Hlavní práce69395_shym00.pdf, 801.1 kB Stáhnout

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University of Economics, Prague

Bachelor’s Thesis

2020 Mykhaylo Shynkarenko

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University of Economics, Prague

Faculty of Business Administration Bachelor’s Field: Corporate Finance and Management

Title of the BACHELOR´S THESIS:

Evaluation of investment decisions for residential rental property in three different

countries: Czech Republic, Poland and Slovakia.

Author: Mykhaylo Shynkarenko

Supervisor: Ing. Ladislav Tyll, MBA, Ph.D.

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D e c l a r a t i o n o f A u t h e n t i c i t y

I hereby declare that the Bachelor´s Thesis presented herein is my own work, or fully and specifically acknowledged wherever adapted from other

sources. This work has not been published or submitted elsewhere for the requirement of a degree programme.

Prague, May 1, 2020 Signature

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4 Title of the Bachelor´s Thesis:

Evaluation of investment decision in residential rental property among three different countries: Czech Republic, Poland and Slovakia.

Abstract:

The aim of this thesis is to investigate the investment decision of a non- resident to purchase the best residential property with rental purposes in three different countries in central Europe. The topic is extremely important due to an increasing number of business schemes for entrepreneurs and international business integration for foreigners, as well as due to rapid economic changes and international cooperation. Current research will describe the investment

environment of the Czech Republic, Poland, and Slovakia, specifically will provide instructions for evaluation the real estate investment environment. Therefore, data about the legal structure of three countries, tax regulations, and limitations for the acquisition process of real estate as a non-resident were collected, in order to conduct a comparison and present results. Moreover, this paper will provide all related calculations in specified countries conducted via a discounted cash flow method.

Key words:

Investment decision, investment climate, evaluation methods: DCF, NPV, IRR

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Table of Figures

• Tables:

Table 1 Methods for investment evaluation (Morri and Benedetto, 2019) ... 16

Table 2 GDP in CZ; Source: Plecher, H. (2020, April 29). Czech Republic - Gross domestic product (GDP) growth rate 2021. ... 28

Table 3 Inflation rate in CZ; Source: Plecher, H. (2020, April 29). Czech Republic - Inflation rate 2021. ... 28

Table 4 Unemployment rate in CZ; Source: Plecher, H. (2020, February 11). Czech Republic - Unemployment rate 2019. ... 29

Table 5 Source: Excel author ... 33

Table 9 GDP in Poland; Source: Plecher, H. (2019, November 21). Poland - gross domestic product (GDP) growth rate 2024. ... 37

Table 10 Inflation rate in Poland; Source: Plecher, H. (2019, November 21). Poland- Inflation rate 2024. ... 38

Table 11 Unemployment rate in Poland; Source: Plecher, H. (2020, February 12). Poland - Unemployment rate 2019. ... 38

Table 16 GDP in Slovakia; Source: Plecher, H. (2019, November 25). Slovakia - Gross domestic product (GDP) growth rate 2024. ... 46

Table 17 Inflation rate in Slovakia; Source: Plecher, H. (2019, November 25). Slovakia - Inflation rate 2024. ... 46

Table 18 Unemployment rate in Slovakia; Source: Plecher, H. (2020, February 12). Slovakia - Unemployment rate 2019. ... 47

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• Figures:

Figure 1 Growth of apartments prices and rent prices growth; Source:

http://www.conbiz.eu/information/articles/czech-residential-real-estate-market- study-2018-trends-and-predictions ... 30

• Formulas:

Equation 1 Discounted Cash Flow Formula; Source: (Chen, 2020) ... 18 Equation 2 Net Present Value Formula; Source: (Kenton, 2020) ... 21 Equation 3 Internal Rate of Return Formula; Source: (Hayes, 2020) ... 21 Equation 4 Equation 4 Discount rate Formula; Source: Team, A. S. P. I. (2020, May 7) ... 23

Equation 5 Weighted Average Cost of Capital Formula; Source: (Hargrave, 2020) ... 23

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1 Theoretical part

1.1 Introduction

A lot of foreign entrepreneurs and investors want to find the best investment opportunities out of their home jurisdiction. An especially big number of foreign direct investments is coming from the Former Soviet Union. Closest European countries are Czech Republic, Poland, Slovakia, Hungary, etc.

There are a couple of reasons to invest in Central European

countries: these are stable returns that are supported by a regular economic growth of a particular region; great tourism activity of the region and a high portion of middle class people, which support the economy and businesses on every level.

This particular paper describes in details the core methods for evaluating the investment environment, the connection between investment climate and states economy; methods for evaluating the profitability and efficiency of real estate investments were investigated and presented in the designed research; discounted cash flow method was described in details and was chosen as the most applicable in the particular case.

Moreover, current paper investigates investment environment in three different countries in details. Specifically, main economic up-to-date figures were presented - GDP, unemployment, inflation, corruption and risk-free rate for period 2017 - 2021 - the research describes the tax regulations of three actual states in general terms. Real estate market conditions and regulations for the acquisition of real estate were investigated to compete in particular investigations.

