This Weak Recovery

For those who like to crunch numbers it seems that we are on our way to recovery but not a full recovery by any means.  It's still a long way back to health.

From all we can gather both on paper and anecdotal, the commercial business is expected to do well in 2011.  2010 has already given indication that institutional investors are moving again. Residential, however, still seems stuck.  There remains a large block of unsold new development flats. So called buyers are still very wary of pricing of new developments and have made that clear by steering towards existing, older, homes/flats.  And to add fuel to the fire, they remain cautious regarding their jobs, worried about their pensions and therefore prefer to save wherever they can and use the slowdown time to shop.

Almost every residential agent will tell you the same thing; sales on older flats went fairly well last year while new developments stagnated.  This, they say, is because the developers are stuck on their prices.  I guess it's their own fault really.  They bought land at the peak of the market and now can't make their numbers work at lower sales prices. It's a clear damned if you do situation.  The owners of the older flats had less basis in their property and therefore could afford to reduce their price to move it.

There was one ray of sunshine however.  Seems that sales at new developments had more success up to a ceiling of about 45,000CZK per meter.  Above that, sale were very slow; almost zero.

So what has to happen to get the new development sales moving?  Should the banks take a hit on their loans so that the developer can reduce his pricing to move units?  Why not?  Doesn't seem that anyone will make money if sales won't occur.  These loans could be restructured in such a way that the bank and the developer work together on the sales and marketing and participate on the profit side once sales get underway.  Everyone has to understand that they will take home less but at least there's something there to take home.  Moreover, they - the banks and developers - should give their buyers the feeling that, as a result of the reduced prices, there's more of a chance of value appreciation down the road.  For residential investors it will be about yield, period.  If they can't buy and realize a return on my money, why bother? 

Which brings me to another point.  Could or should developers limit the number of investor units?  It might keep the rental pool in the city "controlled" as it were and could, in theory, prop up rental prices which so far as been slipping.