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Russia's property market forecast 2021 - Part 2

Part Two / RETAIL & INDUSTRIAL SECTORS

Retail and restaurant premises:

The closures imposed during the spring lockdown not only led to a serious crisis in the retail sector due to lost revenues and the subsequent impossibility to meet their contractual obligations (which affected deeply also the shopping center industry), but also induced a changed perception of the shopping experience among many regular users.

Statistical data published by a number of specialized companies show that during the spring 2020 lockdown the average number of visitors to Moscow's shopping centers (where only supermarkets, pharmacies, children's stores and telecom stores could be visited at that time) plummeted by 70 per cent, but even in the weeks between October and the end of the year - despite the absence of formal restrictions - there was a 30 per cent drop in Moscow and around 25 per cent drop in St Petersburg compared to the same period the previous year.

At the same time, online sales increased by 20% during the year and online grocery sales also rose significantly.

It is no coincidence that even in the most prestigious shopping streets and "luxury districts" the number of vacancies has clearly increased (up to the 15%) compared to the past. This has led to a drop in rents, which - while in the most sought-after areas amounts to an average of 10-15% - has reached peaks of up to 30% in less popular locations. A similar trend can be observed in shopping centers, where the percentage of vacant space averages between 10-15%.

Uncertain times are also being experienced by restaurant operators everywhere. Many establishments have closed their doors permanently in recent months, although most have continued to operate even during the period of introduction of the more restrictive measures thanks to home deliveries and take-away sales. The average expectation for a drop in turnover in the current year for operators in the sector is 20-25%.

Under these assumptions, it is plausible that at least in the first half of 2021 the situation will remain more or less unchanged and landlords will have to resign themselves to offering retailers and restaurateurs cheaper rents than they were used to in better times.

 

Industrial properties (warehouses, storage- and manufacturing spaces):

The segment of light industrial, storage- and manufacturing spaces in and around major cities is the one that probably has been least affected by the upheavals related to the pandemic.

In the Moscow region alone, there has been a total demand for 1.5 million square meters of new properties of this type, which can also be explained by the increasing turnover of e-commerce operators who therefore need more and more space to store their goods. It is no coincidence that the record-breaking deal of the year saw Russian online retail giant "Ozon" sign a lease for some 200,000 m2 of warehousing space on a build-to-suit basis.

This is what many operators in the local market value most: the turnkey construction of warehouses based on their own individual technical requirements and specifications. This keeps the vacancy rate rather low (approx. 5%) in "A" or "B+" category complexes built in recent years and at the same time tends to prevent downward price fluctuations.

It should be noted that the demand for modern, high-quality warehouses is also increasing in the regions, driven here as well in particular by e-commerce operators.

All in all, it is to be expected that prices for industrial (manufacturing and warehousing) spaces will remain virtually unchanged in the coming months, and in some cases may even rise slightly.

 

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Russia's property market forecast 2021 - Part 1

Part One / RESIDENTIAL & OFFICE SEGMENTS

It is always very difficult to make predictions of any kind in a country like the Russian Federation, but on the basis of our daily on-the-ground experience we can share the following considerations.

In the course of 2021 it seems likely that a certain gap will remain (and perhaps even further increase) between the large number of offers on the market and a more timid and limited demand, which more plainly will show in certain segments.

Residential:

The increasing affordability of mortgage loans should help keep demand lively in the segment of new construction homes, especially when the talk is about cheap apartments in the suburbs of large cities, which some buyers usually consider also for investment purposes.

Despite the crisis, average prices on the resale market in Moscow's traditionally "sought-after" districts (e.g. most of the city centre and the South-west) have risen over the last two years, although the average exposure period for finding buyers has definitely increased there as well. In this case, prices could remain more or less at the same level due to the fact that in the centre new developments mainly relate to conversion projects of historic buildings into luxury condominiums with prices that are accessible only to a very limited number of "lucky few".

In St. Petersburg, on the other hand, average prices for flats in good condition in the central districts remain comparatively very appealing and keep attracting interest mainly among domestic buyers from other cities and investors from abroad. Suffice it to say that even today in the Tsentral'ny and Admiralteysky districts it is still possible to find apartments at prices ranging between 130,000 and 170,000 RUB/m2 (equal to about 1500-1900 EUR/m2 as per the current exchange rate) in historic blocks of flats where, however, the condition of the common areas often leaves much to be desired.