For calculations in the practical part, three objects that are similar in

parameters were chosen: size in square meters, area of localization (business area of the city near to the city center), and new or reconstructed building. For particular research author assumed that the investor will hold the property for 10 years to make profits from rent and on the 11^th year the property will be sold with additional value, considering the growth of the real estate market, inflation and the risk-free rate of the country. Discounted cash flow method will be used to estimate the future value of the project and projects creditability on the present day:

• To estimate the cash flow of annual rental income average rental prices for similar objects were investigated on the web portal of real estate and in the end was multiplied by 12 to estimate the annual rental income.

• 30% was subtracted from annual income on maintenance (cleaning, insurance, repair, etc.) of the object.

• Another amount was additionally subtracted in the form of depreciation

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• Then depreciation was subtracted for tax purposes and taxes related to real estate were subtracted from annual rental income according to the law of each related country.

• Finally, NPV and IRR of the project were calculated via excel via DCF.

Among economic scientists, there are different opinions about real estate investment. The challenge connected with real estate investment is that it requires more stages of planning to get started. Contacting an investment company and purchasing some shares of your favourite mutual fund or stock is a lot easier than acquiring rental property. Compared with most other investments, accurately chosen property investment can produce additional income for property owners, because of the rents received. To sum up, additionally to the longer-term

appreciation potential, the owner can also earn income year in and year out.

The Real estate investment represent true growth in capital investment. (Tyson and Griswold, 2015)

Real estate is the base for national wealth of the country and is the most important part of the entire world wealth, which accounts for more than 50% of the value of all material assets. (Global Investment Report, 2019) Investment in real estate is not only a way to increase the wealth of the owner or a source of reliable profits, but it also has a real impact on economic processes in society, budget revenues, and social relations. Investing in real estate is one of the most effective ways to get a stable income. Therefore, it is not surprising that this type of

investment is not only popular among entrepreneurs, but also among ordinary citizens who have a certain capital and want to increase it. (Kiyosaki, 2009).

PricewaterhouseCoopers (PwC) reports in 2019 that investors are still looking at real estate in Europe as capital preservation. They are not looking for outsize returns, but security. Compared to other types of investment, (such as equity shares, bonds and securities), real estate investments have obvious advantages. Firstly, investing in real estate effectively protects capital from depreciation. Secondly, it can earn income regularly and in larger amounts than with a bank deposit. Another absolute advantage of investing in real estate – a relatively lower risk of "burning out". Unlike the acquisition of securities (shares). Moreover there is a significantly lower risk to lose money, because real estate is not subjected to a sharp down turn in prices. (Haight and Singer, 2005)

“Investors are lowering their risk-adjusted returns or keeping them the same, and everybody is trying to get longer-dated, annuity-style products out there. Bonds still look unattractive, stock markets are volatile, you’re getting nothing on your cash, and you are getting a decent yield on real estate.” (PwC, 2019, pp. 15 )

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10 To power the statement above we would like to mention, that there is always going to be a real estate demand. A roof over your head in a civilized world is as important as food, clothes, energy, and water. For keeping this crucial human need at a reasonable price, real estate investors are the most important players. (Kiyosaki, 2009)

1.2 The determining indicators for real estate investment evaluation In addition to the main indicators of financial analysis of an investment project, such as DCF, there are also other important terms that should be emphasized before starting this research. With the understanding of these investment analysis

indicators the overall Economics of capital investment becomes clearer and it is visible what an important factor in making investment decisions it is.

Yield: The overall yield is calculated from a risk-free return and a risk premium. The risk-free return reflects the yield on government stock that is considered to be a universal point of reference for safe investment. Yields are effected by the perceived risk of the actual investment. The risk premium attempts to interpret the market response to a selected level of risk. The yield will accumulate all annual interest payments or dividends, similarly as any capital growth achieved on the eventual sale or maturation of the investment. (Scarrett & Osborn, 2014)

Security: The investor wants to be assured either that the investment is permanent or that investment will survive the length of the investment period.

Risk: Investors have different behaviour regarding the risk. Some investors are not prepared to accept any level of risk, in such cases investments are limited to accounts where the investment is guaranteed by government or otherwise secure from default. Many investors hold securities with a variability of volatility to reduce their overall level of risk in their portfolios. (Scarrett & Osborn, 2014)

Liquidity: The result in long run is unknown and ideally any investor wants to be able to eliminate the investment if funds are required urgently and

unexpectedly. For this reason, investor will try to keep most assets in an accessible form, but investor has to expect lower returns for higher liquidity. Investors with larger funds will handle this issue by balancing the portfolio to ensure that only a proportion of funds instead of the complete fund will be available at short notice if required. (Scarrett & Osborn, 2014)

Return: The return of investment should take into account all pros and cons of the actual investment; regular and foreseeable payments are usually an important consideration. Scarrett &Osborn (2014) mentioned that payment made quarterly is worth more than payment made annually, where the nominal rate is the same. The actual rate is slightly higher where payment is made quarterly, as the sums are available for reinvestment at an earlier date.

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11 Divisibility: The flexibility to sell part of an investment holding without creating problems for the remaining part of the holding.

Costs of transfer: Costs variability is determined by the type of investment.

