Slovakia Investment Property

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Slovakia Investment Property Newsletter
September 2007 - Issue # 35
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Welcome to the first autumn issue of your Slovakia Newsletter.

Apart from (as usual excellent) economic news from Slovakia,
today we will look at possible impacts of the global credit
crisis, as well as bring you details of a newly introduced
registration requirement for landlords renting out property
in Slovakia.

And, in case you've missed any of our previous newsletter
issues, they are available for you here:

www.slovakiainvestmentproperty.com/newsletters.php

In this issue you will find:

1. Record Breaking Growth for Slovak Economy
2. New Mandatory Landlord Registration in Slovakia
3. Booming Bratislava - Excellent Value New & Classic Properties
4. Tell Us What You Think!

===================== MUST READ NEWS ====================

1) Record Breaking Growth for Slovak Economy

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After record growth in the last year the Slovak economy
grew by spectacular 9.4% y/y in QII 2007, according to the
Slovak Statistical Office. This represents a 2.7% faster
growth than in the same period last year.

* * *

The average wage in Slovakia reached 19,598 SKK (582 euro)
in QII 2007, an increase of 6.7% y/y (figures from the
Slovak Statistical Office).

Meanwhile, Eurostat (EU Statistics Office) states that hourly
labour costs in the country grew by 7.9% y/y in QII 2007.
The highest increase was reported in civil engineering
(9%), industry (8.1%) and services (7.4%). Of this the
indirect costs (social and health insurance contributions)
paid by employers increased by 8%, while direct payroll
costs grew by 7.8%.

* * *

In the first six months of this year 6,536 homes were built
in Slovakia. This represents an increase of 949 units
compared to the same period in 2006. (5,383 units were built
by the private sector, 1,153 by the public sector.) Of these,
3,542 housing units were in family houses and the rest in
apartment blocks. (Source: Slovak Statistical Office)

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2) New Mandatory Landlord Registration in Slovakia

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US credit crisis and its impact on Slovakia
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With the recent US real estate and credit crisis in mind,
it would only be prudent to look at the possible consequences
in Central Eastern European markets and Slovakia.

The impact on the willingness and ability of large global
investors to continue pouring vast sums into the property
markets - in particular the emerging ones, viewed as highly
profitable but also riskier - has already been seen on share
prices. Large regional players involved in property development,
investment and management in CEE have seen their share values
drop in recent weeks.

These investors will likely encounter a more difficult
access to (cheap) funding, which can lead to halting of
some of the planned investment projects and less acquisitions
in the future.

In practice, however, we are barely seeing any impact on
the Slovak market. Institutional investors, real estate
funds and large regional players have continued the wave
of acquisitions in the last few months and weeks and new
projects have been announced.

Slovak banks (daughters of mainly German, Austrian and Italian
banking groups) are also remaining optimistic. The main banks
have voiced confidence in the Slovak property market with its
strong demand, and don't expect any tightening of lending
conditions - including those to developers - at the moment.

In particular in the housing market the current strong growth
is expected to continue in the short-medium term, and even
a further acceleration due to the 2009 euro adoption is
viewed as possible.

* * *

Tax registration of landlords
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The Slovak tax authorities have introduced a new weapon
to fight landlords who don't declare income from letting
and hence don't pay income tax on rents.

Income from rental is subject to Slovak income tax like
any other income. While the income tax is levied at 19%,
in effect the taxation on rents is far lower, as landlords
can offset expenses as well as depreciation.

Despite that, many of those renting out an apartment, holiday
home, garage, etc decide not to declare such earnings.
Effective in September, a new registration requirement should,
according to the tax office, improve the discipline of
landlords.

This registration of letting with the tax authorities is
mandatory for everyone renting out a property in Slovakia
(including residential, commercial, holiday homes, garages,
etc). It affects both Slovak and foreign nationals. Even
those subletting a property need to register, since it is
not a matter of who is owner but who is landlord.

Most experts question the effectivity of the registration
in the fight against tax evaders. It is likely that those
who have not been paying tax on rents will also not register.

The registration becomes mandatory on 31 December 2007 for
current landlords (that have let property before September
2007), while those renting out after 1 September have to
register within a 30 day period from the end of the month
in which the letting started, according to rental contract.

A landlord who has already registered needs to repeat the
process with each new letting, for each property rented out.
When the tenancy ends, the landlord is also required to
inform the tax authority.

So how does it work in practice?

The landlord has to fill in a registration form with the
appropriate local tax office that will consequently register
him/her and issue a tax ID number. The registration is
free of any charges. The penalty for not registering
ranges from 2,000 - 100,000 SKK (approx. 41 - 2,041 GBP).

As has also been the case before, the landlord will have
to file a tax return once a year, where rental income will
be included in earnings. The tax obligations have therefore
not changed and the only new introduction is the registration
of (each) letting.

In the Slovak property industry's view the most visible
benefit of the registration will be more accurate statistics.
Currently nobody has an idea how many people are renting out
a property in the country. After the end of the year, the
authorities should have a better picture of the number of
landlords (this of course will not include the black market).