As far as residential rentals are concerned, the following key-factors have been observed over the last few years: (a) a sharp decline in the number of foreigners moving to Russia for professional tasks in management roles; (b) many foreigners, by virtue of the worsening economic outlook in the country  have left the country (and, as a consequence, made vacant a large number of high-end properties); (c) the constantly decreasing purchasing power of the population and households; (d) a widespread perception of the risk of job loss and the decline in profits from business activities.

All these elements have contributed to a strong reduction in the 'popularity' of expensive or premium rental solutions, which were previously largely the preserve of expatriates and foreign executives. Demand for these types of options has dropped significantly and - at least in the first half of 2021 - we would not expect this trend to change. This may lead more and more landlords to review their price expectations downwards in order to try to rent their flats within a reasonable timeframe.

In addition to that, some landlords who have resigned themselves to prolonged tenancy vacancy periods may decide to put their flats up for sale, especially once they realize that rental yields have fallen, in the hope for an immediate monetization.

Offices:

In recent years, this segment has perhaps suffered the most from the country's economic downturn and financial crisis. As if that were not enough, in recent months, it has been the one that has felt the impact of the pandemic's effects most strongly.

In fact, while in the previous five years many companies went bankrupt, abandoned the Russian market or at least tried to optimise operating costs by moving to smaller spaces and cutting down on staff, as of this year the impossibility of making full use of rented spaces has made local companies discover "smart working" and convinced many of them that this working system could be maintained even after the restrictive measures linked to COVID have been lifted.

If we add to this the fact that in many sectors the projections for the coming months do not give rise to any particular optimism, it is to be expected that in this segment demand will continue to be exponentially lower than supply, many spaces will remain vacant and the administrations of some office complexes may opt for a conversion of large vacant areas (for which it might be particularly difficult finding tenants in the current situation) into co-working spaces, as is already happening in part.

END PART ONE

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Prague property market: trends and forecasts

There are not many cities in Europe that can boast Prague's popularity both as a tourist destination as well as in terms of property investments carried out by foreign individuals and corporations.

It must be because of its strategic location just a few hours' drive from Munich, Vienna and other Eastern European capitals. It must be also thanks to the large number of low-cost direct flights connecting the city with almost every corner of the continent (and beyond). It must probably be also and above all because of Prague's unique and unrivalled atmosphere, making it a genuine emblem of "Mitteleuropa".

The first boom in the real estate market in the Czech Republic took place between 1998 and 2003: during this period average house prices in the country rose by more than 60%, also in anticipation of the country's entry into the EU in 2004. This was followed, though, by years of partial stagnation due to the fact that the Czech Parliament had decided that also EU citizens not residing in the Czech Republic were not allowed to buy property for a transitional period of 7 years.

After a brief upturn (in the years 2006-2008) the impact of the global financial crisis took its toll and average prices fell slightly. Only since 2014 has there been a real recovery and in the following years an average annual growth of 5% with peaks of more than 10% after 2016 was recorded.

And what's Prague's property market like right now? We exchanged a few words on the subject with Mr.Rostislav Petchenko, managing partner of Gartal Development, a company boasting a long-running track record of both new developments and renovation projects of historic buildings in the heart of the city.

Q -  What have been the property price trends in Prague over the last 3 years? What is the average price range now in the city centre?
A - For the last 3 years real estate prices in Prague have been growing on average 15% per year. This is due primarily to high demand and lack or shortage of new housing solutions. With regard to apartments in the city center, prices range between 5 to 8 thousand euros / m2. In some projects prices may go up to 9-11 thousand euro/m2.