Extended transfer periods can be described by greater formalities and higher costs;

where the costs of transfer are significant there will be a tendency to hold the investment for longer periods.

Management: Any investment activity requires good and reliable management. Capital investments, such as real estate, will need a permanent management oversight and result in more complex operations. For instance, tenancy changes, rent reviews, advice on insurance cover, condition reports and ongoing investment direction will all incur charges that must be investigated systematically. (Scarrett & Osborn, 2014)

Dealing costs: When investing in capital, an investor wishes to determine the entire amount paid or repaid. All fees related for setting up a deal or for closing it will influence the actual rate of return.

Growth and inflation: The effect of growth and inflation is crucial for real estate investment, because property investment tends to offer good returns and steady income growth. When this is anticipated, the initial yield is likely to reflect the prospect. An increase in annual return would tend to have a knock-on effect in the shape of an increased capital value. The terms of a modern lease ideally provide for regular upward-only rent reviews, full repairing and insuring leases and rent paid quarterly in advance, leaving the landlord with only the costs of management to deduct from the income. The fewer liabilities for outgoings remaining with the landlord, the greater is the certainty of the net income. (Scarrett & Osborn, 2014) 1.3 Methods of evaluation for real estate investment environment and

investment decision

The designed research begins with a review of empirical literature describing methods used for evaluating real estate investment environment and methods for evaluation of commercial real estate investment decision. Since different companies consider various investment possibilities, the key task of Investment management is to determine the most effective directions of capital, taking into account the limited resources available, as well as various internal and external factors, including taxes, risks and liquidity. Successful implementation of this task involves a complex and comprehensive assessment of available alternatives in order to select the best option to achieve organizational goals for capital returns.

The process of making an investment decision is based on the results of strategic, economic, financial, technical, legal, environmental and other types of

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12 analysis that constitute the subject of study to various disciplines. (Brown & Reilly, 2009)

Ginevičius and Zubrecovas (2009) proposed real estate projects’ efficiency evaluation process that will be implemented in designed research, but simplified due to micro and macro data limitations. Property evaluation process consists of seven main stages to be investigated for efficient evaluation and commercial real estate projects’ comparison (e.g. customers, developers, investors):

Stage 1. Identification of investment climate and determination of projects’

parameters:

• Investment environment (business perspectives) analysis;

• Legal environment analysis;

• Object’s techno-economic environment analysis (evaluation of attractiveness of the territory);

• Financing parameters calculations;

• Financial analysis;

• Risk analysis.

Stage 2. Analysis and comparison of the parameters between projects;

Stage 3. Multiple criteria (NPV, IRR) evaluation of projects’ efficiency;

Stage 4. Conclusions and recommendations about projects’ efficiency;

Stage 5. Investment decision-making.

When real estate investment project is to be chosen, investor or his advisors have to conduct a multi-criteria research considering all the necessary information needed for successful investment return. One of the most important criteria for making decision when investing in real estate is evaluation of investment climate at micro and macro levels. State regulates investment activity through legislation, tax policies, subsidies, benefits and governmentally planned implementation of social and economic programs – and mainly these are the most crucial aspects that effect investment climate. For any investor – local or non-resident, it is significantly important to find the optimal combination of market freedom and government regulation. (Brown & Reilly, 2012)

According to Sangeetha (2013) investment plays a crucial role in maintaining and creating economic potential of the country. This, in turn, has a positive impact on the activities of enterprises, leads to an increase in the gross national product, increases the attractiveness of the country on the foreign market, as well increases the prices of the assets acquisition in state economies. Investments are the most important sources for the development of the socio-economic system of the

country, they determine the process of economic development in general, affect the deepest foundations of economic activity.

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13 As Sangeetha stated – both states and investors are wining when

governments create an attractive investment climate. Moreover the concept of investment climate can improved considering the fast-changing world and economy. Only deep analyses and instigation of investment climate would make investor able to create a maximum return from a particular investment project.

1.3.1 How to define an Investment climate

There is a definite link between economic growth, prosperity, investment, and investment climate. Many of the Eastern European countries without major energy or raw material reserves have transformed their economies into some of the most attractive global FDI destinations through reform of their economies and business climate.

According to UNCTAD World investment report (2019) Western Europe will be the leading region for foreign direct investment. Economists predict that in 2020, investors will be more active than in 2019 to invest in the economy of foreign

countries, but still this increase in investment will be insignificant. At the same time, even modest forecasts may not be justified due to the growth of geopolitical tensions and COVID-19 situation.

Ginevičius and Zubrecovas (2009) stated that micro- and macro- environment determine the risk levels and complexity of projects realization.

Generally investors like private individuals, corporations or investment funds are solving one same issue - how to use current amount of resources to gain the

maximum return from the investments. Thus, each investor considers the problems of alternative projects selection, investment resources allocation, real estate value development, maintenance and enhancement.

Considering the changes in the world economy and globalization we have to search for the best investment climate very accurately in order to find the best return from the investment. This means researching the existing system of political, economic, institutional, fiscal and other conditions specifically for a particular territory at a certain time, in terms of the opportunities and attractiveness of investment activities. Guo (2010) agreed with Kummerow (2002) on the following characteristic of real estate assets - they are heterogeneous, it means there are hundreds of factors, such as age, location, site/view, design/appeal, room

count/gross living area, functional utility, etc., which might affect prices in various situations. This complicates the comparative analysis of where to invest as future returns are hard to compare.

