Regulated Rents in Post Communist Countries

From the most recent issue of the Czechpoint101.com newsletter by Nathan Brown

Regulated Rent

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.

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.

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?

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.

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 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.

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.

We will strive to keep you informed of any further developments in this area that would affect investment in the Czech Republic.