about expenditure and, at best, they won´t hire new employees, to the contrary, it´s more probable that there will be redundancies which will result in further vacating of rental properties.

The financial situation of a large number of tenants who could remain long-term and problem-free tenants and who don´t fall into the categories above, will gradually get worse as the economic situation will deteriorate. It´s now clear that the world will fall into a severe recession this year.

Everything stated above can take 1-2 years.

Probable future development in the rental housing market

The offer of rental housing will begin to increase

The latest numbers from the portal prove this. The rental offer in Prague has been developing in recent days as follows:

March 21 – 5.659 apartments
March 23 – 5.874 apartments
March 24 – 6.013 apartments
March 26 – 6.240 apartments
March 28 – 6.459 apartments
March 31 – 6.766 apartments
April 1 – 7.041 apartments
April 2 – 7.257 apartments

If only half of the capacities mentioned in the first part of this article are vacated, then the offer of rentals in Prague can go up to about 15-20 thousand apartments.

The gradual reduction of the rental price will begin

Due to the higher offer of vacant rental flats, it´ll only be a matter of time before some landlords start lowering the prices of rentals on offer to occupy the apartment as soon as possible. This can already be seen in some offers that wouldn´t have been conceivable a month ago. Gradually, the average price of most rentals will start to decrease.

The most affected neighbourhood will be Prague 1 because it´s where a substantial part of AirBnB apartments was and at the same time this part of Prague isn´t popular with tenants, it has no basic civic amenities and doesn´t have character and its target group as, for example, Letná. Likewise, there is a risk that as soon as tourism picks up, the long-term rentals will be terminated immediately, and therefore a significant influx of tenants to Prague 1 will happen only if it´s clear that it will no longer be possible to operate AirBnB. Furthermore, Prague 3 – Žižkov will be hit hard as this neighbourhood had a substantial part of short-term rentals and was also popular among foreign students.

On the contrary, the current situation will have a smaller effect on the rental price in popular or somewhat specific locations. Meaning that if a tenant who likes café life and works in IT can choose a studio apartment in Žižkov for 7 500 CZK + utilities or in Karlín for 10,500 CZK + utilities, they will go for Karlín. Likewise, if the tenant has a job near Zahradní Město, they will rent a studio apartment for 9 000 CZK + utilities there rather than, for example, in the already mentioned Žižkov.

Fluctuation of current long-term tenants will start

If the rental agreement is concluded at 2019 prices and the rental prices start to go down, the tenants will know this and will start thinking about finding other rental housing as soon as possible. The offer will be huge and therefore the opportunity for change is attractive.

The period of looking for a tenant will be longer

The only way to quickly occupy the apartment with a tenant will be to offer it at a good price. The offer of real estate will be much higher and at the same time not so many people will move to Prague as in previous years because companies in recession won´t be hiring new employees in large numbers. Most tenants will be recruited from tenants moving from a rental to another rental within Prague – either going from more expensive to cheaper or for practical reasons – for example, from a smaller to a larger one or from one location to another closer to work, etc.

Problems with so far problem-free tenants will start

The economic recession will result in the lack or reduction of income of some tenants. Late payment of rent or non-payment will start to occur more often. The government of the Czech Republic also paved the way for tenants with its bill which will probably be approved in an emergency regime within the next couple of days. The measure prevents landlords from giving notice on the grounds of non-payment of rent, the tenant will then be obliged to pay the rent due by the end of May 2021. The measure will be applicable on the rental of both apartments and non-residential units.

Measures adopted by landlords

Current tenants

The cheapest solution for landlords is to keep the current tenants. As soon as they change, you´ll probably get a lower rental price and it´s also possible that the apartment won´t be occupied immediately and some money from the rental will be lost. Therefore I recommend the following procedure:

  1. Contact the current tenants and ask if they are affected by the situation.
  2. If so, discuss a possible solution to the situation, for example offer them temporary and partial decrease in rent or deferral of payment of part of the rent, etc. They´ll be pleased with your proactive solution and will remember it.
  3. Communicate with the tenants regularly. Tenants expect rental prices to go down. It’s only a matter of time before they consider change. If we talk to them regularly, it´ll be more probable that they´ll tell us their intention and we´ll be able to agree on a compromise solution, contrary to the situation where the tenant directly gives us a notice of rental termination.