Moreover, properties trade infrequently, perhaps once every 5-10 years for the average house. The amount of sales evidence varies widely in particular cases, but generally, there are few sales of properties which are similar enough to be

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“comparable” and none of identical properties. Additionally, these are factors affecting the investment climate:

a) Legal - quality and stability of the legislative framework, compliance with federal legislation, policy of local authorities, protection of property rights, protection of investors’ interests, level of monopolization in the economy, real estate market openness of the economy, compliance with law and administrative barriers to entry the investment market, level of corporate governance.

b) GDP dynamics, inflation and bond interest rates, labour market, and unemployment.

c) Taxation - the quality of the tax system and the level of the tax burden.

d) Information support - information support system, completeness and availability of information about investment opportunities in the country as a whole; real corporation’s cases and the relevance of information.

e) Attractiveness of the area – how developed is the environment regarding the system of interconnected service structures or objects that make up and provide the basis for the functioning of the transportation, economic and technological infrastructure.

f) Criminal factors - corruption in legal authorities, crime rate in the region.

Kummerow (2002) stated that the market has the same problem as the valuer—how to discover prices of heterogeneous assets where there are few similar transactions and many property characteristics that influence prices? For any individual property at a particular point in time, different prices are possible due to different circumstances of sale, differing buyer preferences, different buyer

information sets or other factors. Each property is unique if only because it stands on a different site. Properties built to similar plans and with similar external

appearances may nevertheless have significant differences in layout, use or location.

For example, two adjoining and similar houses may have substantially

differing interiors, while two structurally identical properties on adjoining sites, one with permission limited to use for retail business and the other only for office use would be likely to have quite different values. An office block in the city centre would be likely to have a different value from a similar building on a business park or on the outskirts of a town. The uniqueness adds to the care required in the valuation process. Valuer’s tasks therefore include:

a) Choosing which sales are best to use to infer price of a particular property.

b) Identifying price-affecting characteristics that differ between sales and subject property.

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15 c) Estimating the dollar value of these differences for each pair-wise

comparison of subject and sale.

d) “Reconciling” to give a single price estimate, where indicated values of the subject from different adjusted comparable sales are not identical (the usual

outcome).

Different authors, analysing investments and investments’ assessment,

propose various methods of investment projects evaluation. They can be categorized as financial, risk assessment, multiple criteria evaluation and other methods.

Each of these methods has particular advantages and disadvantages. Indeed the unified algorithm of investment evaluation is still not developed. Kucharska – Stasiak (2006) said that investment valuation methodologies are different between countries because they are based on agreements worked out by governmental authorities.

The foregoing analysis provided by Morri and Benedetto (2019) has shown that not only the assumptions underlying the income approach being different against the classical valuation schools which were also evolving through time. One important effect of this evolution is the increasingly wide use of the US concept of valuation which is considered to give the fullest picture of the market including future changes in supply and demand. For instance, criticism against valuations taking account of future changes in the market, the state of the real estate market, and the model of valuation education lead to the conclusion that the standard of valuation for Polish property should recommend using implicit cash flows as the most appropriate for local market conditions.

1.3.2 Valuation methods for investment decision

The lack of precise information on properties often poses a problem for collecting data. As mentioned by Bagnoli and Smith (1998), investors use a great deal of judgment to identify the characteristics (attributes) of properties that relate to property prices.

Additionally, they usually have to consider qualitative characteristics, such as structural quality, architectural attractiveness and location convenience. In order to express the inherent imprecision in the ways that people think and make decisions about the pricing of real estate, they propose a fuzzy logic based model to obtain the possibility distribution (fuzzy membership function) of the property price and show its effectiveness. (Bagnoli and Smith, 1998)

Brown and Reilly (2012) mentioned that methods for evaluation of

investment decisions may not be suitable for all cases, as investment projects can be different in terms of costs, terms of their useful life, as well as useful results. For small investment projects that don’t require large capital inflows, that do not have a

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16 significant impact on output result, you can apply the simplest methods of

calculation. At the same time, the implementation of larger investment projects such as purchase of an apartment house, it is necessary to consider a large number of factors and, as a result there is a need for more complex calculations, as well as clarification of methods for assessing efficiency. But Morri and Benedetto (2019), Kummerow (2002) and Guo (2010) all agree on similar opinions regarding real estate investment decision and they identified three approaches for property evaluation:

Method Models

1. Market Approach methods

Direct Comparison Approach

Hedonic Pricing Model Multipliers and Rules of Thumb – (Depreciated) 2. Cost Approach Methods

Replacement Cost Approach

Reproduction Cost Approach

3. Income (Capitalization) Approach Methods

Direct Capitalization Approach

Discounted Cash Flow Approach (DCF)

Table 1 Methods for investment evaluation (Morri and Benedetto, 2019) 1. Market Approach (also known as sales comparison approach): based on comparing the subject asset with identical or similar assets (or liabilities) for which price information is available, such as a comparison with market transactions in the same, or closely similar, type of asset (or liability) within an appropriate horizon.

