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

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

Regulated rent is a real issue in the post-communist countries

of Central and Eastern Europe. Its purpose has been to keep

accommodation affordable for all citizens but there are problems

that are arising.

Under regulated rent, a tenant is only obligated to pay a fixed

fee for the rent and this rate is not controlled by the actual

owner of the apartment or block of flats. It can only be passed

on through immediate family members and applies to that

particular apartment only. The tenant cannot move to a bigger

flat and still enjoy rent control unless they do this through

the underground regulated rent swapping market.

Yes, it exists and thrives in the Czech Republic.

Currently it is estimated that there are about 750 000 flats

under rent control in the Czech Republic. This is almost fully

one-fifth of occupied flats. Around 300 000 are privately owned

and the rest are owned by towns or villages.

Client Example

An example of how this affects landlords recently came to light

with a client from the US who is partial owner in a block of

flats in Prague. She is an absentee co-owner and asked us to

help advise her on matters pertaining to her property. She has a

tenant who enjoys regulated rent in a 1 + 1 (studio) flat in the

building. This tenant pays a mere 1 800 CZK/month when the

actual market value is at least 10 000 CZK/month. She had been

approached by the tenant offering to be bought out for 400 000

CZK so that she could move the apartment into the free market.

This is a common approach to getting apartments into the free

market but is quite costly as you can see. For this owner

however, there are two options. One is to take the payout. With

this decision she will get payback within 5 years considering

rental rate increases and the added value that her property has.

The other would be to wait for legislation to move the apartment

into the free market. Why is this an option?

European Court of Human Rights

Recent filings at the European Court of Human Rights in

Stasbourg have shown that owners are not happy with the

situation and the governments are going to be forced to revise

their laws sooner rather than later.

One complaint, lodged by the Association of Homeowners (OSMD),

involved a filing for compensation for the losses caused by rent

regulation in the 16 years since the fall of communism. As

reported in Czech Business Weekly, Libor Dellin, deputy chairman

of OSMD said that when the court decides in favor of the

property owners, each of them will require a minimum

compensation of 10 000 EURO (340 000 CZK).

Another homeowners association, the Movement for the Protection

of Property Owners (HOMR), has filed a similar complaint, hoping

to be awarded compensation from the state of up to 1.7 billion

EURO (50 billion CZK).

Why do they feel so confidently about their cases?

The Strasbourg court recently ruled in favor of a Polish

landlord who had accused the government of violating her human

rights by maintaining rent controls. The court ruled that the

government's action of regulating rents at the expense of

property owners was illegal and against human rights.

What is the Current News on Regulated Rent in Czech

Republic?

How have these developments and others affected the regulated

rent market in the Czech Republic?

A recent bill proposed by the Ministry for Regional Developments

(MMR) on June 14th suggests a gradual rent deregulation

beginning in October 2006.

The Minister of Regional Development, Radko Martinek, has

proposed that rents should, on an average, grow by 9.3% annually

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to within 5% of the market value. He is suggesting this increase

should take place from October 2006 until 2012. Rents would

increase most in Prague and Brno but would not grow at all in

some areas like Zlin.

Recently proposed rental increases were 17% for Prague, 12% for

Brno and 2% for Ostrava. As of the writing of this article there

is discussion as to over what time period to implement these

changes.

Will all of these changes come to pass?

There is strong lobbying on both sides of the issue and time

will tell. Many are taking the opportunity to gamble on the

chance that these changes will come sooner rather than later and

are buying regulated rent apartments at the current below market

values.

If you have money to sit on and don't mind no return for the

short-term, it can be a very good investment. Many people have

done well in similar situations such as in the UK when it moved

from regulated rent some years back.

If I Purchase A Buy-to-Let Property in Czech Republic, Could

It Be Brought Under Rent Control?

No! You will know immediately if the property is currently under

rent control and the government cannot take a property they

don't own and move a rent control tenant into it.

If you find properties which are priced well below average, it

could be the reason why.

About the author:

Nathan Brown is the owner of Czech Point

101, a business which helps buyers find their perfect

home in the Czech Republic and complete the purchase. Current

projects in which Mr. Brown is directly involved include

commercial and residential property investments and a portfolio

of individual and corporate business interests in Czech Republic

and North America.