New potential tenants

Here I´ll refer to the next part of this article concerning measures in the practice of our real estate agency as I´d recommend to landlords very similar measures when looking for new tenants as we have adopted.

Measures of real estate agency when searching for new tenants

There won´t be as many tenants as in recent years so if we want to rent out a property in the foreseeable future and to find a good tenant, the offer must be competitive when compared to other offers, of which there will be many. Of course, we can always compete with the amount of rent but this is a very primitive solution. Most landlords expect a fair rent and that’s right. There is a need to offer some added value that will attract the right tenants.

Reliability of the lease

If we omit the location, layout of the apartment and its state, the most important factor for tenants are the following two basic aspects of the rental, which we agree on in advance with the landlord, we present them in real estate advertising and use them in arguments during tours:

  1. Tenants generally expect a long-term rental for minimally a couple of years. Therefore, the rental agreement will be concluded for 1 year with an automatic extension to 2 years in case the tenant complies with all their obligations in the course of the first year.
  2. Tenants want a reliable landlord who respects the tenant’s fundamental rights. Therefore, the draft rental agreement will be in compliance with the provisions of the Civil Code. Likewise, the tenants won´t be prevented from registering their permanent residence in the apartment (for landlords, this results in negligible risks and its refusal is based on false notions). Furthermore, it´s necessary to prove that all advance payments for utilities are based on real consumption and therefore there´s no risk of high arrears. Likewise, the advance payments won´t include items that are to be paid by the landlord, such as the repair fund, real estate insurance, the administration fee and the remuneration of the Owners´ Association committee.

Setting the finances

  1. The real estate agency won´t charge the tenants a commission. The rental fee will be collected only from the landlords. The logic is following: the broker is hired by the landlord, not the tenant, and when renting out the landlord´s apartment, the broker should defend the interests of the landlord in particular, therefore the broker shouldn´t collect a commission from the tenant. Therefore the offer with a competitive advantage will be such real estate where the tenants don´t have to pay a commission and such property will be rented out sooner. The real estate agency will guarantee the landlord that the tenant will stay in the rental for at least one year, if not, it will find a new tenant free of charge. If there are problems with the tenant during the rental, the real estate agency will deal with them.
  2. A refundable deposit of two monthly rents will be established for rentals, tenants will be willing to pay a higher deposit (the standard for most rentals is one monthly rent only) because they won´t have to pay a commission, which, unlike the deposit, is non-refundable and is a net cost. For landlords it´s important to have a higher deposit in these times when the protectionist measures of the current government come into force, and when there is a large number of tenants on the market whose incomes will be at risk due to the coming economic recession.
  3. The real estate agency will establish a new company dealing with the property management and sublease of real estate. If the economic situation gets worse and the delinquency of non-payment of rents increases, in this case the solution may be to rent out the property to this new company and subsequently sublease it to end users, as the subtenant isn´t protected to the same extent as the tenant. This structure will also enable to the new company to advertise real estate on portals where direct owners advertise which will increase the reach of real estate presentations. However, I consider this measure to be temporary for this situation as our long-term plan isn´t property management and sublease.

Extension of the scope of addressing those interested in renting

In recent years, it was sufficient to advertise the property on the Internet but this will no longer be sufficient due to very high offer in the future and it´s necessary to create a broader scope of how to acquire potential tenants.

Most tenants look for an apartment that is close to their jobs, therefore local employers will be the source of tenants. It´s worth contacting them and promoting the property at the reception or otherwise, depending on agreement. We tried this procedure with one of the last orders and it worked.

We plan to collect contacts for quality tenants and create their database. The database will include those interested in renting who came for a tour and didn´t choose the property but based on the interaction we had we consider them to be promising tenants and we could recommend another property to them. Then it will be the collection of contacts for tenants on the website where we´ll offer verification of the current market rent or information on the fundamental rights and obligations of the tenant, and the amount of rent or violation of tenant rights will probably be the most common reason for reliable tenants to move out of a rental to a new one.

Compliance with time-tested rental rules

A large number of rental rules are valid in every period and in critical ones in particular. It´s possible to read them in the „Manual of a successful landlord“ ebook or in the „5 rules for choosing a reliable tenant“ ebook.