Compares the characteristics of a subject property with those of comparable

properties sold in similar transactions - this kind of method is a variation of hedonic regression models.

2. Cost Approach: based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction. Particular method estimates the value of property by summing the land value and the depreciated value of any improvements.

3. Income Approach: based on capitalisation or conversion of present and predicted income (cash flows), which may take a number of different forms, to produce a single current capital value. Among the forms taken, capitalisation of a conventional market-based income or discounting of a specific income projection

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17 can both be considered appropriate depending on the type of asset and whether such an approach would be adopted by market participants.

The above three approaches are used for the valuation of property

investments, which approach is more applicable is problem-specific. For example, in a situation where the purchase of real estate is for investment, the income approach seems more suitable, whereas for individual use, the sales comparison approach is more acceptable.

These traditional real estate classification methods have at least two

limitations. The (Depreciated) Cost Approach Methods are not significantly limited in their implementation but often also fail to provide a Market Value, resulting instead, in the maximum price obtainable from a potential sale of the property, and Market Approach and the Income Approach Methods are based on market data, therefore, there is no significant difference between the two approaches since in both cases the starting point is a piece of information (the price or yield) derived from recent transactions.

So new valuation approaches were described by Morri and Benedetto (2019) to improve the traditional classification of real estate evaluation methods:

1. Sales Comparison Approach Methods:

• Direct Comparison Approach

• Hedonic Pricing Model

2. Income Capitalisation Comparison Approach Methods:

• Direct Capitalisation Approach

• Discounted Cash Flow Approach

In the new classification, some methods were excluded:

• Multipliers and Rules of Thumb have not been included in the new

classification, since, traditionally, being based on direct sales comparison, they are included in the Sales Comparison Methods. On the contrary, since they rely on economic parameters such as EBITDA, they should also be considered as belonging to the Income Capitalisation Methods

• The Depreciated Cost Approach Methods have been excluded from the new classification proposal because they are often inapplicable and misleading when estimating the Market Value.

• The Residual Value Methods are not mentioned in the previous classification because, even though they are considered extremely useful, they are viewed merely as a different way of applying the Income Capitalisation Methods.

To sum up, the valuation method choice is fundamental to estimate market value correctly. It is essential to understand that, while in some cases several criteria can be applied at the same time, in other situations some models may not work

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18 appropriately and may contribute to mislead the correct value. It is crucial to pay attention, when applying different models at the same time, significant differences emerge in the estimated value. Recently some more advanced multicriteria

evaluation methods have been offered for determining the value of the property.

However, they cannot solve the problem caused by a large number of the criteria to be evaluated (Ginevičius and Podvezko, 2003).

An effective solution would be to reduce the number of criteria. However, the more criteria are eliminated, the less accurate is the description of the project. It should be mentioned that hierarchical view in multiple criteria based evaluation theory and practice is rather new yet, so it is always better to stick with a more experienced and traditional approach for commercial property evaluation.

1.3.3 Discounted cash flow method for commercial property valuation

Discounted cash flow (DCF) is the most universal method that allows investor to determine the present value of money/investment by calculating its value of the expected income in future periods, reduced by the discount rate of the current period.

The formula for calculating discounted cash flow is as follows:

Equation 1 Discounted Cash Flow Formula; Source: (Chen, 2020) Where:

CFt is cash flow for period t, r is discount rate,

n is the number of periods for which cash flows occur.

The Discounted cash flow model is one of income approaches where appraisers determine the most probable use of the land, estimate the property future value according to the use, and then discount the future value, such as rental rate for condominiums and capital gain in the real estate market, to the present.

According to Poorvu (2003) and Haight & Singer (2005) the discounted cash flow method is used by professional investors and analysts at investment banks to determine how much to pay for a business, whether it’s for shares of stock or for buying a whole company and it’s also used by financial analysts and project

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19 managers in major companies to determine whether a given project will be a good investment.

The discounted cash flow (DCF) technique, a tool long used by accountants and business analysts, has been adapted for use in the appraisal of real property.

The technique needed adaptation as it is now being required to deal with very long time scales, whereas the business use of the method is normally for a short

‘pay-back’ period only, which could be as little as 5 or 10 years, with the terminal value most often relatively low (scrap value or 0).

The two approaches within the DCF technique are the net present value (NPV) and the internal rate of return (IRR). NPV enables all the cash flows

(incoming and outgoing) to be discounted at a selected rate of interest. When all the cash flows are summed (having regard to their signs) the result will show whether the target rate of interest will be achieved (0) or exceeded (a positive balance). A negative result shows that the particular discount rate specified will not be

achieved. Information is needed about the rent payable, the current rental value, the probable rental growth, the review intervals and the discounting rate of interest.

Remer and Nieto (1995) defined most common methods for the assessment of financial viability: payback period, average accounting rate of return, the net present value (NPV), and the internal rate of return (IRR) methods. Decisions

derived from these methods are based on the forecasts of base-case cash flows. Real estate projects are characterized by high capital outlays, long lead times, and long operating periods (usually 5 to 10 years). These characteristics make the forecasts of cash flows more difficult and expose the private sector to high levels of financial, political, and market risks. This requires the decision to incorporate risk analysis into project appraisal methods.