Q - What one can buy nowadays in Prague (and in which areas) with 100,000, 150,000 and 200,000 Euros respectively?
A  - For 100,000 Euros you can buy a studio or one-room flat of up to 25 m2 on the outskirts of Prague. The storage and parking place will cost you about 15,000 EUR additionally.
For 150,000 Euros you can buy a studio or one-room flat (up to 25 m2) in the city center or in districts with well-developed infrastructure (subway station, shopping centers, etc.) or a small (up to 50 m2) two-room apartment farther away from the centre.
For 200,000 Euros you can buy a spacious one-room apartment (35 m2) in the city center or in the districts of Prague 5, 7, 8 with good transport connections and infrastructure. Basically with this budget one could find also a two-room apartment of up to 60 m2 in almost all parts of Prague, except with the center. The above examples are indicative and show a general trend. It may happen that a downtown apartment is cheaper than a similar apartment located farther away from the center. It all depends on infrastructure, transport connections, quality of the renovation and other extra features (balcony, basement, parking, etc).

Q - What are the average rental prices which could be expected for long-term rent of one-, two-  and three-room apartments respectively in the center (not luxury)?
A - One-room - 600 euros per month.
Two-room - 750 euros per month
Three-room - 1 000 euros per month
The above mentioned rental rates would be inclusive utility bills. 

Q -  In which areas of the capital (among the most "underrated" to date) do you expect the most interesting growth in real estate prices in the coming years? Аnd why exactly in these areas?
A - In my opinion, the most promising areas as of today are:
- Globetin, Palmovka (Prague 9) - districts that have been changing their looks in recent years, where empty or obsolete sites and former industrial zones are being redeveloped into new interesting projects;
- Sporzhilov, Chodov, Zabeglice (Prague 4) - areas with lots of green areas and excellent infrastructure, where new residential and commercial projects are gradually being built;
- Nusle (Prague 4) - next to one of Prague's most expensive neighborhoods (Vinohrady), but the housing prices here are still very reasonable. 

Q - As far as I know, one of the most popular investment options on the local property market are the so-called "atelier". What are the differences between these properties and "traditional" apartments?
A - "Ateliers" look like ordinary apartments however, due to their not complying with certain technical requirements, they cannot be registered at the Cadastral office as residential premises. As a result, unlike "ordinary" apartments, one can not register his/her domicile in these premises.

Q -  Are there any restrictions for foreigners willing to buy real estate in the Czech Republic?
A - There are no restrictions - a foreigner has the right to purchase any real estate on the territory of the Czech Republic. 

Q - Do Czech banks finance the purchase of real estate by foreigners or non-residents? If not, are there any alternative financing options available to foreign nationals?
A - Since October 2019, Czech banks can issue loans only to foreigners with a residence permit in the country. Following the introduction of this restriction an alternative financing "product" has emerged, which is today the only way to obtain financing for the purchase of real estate for a non-resident. This is made via a leasing. The leasing company acquires the property chosen by the client and the latter commits to pay it off by monthly installments. The client is entitled to use the property either for his/her own personal purposes or to rent it out to third parties. Once the financial obligations have been fully paid off to the leasing company, the client becomes the sole and full owner. The main advantage of this type of financing is that the leasing company does not require the buyer to have either an income in the Czech Republic or a permanent residence in the country. 

Q - What are the typical yield expectations in terms of rental returns for apartments or commercial premises in Prague?
A - Residential property has an average yield of less than 5% per year. In commercial real estate this figure is slightly higher (4-6% per annum), but also the "entry level" of the investment is comparatively higher. Besides, small cheap premises are usually not very profitable and are poorly rented.

Q - What are the additional costs that a buyer should consider when purchasing property in the Czech Republic? When buying from a developer, VAT is usually included in the price or is to be paid additionally?
A - In case of purchase of apartments from developers VAT and other costs (stamp duties, etc.) are already included in the prices.
As far as re-sales are concerned the costs should not exceed 4% of the value of the property and include agent's commissions (in some cases they are included in the price of object), legal fees and checks, stamp duties, etc. 

Q - What is the tax rate applicable to rental incomes in the Czech Republic?
A - Income is taxed at the rate of 15% for individuals and 19% for legal entities. Owners are entitled to some deductions in certain cases. 

Q -  How much could the property tax on an apartment in the centre of Prague cost approximately per year?
A - The property tax in the Czech Republic is very low. For example, for a 50-sqm apartment in Prague the owner should expect to pay up to 2,000 Czech korunas per year (75 EUR).

 

Alessandro Alessio
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