Regulated Rent in the Czech Republic - Is Your Property at Risk?

Regulated rent is a real issue in the post-communist countriesof Central and Eastern Europe. Its purpose has been to keepaccommodation affordable for all citizens but there are problemsthat are arising. Under regulated rent, a tenant is only obligated to pay a fixedfee for the rent and this rate is not controlled by the actualowner of the apartment or block of flats. It can only be passedon through immediate family members and applies to thatparticular apartment only. The tenant cannot move to a biggerflat and still enjoy rent control unless they do this throughthe underground regulated rent swapping market. Yes, it exists and thrives in the Czech Republic.Currently it is estimated that there are about 750 000 flatsunder rent control in the Czech Republic. This is almost fullyone-fifth of occupied flats. Around 300 000 are privately ownedand the rest are owned by towns or villages. Client ExampleAn example of how this affects landlords recently came to lightwith a client from the US who is partial owner in a block offlats in Prague. She is an absentee co-owner and asked us tohelp advise her on matters pertaining to her property. She has atenant who enjoys regulated rent in a 1 + 1 (studio) flat in thebuilding. This tenant pays a mere 1 800 CZK/month when theactual market value is at least 10 000 CZK/month. She had beenapproached by the tenant offering to be bought out for 400 000CZK so that she could move the apartment into the free market.This is a common approach to getting apartments into the freemarket but is quite costly as you can see. For this ownerhowev...

...er, there are two options. One is to take the payout. Withthis decision she will get payback within 5 years consideringrental rate increases and the added value that her property has.The other would be to wait for legislation to move the apartmentinto the free market. Why is this an option? European Court of Human RightsRecent filings at the European Court of Human Rights inStasbourg have shown that owners are not happy with thesituation and the governments are going to be forced to revisetheir laws sooner rather than later. One complaint, lodged by the Association of Homeowners (OSMD),involved a filing for compensation for the losses caused by rentregulation in the 16 years since the fall of communism. Asreported in Czech Business Weekly, Libor Dellin, deputy chairmanof OSMD said that when the court decides in favor of theproperty owners, each of them will require a minimumcompensation of 10 000 EURO (340 000 CZK). Another homeowners association, the Movement for the Protectionof Property Owners (HOMR), has filed a similar complaint, hopingto be awarded compensation from the state of up to 1.7 billionEURO (50 billion CZK). Why do they feel so confidently about their cases? The Strasbourg court recently ruled in favor of a Polishlandlord who had accused the government of violating her humanrights by maintaining rent controls. The court ruled that thegovernment's action of regulating rents at the expense ofproperty owners was illegal and against human rights. What is the Current News on Regulated Rent in CzechRepublic?How have these developments and others affec...

...ted the regulatedrent market in the Czech Republic? A recent bill proposed by the Ministry for Regional Developments(MMR) on June 14th suggests a gradual rent deregulationbeginning in October 2006. The Minister of Regional Development, Radko Martinek, hasproposed that rents should, on an average, grow by 9.3% annuallyto within 5% of the market value. He is suggesting this increaseshould take place from October 2006 until 2012. Rents wouldincrease most in Prague and Brno but would not grow at all insome areas like Zlin. Recently proposed rental increases were 17% for Prague, 12% forBrno and 2% for Ostrava. As of the writing of this article thereis discussion as to over what time period to implement thesechanges.Will all of these changes come to pass? There is strong lobbying on both sides of the issue and timewill tell. Many are taking the opportunity to gamble on thechance that these changes will come sooner rather than later andare buying regulated rent apartments at the current below marketvalues. If you have money to sit on and don't mind no return for theshort-term, it can be a very good investment. Many people havedone well in similar situations such as in the UK when it movedfrom regulated rent some years back.If I Purchase A Buy-to-Let Property in Czech Republic, CouldIt Be Brought Under Rent Control?No! You will know immediately if the property is currently underrent control and the government cannot take a property theydon't own and move a rent control tenant into it.If you find properties which are priced well below average, itcould be the reason why.