Ye and Tiong (2000) described the idea above in more details and provided the classification of project evaluation methods into three categories: methods based on return, methods based on risk, and methods based on both - return and risk. The methods based on return include the payback period, the average accounting rate of return (also called the return on capital employed), NPV, and IRR. The payback period and the average accounting rate of return methods (ARR) ignore the time value of money, whereas NPV and IRR methods incorporate the time value of money into decision making using discounted cash flow techniques.

For real estate investments following factors must be included in the calculation:

• Acquisition cost

• Financing costs - interest rate costs of mortgage

• Holding period - for real estate investments, the holding period is generally calculated for a period of between five and 15 years (we will assume 10 years).

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• Additional year-to-year costs:

1) All the material expenses associated with repair, cleaning, purchase of furniture and all the other possible expenses you may incur during maintenance of a leased property;

2) All the expenses for apartment repairing (for instance, replacement of windows of one size, replacement of broken water taps), technical maintenance (painting), insurance, household equipment (buying a refrigerator, washing machines, teapots, furniture, etc.);

3) Depreciation on real estate itself, which is the main item of expenditure.

• Projected cash flows - year-to-year projection of rental income received from operating the property.

• Sale profit—the projected amount of profit the owner expects to realize upon sale of the property at the end of the projected holding period.

But both methods NPV and IRR are based on the assumption that the cash flows of the project are certain, whereas the project’s actual cash flows could differ substantially from the forecast cash flows that is why rental growth rate is implied.

Low initial all-risks yields are acceptable to investors in property only because there is an expectation of rental growth. Traditional valuations do not quantify the

growth, they simply reflect what the market has accepted as appropriate, given past experience of market growth. That experience is likely to inform the level of

expectation of future growth.

The use of discounted cash flow analysis is based on the concept of time value (value) of money. The essence of the time value of money is that the monetary unit available today and the monetary unit expected to be received after some time are not equal. there are many Reasons for inequality, such as Inflation accompanied by many other market risks.

Net Present Value method (NPV)

The NPV method allows us to accept management decision on the feasibility of the project by comparing the sums of discounted future revenues with the costs needed for project implementation (capex). The calculation algorithm is as follows:

1) It is necessary to estimate the cash flows from the project-the initial investment (outflow) of cash and the expected receipts (inflows) of cash in the future

2) Determine the discount rate

3) Discount all cash flows (inflows and outflows) from the project at the rate that you estimated in point #2

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21 4) To sum up all discounted cash flows and the number will be the NPV of the project

Equation 2 Net Present Value Formula; Source: (Kenton, 2020) Where:

CFt is cash flow for period t, R(r) is discount rate,

Internal Rate of Return method (IRR)

The IRR is the rate of interest at which the present value of all cash flows of the investment project (i.e. NPV) is zero. This means that at this rate of interest, the investor will be able to repay his initial investment, but no more. If the IRR value of the project is greater than the cost of capital for the company (i.e. WACC), then the project should be accepted. In other words, this rate can be interpreted as the maximum rate of interest at which a firm can take out a loan to finance a project with borrowed capital.

Equation 3 Internal Rate of Return Formula; Source: (Hayes, 2020) Where:

CFt is the cash flow for period t, IRR (R,r) is the discount rate,

i is a time period

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22 1.3.4 Risk analysis

Risk analysis is the premise and basis for the risk decision. So, a good risk analysis is very important for investors, it is the key to determine the project. Process of the risk analysis consists in the risk identification, estimation and evaluation. Finally, make a comprehensive and system analysis according to the previous analysis.

Including risk identification, risk assessment and risk evaluation stage. In the process of the real estate investment, capital requirements a long and persistent period, which makes the risk varied and complex, which mainly including the following.

Competition in the market risk refers to that there is too much similar

buildings in the real estate market, which makes the real estate competition and the corresponding promotion costs may improve, housing unsolvable and so on . Which will produces a great impact to investors. And the main reason for the market risk is that the early market research and analysis of the work is not very good. Among them, the market competition ability is the main sales risk. Therefore, in order to verify the sustainability of an operation, it is advisable to carefully consider the nature and the extent of each possible risk.

1.3.5 Discount rate

Investors must determine their own required returns. Risk pertains to investment quality, not investment attractiveness (Hennessy, 1986). The most common

methods are the risk-adjusted discount rate methods such as Capital Asset Pricing Model (CAPM), arbitrage pricing theory (APT), and the weighted average cost of capital (WACC). They focus on the determination of discount rates under

uncertainties. The value-at-risk systems provide a decision criterion with a

confidence level. However, they were first developed for dealing with market risks and extended to deal with other risks such as credit, liquidity, and cash flow (Dowd 1998). Furthermore, they do not take financing methods and time value into

consideration.

The appropriate discount rate for particular research will be the rate of return that adequately compensates the investor for the risks taken. As risk rises, the required compensation for the level of risk should also rise, reflected in a rise in the discount rate. The discount rate can be derived by the sum of risk-free rate, inflation and average market risk premium, when comparing real estate investment.

