How will the COVID-19 pandemic transform lease relations?

Legislation mitigating the impact of the COVID-19 pandemic on lessees

Legislation that deals with mitigating the impact of the pandemic provides lessees with a protection period until the end of 2020. During this period, the lease may not be terminated on the grounds of the lessee’s delayed payments that were due in the period from 12 March to 30 June 2020. The lessee’s delay in payments must be a direct consequence of the extraordinary COVID-19 restrictions. The lessee must present certain documents serving as proof of the effect of the restrictions, for example a confirmation issued by the Labour Office (for the lease of a flat), or accounting documentation (for the lease of business premises). The lessees must pay the due rent by the end of 2020. The legislation concerns both flats/premises serving as flats, and business premises.

COVID – Accommodation Programme

Until 3 December 2020, it was possible to apply for subsidies as part of the COVID – Accommodation Programme of the Ministry of Regional Development. The programme focused on accommodation facilities, offering a state contribution ranging from CZK 100 to CZK 330 per room per night in the period from 14 March to 24 May 2020 when these facilities had to be shut down due to government restrictions. The subsidy programme was only intended for accommodation facilities and excluded short-term rental services such as Airbnb.

At the time of the publishing of this brochure, it is unclear whether the programme will be renewed for the second wave of the pandemic.

COVID – Rent Programme

The Ministry of Industry and Trade has opened a second call for applications within the COVID – Rent Programme.  The programme is designated for businesses whose retail sale or provision of services to customers on the premises was curbed or shut down starting from 26 October. Just like during the first round of applications, the applicants may request a subsidy of 50% of the eligible lease for the period from July to September 2020; this time, however, no documentation needs to be presented to confirm the 30% discount provided by the lessor. The subsidy applications may be filed from 21 October 2020 to 21 January 2021.

Real estate acquisition tax cancelled

On 26 September 2020, Act No. 386/2020 Coll., abolishing the real estate acquisition tax, came into effect. The cancellation of the real estate acquisition tax is applicable to cases in which the motion to record the title to the property in the Land Register was filed on or after 26 September 2020. The tax duty has also been cancelled retroactively for cases when the title was recorded in the Land Register in December 2019 or later. Therefore, if the deadline for submitting a tax return that was supposed to include a tax duty resulting from the acquisition of real estate was after 31 March 2020, the duty is cancelled.

According to a statement of the Ministry of Finance, this newly introduced measure should remove a number of tax exceptions and encourage especially young families to acquire their own homes. Another change concerns the possibility to deduct loan interest as a non-taxable part of the tax base. For new mortgage loan contracts concluded after 1 January 2021, the limit of deductions is to be reduced from the original CZK 300,000 to CZK 150,000.

The residential market

During the summer, when most of the restrictions preventing the spread of the COVID-19 disease were lifted, the situation on the residential real estate market basically returned to its pre-crisis trend in most of the market segments. The current situation had the most significant impact on the residential market in Prague, where, compared to the beginning of March, the median rent saw a decrease of approx. CZK 40/m2/month. Sales of flats are continuing to rise, in line with the trend in the past few years, hence the reaction to government restrictions is minimal on this market. The situation on the residential market in regional cities and in the rest of the country has seen very little changes from its usual course of developments.

The short-term development of the residential market in the Czech Republic will mainly be influenced by the measures adopted by the government in the autumn months to prevent the “second wave” of COVID-19 from spreading. The situation will also be affected by the debtors’ ability to repay their loans where their payments were subject to a loan moratorium that ends in October.

The median rent price in Prague continues to oscillate at around CZK 280/m2/month – the level to which the market dropped at the beginning of May. Combined with the rising selling prices of flats, the yield rate on real estate lease is decreasing.

The number of newly-published advertisements in Prague decreased during the summer months to 1,500 per week, which is still well above the median for the past 4 years. The decrease could partially have been caused by the return of some flats to the short-term lease market in summer, when nearly all the pandemic-related restrictions were eased. The number of withdrawn advertisements continues to stay slightly under 2,000 flats per week, which means a gradual correction of the previous excess supply that appeared during the first weeks after the state of emergency was declared in March.

Prices of flats on the second-hand market continued to grow in summer not only in Prague, where the average price is close to CZK 100,000/m2, but also in regional cities.

The commercial segment

The commercial real estate market in the Czech Republic was strongly impacted by the COVD-19 pandemic in the Czech Republic in the course of 2020. In the first half of 2020, commercial real estate worth EUR 1.9 billion changed their owners, which is slightly above the average compared to previous years. This piece of data, however, is significantly influenced by the acquisition of the Residomo residential portfolio by the Heimstaden Group for EUR 1.3 billion. Without this transaction, the first half of 2020 would be well below the average.

In terms of the values of real estate, a slight increase in yields of approx. 0.5% can be observed, which reflects the higher amount of risk as perceived by investors. The industrial segment is the only segment that remained more or less unaffected and saw a minor growth. Prime yields are currently at around 4.5% for offices, 4% for high street, 4.8% for industrial real estate and 5% for shopping centres. Concerning the office segment, the growth of rent has stopped in the A segment (EUR 22.75 for prime offices), and there has been a slight growth in unoccupied offices in Prague, rising to 6%. Many companies have suspended their plans for moving or enlarging their offices and, on the contrary, due to the partial shift to work from home, have started considering optimisation plans for the space they are using. Industrial real estate, on the other hand, is on its historic minimum of unoccupied space (4.2%) and there has also been a slight increase in rent to EUR 4.75/m2/month.

Shopping centres have seen a major drop (tens of percent) in the numbers of customers, however, the average amount of goods purchased during one visit is growing, which means that the impact on the revenues of individual businesses is lower than the drop in the number of customers would indicate. In spite of this, many businesses in shopping centres have had to shut down their operation. The market segment that suffered the most as a result of the pandemic was the hotel segment, especially in Prague, where the hotels strongly depend on foreign tourists’ stays. Before the COVID-19 pandemic, the average occupancy rate in Prague was over 70%, whereas in the summer of 2020, this rate ranged from 15 to 20%.