The Czech Republic has one of the longest and most complicated building procedures in the world and is ranked 156 out of 190 countries observed by The World Bank. Fortunately for real estate developers, the situation is slowly changing. Erwin Hanslik MRICS, Partner and CEE Head of Real Estate at Taylor Wessing talked to us about the legal and regulatory challenges investors and developers need to face in the Czech Republic.
Has the booming real estate market in CEE translated into more business enquires for your office? What kind of services are clients looking for these days?
There is no doubt about it. Investors’ interest in the Czech market is booming. Activity from locally raised capital continues to gather pace and local as well as foreign investor groups are operating with ever-increasing resources. The CEE region is very attractive for investors in real estate nowadays and therefore there is also an increasing number of enquiries for our legal services since real estate is one of our main fields of expertise. The scope of the services is very broad and includes complex legal advice to buyers as well as to sellers of properties and real estate projects (e.g. execution of comprehensive due diligence, drafting of the transaction and financial documentation and support in negotiations). We also provide complex legal advice to investors and developers willing to bring their projects to life. Apart from transactions and constructions, we also help our clients very often with dealing with the lessor and lessee legal relations. With a background of an international law firm we can benefit from our closely connected corporate/M&A and real estate expertise and we can offer to our local as well as foreign clients complex legal advice in this regard.
What are the main concerns investors share with you when evaluating new investment opportunities in CEE?
Nowadays investors looking for real estate opportunities are in a difficult situation since there is a very high demand for top-tier real estate projects in the Czech Republic but at the same time, there is a lack of them on the market. This makes it harder for negotiations and therefore also the role of the legal advisers, who help their clients get through the whole negotiations and transaction or construction process successfully, becomes extremely important. In case of developers or investors who are willing to build their projects, the biggest concern is by far the bureaucracies that they need to face.
In your opinion, what are the biggest risks developers need to face today?
The most significant challenge for the developers in the Czech Republic is currently the mixed legal and administrative side regarding obtaining all necessary permits, especially a site permit and a building permit for their real estate projects. At the moment, it takes up to several years for a developer to obtain a building permit. The Czech Republic has one of the longest and most complicated building procedures in the world and is ranked Nr. 156 out of 190 countries observed by The World Bank. In this regard, it is easier to get a building permit in Bangladesh or in the Republic of the Congo than in the Czech Republic. In Prague, for example, the average duration to obtain a site permit and a building permit for an apartment house is 1100 days, for large projects it can be even 10 years. If we take into account that the economy of the state is in a good condition and that there is a very high demand for real estate projects that are missing, it is clear that this situation is not sustainable in long term and that it needs to be changed.
Developers in the region have had to deal with labour shortage in construction for several years now. How are your clients coping with the situation?
The situation regarding shortage with labour force in the Czech Republic, especially in construction, is still a very recent and hot topic. I would even say that the situation is getting worse in this regard since there are less and less young people interested in this field. Moreover, the unemployment rate is currently below 3 % which is very low; it is even the lowest since 1997. For developers, this results in a very significant shortage of labour force. There are several thousands of workers in the construction sector who retire every year and are not being replaced because there is no available workforce on the labour market. This fact results to decrease of quality of work and to increase of its cost; for example, a labour force cost required for one square meter of office premises increased by 50 % compared to the situation that we had two years ago.
It is hard for developers to face this situation. Of course, they work on optimisation of their processes and effectivity of activities regarding the use of labour force. They also have to take this situation into account when doing their financial planning. At the same time, because of lack of both qualified and non-qualified labour force, developers have limited capacity and cannot take all the changes and deals that would have been available and cannot, therefore, fulfil the desperate demand which is present. The situation on the market, however, needs a more conceptual solution which needs to come from the government and that would focus on granting working visas to foreign workers, e.g. from Ukraine. There are only about 100 thousands of workers from Ukraine who obtain a working visa annually in the Czech Republic. Poland, for example, grants a working visa to 1.5 million of such workers every year.
The permitting process is known to be notoriously long in many CEE markets, especially the Czech Republic. Have there been any positive changes in recent years?
The reason why the process in the Czech Republic is so long and complicated is that depending on the project, the developer has to obtain up to 60 individual permits, binding opinions or consents from various authorities concerned. Moreover, the authorities have their internal deadlines to deal with the applications and inquiries or to provide a reaction. However, these deadlines are often not kept. This situation is nowadays criticised by developers but also by the general public and there is a pressure to pass amendments or new laws to shorten the duration of the process of obtaining a building permit. As a reaction to such a situation, an amending act effective as of 1 January 2018 was passed introducing joint proceedings which allows merging various kinds of building approval procedures into one or which shortens several time limits. Nevertheless, the amendment has also its dark sides which may, on the contrary, lead to a more complicated and longer procedure in certain cases.
There was a positive step forward regarding traffic infrastructure. An amendment of the act on acceleration in the construction of transport is effective as of September 2018 and very significantly simplifies and shortens the whole process. Last year, this amendment won also a prize for the best act of the year. We would need a similar positive step forward that would simplify and shorten the permitting process for real estate projects.
In the reaction to the current residential crises in Prague, there are proposals to establish one main construction administration office for the City of Prague which would focus its agenda on strategic projects for the city, especially large residential projects or projects in infrastructure. The status of the City of Prague would need to be changed in order to achieve it but it is real that such an office could start its operation by the end of this year. Establishment of such an office would help to speed up the administrative procedure and more flats could be offered on the market every year.
Moreover, the Minister for Regional Development, Mrs. Klára Dostálová, presented her intention to push through another amendment to the Building Act which would shorten the period of obtaining the building permit to one year from the filing of an application and would create a one-stop-shop for applicants which would decrease and unify the number of statements and permits to one permit granted by one authority in one single proceedings. This legal change would also include a legal fiction of consent of the authority concerned if the deadline set for the reaction of the authority is overpassed. This would mean for example, that if an authority does not issue its binding opinion on time, it will have the same effect as if it agreed with the project without any objections. Moreover, it will not be possible to grant a building permit subsequently for illegal buildings.
This step will be the first bigger step with a vision of adoption of a brand new Building Act probably in 2022 which would affect about further 80 connected acts. However, no precise text of the new act is available and it is unclear whether it will have enough support during the legislative procedure or which modifications will be done during such procedure. Therefore, there is still a very long way until the current situation gets improved. On the other side, it is a positive sign that there is a will to change the critical situation and to shorten and simplify the permitting process.
Partner and CEE Head of Real Estate
Erwin Hanslik is CEE Head of the Real Estate & Infrastructure, the Environment, Public & Regulatory as well as the Energy and the Hotels & Leisure group. In addition, Erwin advises national and international clients in all areas of corporate law and is well known for his expertise in M&A. He has a particular industry focus on Consumer & Retail, Healthcare and Life Sciences. Erwin heads the offices in Prague and Brno. More »