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Discount rate = Risk-Free Rate + Inflation + Average country Risk Premium rate

Equation 4 Equation 4 Discount rate Formula; Source: Team, A. S. P. I. (2020, May 7)

The systematic classification shows that a more rigorous method to consider the time value of all the possible outcomes and financing methods in a decision- making process is both necessary and possible. One of the possible approaches is to synthesize the WACC and the expected NPV method together to form a minimum expected NPV. This leads to the development of the NPV-at-risk method. Unlike CAPM and APT, WACC is the cost of various financial sources weighted by their corresponding proportions in the overall pool of financing.

A systematic review of various investment decision-making methods shows that WACC and mean-variance methods can be combined to form the NPV-at-risk method. It incorporates the time value of money into the mean-variance method using NPV concept and takes financing methods into account using WACC as the discount rate. The comparison of different methods for two hypothetical projects shows that this combination can overcome some problems inherent in other methods, and the method can be used in decision making for privately financed infrastructure projects. (RICS ValuationStandards, 2011)

Investors and property owners consider the debt costs or weighted average cost of capital (WACC) as the best metric for assessing assets.

Equation 5 Weighted Average Cost of Capital Formula; Source: (Hargrave, 2020)

Where:

E is a market value of equity D is a market value of debt Re is cost of equity

Rd is cost of debt T is corporate tax rate

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24 1.3.6 Depreciation and maintenance expenses

Investing in rental property can prove to be a smart financial move. Rental property can provide a steady source of income while you build equity and the property (ideally) appreciates. There are tax benefits of depreciation, depending on the local legislature and the characteristics of the owner. You can deduct your rental

expenses from any rental income you earn, thereby lowering your tax liability. Most rental property expenses, including mortgage insurance, property taxes, repair and maintenance expenses, home office expenses, insurance, professional services, and travel expenses related to management are deducted in the year you spend the money.

Bokhari and Geltner (2016) state that depreciation varies in interesting ways.

It tends to be greater in younger properties (those with more recently constructed buildings). This probably largely reflects the relative share of land value and building structure value in overall property value, as land does not tend to

depreciate. Holding building age constant, depreciation tends to be slightly greater in apartment properties than in non-residential commercial properties.

Depreciation varies importantly across metropolitan areas. Places with plenty of land and less development constraints have higher average depreciation.

Differences in land value fractions underlie these results.

The Income Tax Act states that self-employed persons can apply their actual expenses, counter to their income, which were used to achieve, secure, and

maintain their income within the bounds of limits given by the law. If the tax subjects meet the necessary conditions, they may decide for the easier way to apply deductible expense – lump sum expenditure. Lump sum expenses are set at a certain percentage of the subject’s income between 30 % to 80 % depending on the conducted activity. (Fucik and Partners, 2019) As a rule, operating expenses make up 30% of the income from renting real estate, in this case, this percentage will be deducted from the tax base. But real estate expenses usually exceed the burden of 30%. The main cost is the depreciation of real estate – amount is calculated

according to the local law. There are also a several types of depreciation: uniform, accelerated and with multiplying factors. To calculate the depreciation, it is

necessary to determine the cost of the property and the legislation property applies to. (DoMyTax.cz, 2019)

So how to calculate depreciation for rental property? The first step in determining the amount real estate owners may depreciate their property by each year is to calculate the asset’s basis. The basis of the property/asset is its cost or the amount you paid (in cash, with a mortgage, or in some other manner) to acquire the property. Some settlement fees and closing costs, including legal fees, recording fees, surveys, transfer taxes, title insurance, and any amount the seller owes that

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25 you agree to pay (such as back taxes), are included in the basis. These include fire insurance premiums, rent for tenancy of the property before closing, and charges connected to getting or refinancing a loan, including points, mortgage insurance premiums, credit report costs, and appraisal fees. The cost of the actual land is excluded from the basis. (IRS, 2019)

Once you are confident you have the correct basis for your property, proceed to choose which Modified Accelerated Cost Recovery System (MACRS) the IRS will want you to use to calculate your rate of depreciation. Renters will typically be forced to choose between two specific depreciation systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).

Investors generating rental income through a business entity typically resort to using the GDS, unless there is a specific reason the ADS makes more sense for their situation. The system you use will depend on the year your property was put in service. (IRS, 2019)

1.3.7 Specifics of taxation on rental income

Real estate rental income is considered to be the funds received by the owner of the property directly from its rental. So, let's look at what exactly is included in the concept-income from renting real estate, and what is not included in it: the rent does not include payments for services related to the use of the apartment.

Therefore, the rental income does not include advances for heating, water heating, insurance, cleaning of common areas in the house, use of the elevator, water supply from municipal facilities, control and cleaning of chimneys, removal of ash and debris, sewage treatment, etc. – the so-called "utilities for apartment maintenance".

That is, all those services for which the landlord receives invoices for the actual number of services rendered from performers after the end of the year.

It is important to understand and correctly calculate the amount that is the basis for calculating of the tax. The basis of tax is income less depreciation and expenses related to the maintenance, provision and maintenance of real estate.

