Czech developers tangled in kafkaesque maze of red tape

Prague

ONE of Europe's hottest property markets is lavishing opportunities on those lucky or smart enough to have bought early. But for Richard Gallo and Michaela Tomaskova, it's a headache with no end in sight.

They are caught on opposite ends of the same conundrum, an alignment of forces pushing housing prices relentlessly higher in Prague.

When Mr Gallo moved from Italy to the Czech Republic, one of the European Union's (EU) cheaper countries, he found himself priced out of the capital.

It's the job of Ms Tomaskova, a developer, to provide people like him with places to live. But her company is drowning in a sea of red tape.

The problem is a supply squeeze that's been exacerbated by Prague's booming tourism industry and its rapidly growing population.

Mostly, though, it's bureaucratic hurdles that have capped the flow of new apartments at a rate that's changed little in the last decade, even as soaring demand sparked construction booms in cities like Budapest and Warsaw. It means that, even though prices jumped 22 per cent last year, the surge has no reason to slow any time soon.

"We are absolutely convinced, and there's a consensus among developers, that the jump in prices will stop and the market will stabilise only if the permit process speeds up," said Ms Tomaskova, the head of one of Prague's biggest developers, Central Group.

Prague often feels full, with throngs of people crowding its compact downtown area. The medieval cobblestone streets, Gothic towers, Romanesque rotundas and Art Nouveau palaces have long attracted millions of tourists.

With the EU's lowest unemployment rate, the country has also become a magnet for foreigners looking for work. All of them need places to stay - while local demand is also up, driven by rising wages.

Mr Gallo struggled to find work in his hometown of Corropoli in Italy after the global financial crisis, but made his move and quickly found a job working as a lathe operator in a factory in Prague. That, however, did not mean he could afford a place to live in.

He's not alone. Compared with wages, the prices are the EU's highest. Across the nation, potential buyers need 11 gross annual salaries - the average pay cheque is 409,260 koruna (S$24,145) - for an apartment, more than in the UK, France or Germany, according to a study by Deloitte. Even in an age of cheap mortgages, that's out of reach for many.

"In the past, perhaps it was doable to buy something in Prague," said Mr Gallo, 27. "But these days the prices are so high that it's impossible."

Part of the problem are the apartments taken off the market as owners jump into the Airbnb-fuelled short-term rental craze.

According to a 2018 study by the Planning and Development Institute of Prague, as many as a fifth of all apartments in the capital's Old Town district, and 10 per cent in the surrounding areas, are listed on the site.

But the biggest factor is the absence of new apartments. For years, developers have failed to build the estimated 6,000 a year that the city needs to keep up with its growing population, now at 1.3 million. That's expected to grow by 160,000 in the next decade. Last year, builders finished only 5,290 flats, according to the statistics office.

"It takes developers ages to get through the approval processes for new projects," said Petr Hana, a senior manager at the consultancy Deloitte.

Ms Tomaskova, the developer, has 30,000 apartments in the pipeline. But the approval process is kafkaesque. Just a planning permit - one of three required stages - needs about 40 stamps from different authorities from the Fire Department to the Cultural Heritage Office. Approvals often take so long that plans need to be amended to reflect technological advancements, she revealed.

"These three steps take us 10 years," Ms Tomaskova said. "The documentation for buildings is now so detailed that we have to drive it to the construction office in a van, and it's also clear that the clerks can't understand everything."

As a result, Central Group is well below the lower end of its target of bringing 1,000 to 1,500 apartments to market each year.

Still, the surging prices are breathing life into some big projects. One site that may help clear the logjam is Bubny-Zatory, an area about the size of 140 football fields about three km from Prague Castle.

Not that it has been a smooth run for the former rail freight terminal. Along with other brownfield sites, it's been locked in bureaucratic battles since the fall of communism three decades ago. BLOOMBERG