It was the best of times; It was the worst of times

I'm using the opening line from Charles Dickens' "A Tale of Two Cities" only because I am thinking of the differences a few years have made in the property market in Prague - perhaps everywhere nowadays.

Once robust, the market seemed to see no bounds.  Businesses started on a few Crowns because leasing and sales were booming and immediately generating cash flow which kept business owners in a lifestyle which they immediately became accustomed.  Business plans were not even a requirement for many.  Why?  They all knew what they were doing.  Hire a few girls for leasing flats in the center and houses around the International School and they'd be swimming in it.  Talk a few developers into letting your company represent their projects; help with designing the layouts that the buying public would like; implementing the right marketing campaign, etc, etc.  Every Tom, Dick and Honza got into the real estate agency business or worst, property development, it seems.  Every bank got on the mortgage band wagon.  And no one at any point thought about what might happen if a market correction occurred.  

And it did.  We went through a downturn that people tried to ignore at first.  Not one developer or seller recognized that pricing was high - too high, in fact, for the target group they should have been concentrating on - the locals - now that the foreign investors pulled out.

So the foreign owners are now wondering what to do.  Should I stay or should I go?  What kind of money can I get if I sell today?  What? A loss?  Ok, I'll just hang on for another year or so!  Yeah, buddy!  You don't realize it but that same development you're in still has a dozen flats to sell and they've been marked down 20%.  You're behind the eight ball.  You'll be competing with new product for at least another two years THEN another project down the street which will be coming out of the ground at lower prices. Plus the biggest hurt is that your rents don't cover your nut.  No one explained to you that local renters won't pay expat prices and that the expat market has more or less dried up.

It's called long term investment for a reason.  Hang in there.  The market will recover.  Never to the peeks (or volumes) we saw but it will level out; prices will normalize and rents will eventually improve.

But in the meantime.... will we see properties selling for below replacement costs as being seen in other parts of the world?  Will there be significant foreclosures hitting the market?

I believe that all of this is merely waiting in the wings.  Banks are holding out.  They do have developments that they continue to feed and developers they continue to support but they won't continue.  I think it will make itself known in 2011.  The so called vultures are hovering above.  These guys will come in and make deals - if they're not already meeting behind closed doors cutting deals - and we will see projects change hands and inventory being sold at lower prices.