In particular non-resident landlords will likely want to
grant a power-of-attorney to a local party who will then
do the registration on their behalf. If required, we can
recommend you an accountancy/tax advisory firm that also
offers the registration services.

Independent of the registration, all rental income is
taxable and has to be declared for income tax purposes.
While we are not accountants and cannot give you any tax
advice, below is a very brief overview of Slovak tax related
to rental income from property.

Please keep in mind that (as in any other country) you should
use the services of an accountant and tax advisor when buying
or letting property in Slovakia... unless you are fluent in
Slovak and able to perform your tax duties yourself of course.

Income tax (on rental income)

The rental income is subject to income tax; tax returns have
to be filed by 31 March each year. Each landlord can deduct
24,900 SK from the 2007 rental income (this sum goes up to
25,650 SK for 2008) as a non taxable maximum. (This is
specific to rental income rather than other income sources.)

As an example, rental income represents 100,000 SK for the
year 2007. Deducting the non taxable 24,900 SK, it leaves
75,100 SK as a tax base. From this sum the tax payer can
deduct either expenses at a flat rate of 40%, or real expenses
incurred.

The decision is up to the tax payer and which model is more
effective depends on the individual situation and should
be discussed with your tax advisor/accountant.

It is important to note that by going with the 40% flat
expense model one cannot deduct any further expenses (such
as interest on loans, depreciation, agent fees, etc). On
the other hand by setting off real expenses the tax payer
can include interest, depreciation, repairs, property agent
fees, management fees, etc - though all expenses need to
be accounted for via receipts/invoices.

Therefore, in the above calculation, when opting for the 40%
flat rate, the tax payer would pay 19% tax on 45,060 SK
(tax base less 40% expenses).

Note the above does not constitute tax advice and is for
basic information purposes only. We don't guarantee the
accuracy or correctness. Please consult your tax advisor.

Remember also that anyone subject to taxation in Slovakia
needs to have a local presence for representation and
correspondence. Accountants usually fill this role (with
a POA.)

Property tax

While we are at taxation matters, it is worthwhile to
mention that anyone who purchases a property in Slovakia
must register for property tax and file a tax return for
this tax before 31 January of the year following the year
of purchase. (Property tax rates are very low in Slovakia.)

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3) Booming Bratislava - Excellent Value New & Classic Properties

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Bratislava - Slovakia's strongest and fastest developing
property market - has been rewarding investors with constant
price appreciation over recent years. Yet in spite of 10-15+%
annual growth in values, the Slovak capital remains one of
the cheapest and most affordable capitals in Europe.

With the demand from local home buyers far outstripping
supply, there is little doubt Bratislava will continue to
see increasing property prices in the next few years.

Apart from the 2009 euro adoption (predicted by many experts
to cause an accelerated growth), another good news for the
city is Slovakia's entry into the Schengen zone on 1 January
2008.

Slovakia (with Czech Republic, Poland and Lithuania) will
be the first 'new EU' countries to join the Schengen zone.
With that the borders to old EU states will be taken down
and it will no longer be necessary to present documents
and undergo any customs inspections.

Bratislava being just 3km from the border to Austria, and
just 50km from Vienna (with its far higher property prices),
the border free zone is expected to have a significant positive
effect on the Slovak capital.

* * *

If you haven't yet taken part in the booming Bratislava
market, or wish to expand your portfolio, we have numerous
investment opportunities for you (residential and commercial).

Some of the most popular among investors are classic pre-
war apartments in the lucrative and sought-after city centre
(Old Town district). With the best rental demand and highest
shortage of stock these properties have been benefiting from
very strong appreciation in the last few years. Classic
flats (renovated or not) range from under 50k GBP for smallest
units or from around 70k GBP for 1 bedroom flats and from
100k GBP for 2 beds. Prices depend on m2 size and quality,
and very large top apartments can reach close to 500k GBP
(although this is an exception).

We also have an exclusive range of new built (off-plan)
units just steps from the city centre, at extremely good
values, with studios at just 55k GBP and large 2 bed units
from 126k GBP (including VAT).

Due to the fantastic central location the rental demand is
to be excellent and yields of 6-7% are expected. Only a
handful of these high quality units is available so don't
wait and contact us now to receive full details!

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4) Tell Us What You Think!

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We would love to hear what you think of this issue of our
newsletter. We hope you find the information useful and
wish you best success in your investment activities.
And of course, if you have any suggestions for upcoming
issues that you'd like to share with us, please send them!

Just e-mail us at: contact@slovakiainvestmentproperty.com

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We are looking forward to seeing you next month. In the
meantime, if you have any questions or would like to
request further information, please contact us at
info@slovakiainvestmentproperty.com or at
+44 (0)207 152 4014.

Best of success,

Petra Gajdosikova
Managing Director
Slovakia Investment Property
www.slovakiainvestmentproperty.com

Slovakia Investment Property is a trading name of
Alpha Real Estate Investments Limited