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2 Practical part - Analysis of Investment environment and calculation of investment returns in CZ, Poland and Slovakia

A lot of foreign entrepreneurs/investors want to find the best investment

opportunity out of their home jurisdiction. Especially big number of foreign direct investment is coming from Former Soviet Union. Closest European countries are Czech Republic, Poland, Slovakia, Hungary etc. The reason multinational

entrepreneurs to invest in Central European countries are the stable returns that is supported by regular economic growth of particular region; second reason can be explained by the perfect geographical location of these counties – they are all situated in the middle of Europe, right between the West and East.

2.1 Czech Republic investment climate and legal conditions

The Czech Republic is a state located in the heart of Europe. It borders Poland in the North-East, Germany in the West and North-West, Austria in the South and

Slovakia in the East. The Czech Republic, formerly part of Czechoslovakia, consists of 13 territories (regions) and the capital – Prague. The Czech Republic has been a member of the European Union since 2004. The Czech Republic also is a member state of OECD, WTO, WIPO, NATO and many other international organizations.

The Czech Republic is a parliamentary democracy. Power is divided into legislative, Executive and judicial. The Parliament consists of two chambers (the lower house and the Senate). Since 2013, the President is elected by direct vote of citizens. The Prime Minister is appointed by the President of the Republic on the basis of the results of parliamentary elections. Due to the fact that the Czech Republic is a parliamentary democracy, the main political power is in the hands of the Prime Minister. (Globalex, 2013)

According to The World Bank Group rating “Ease of Doing Business 2020” the Czech Republic takes the 41th place out from 190 competing countries. Also an important factor is that the Czech Republic shares the firstplace with France,

Poland and Portugal in the column “Trading across boarders”. The Czech Republic is considered as a country, where it is easy to start up a company, register a business entity and purchase real estate. That is why it comes as no surprise that a lot of entrepreneurs choose the Czech Republic as a hub for their investment.

Conditions for such economic attractiveness for foreign investors are related to the hospitable behaviour of Czech economic environment. This factors of

governmental regulations create the benefits for doing business in the Czech

Republic. The Czech government provides different supporting actions for business

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27 environment. This support is related to both – already existing companies and new companies. There are various areas of support for Czech Business (Businessinfo.cz):

• Investment support – CzechInvest is a national agency that attracts FDI to Czech Republic in order to increase the compatibility of Czech economy on the international arena.

• Foreign integration support – there are no complex barriers for foreign entrepreneurs and employees

2.1.1 Important macroeconomic indicators

Industrialization and digitalization in the Czech Republic attracts more investors from all over the world, who push the economy forward and brining more money to the country. According to “OECD Economic Survey: Czech Republic 2019” economic growth is projected to continue in 2020-21. Household consumption and

government spending will drive growth. Workers will still benefit from high wage growth, while unemployment will remain low. Adjusting monetary policy should continue in 2020 and 2021 as inflation is projected to stay above the 2% target of the central bank. Government spending is increasing, in particular social benefits,

thanks to rising revenues. Even so, public debt will continue to decrease. Labour shortages remain the main domestic bottleneck to growth. Accelerating childcare reform to increase women's participation in the labour market and streamlined immigration procedures would help to ease tensions in the labour market.

• Gross Domestic product (GDP) growth rate – the real GDP rate in Czech Republic is still growing, in 2018 the growth rate was 2.91% and according to forecast of Statista.com it will continue to grow. In 2018, the Czech

Republic's gross domestic product accounted around 245.23 billion U.S.

dollars. The most stable driving force of the Czech economy has been and remains the individual expenditure of the population - wages are rising (in 2018 the wage growth rate increased from 8-9%). Lack of workers was also the main reason for the increase in wages in 2018. According to some experts these two factors may eventually have a negative impact on the economic situation of the Czech Republic.

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Year 2017 2018 2019 2020 2021

GDP in millions

CZK

215.91 245.23 246.95 261.74 276.11

GDP growth rate in %

4.35 2.96 2.45 2.62 2.65

Table 2 GDP in CZ; Source: Plecher, H. (2020, April 29). Czech Republic - Gross domestic product (GDP) growth rate 2021.

• Inflation - In 2018, the average inflation rate in the Czech Republic accounted about 2.16 % compared to the previous year. Basically, we can state that the prices would not grow much. Inflation is stalling above the 2%

target of the central bank though it remains within the tolerance band.

Currency appreciation is also holding down inflation. As relatively high inflationary pressures are projected to persist and high wage growth set to continue, the central bank will need to further adjust monetary policy to economic conditions, while taking into account euro area monetary policy.

Risks to inflation are substantial and slightly tilted to the upside.

Year 2017 2018 2019 2020 2021

Inflation change in

%

2.45 2.16 2.56 2.26 2

Table 3 Inflation rate in CZ; Source: Plecher, H. (2020, April 29). Czech Republic - Inflation rate 2021.

• Unemployment – in 2011 (6.71 %) temporary decline in the unemployment rate was replaced by an increase in unemployment in 2012 (6.98 %) and 2013 (6.95 %). The reason for this was the low performance of the economy.

During recent 5 years, the indicator for the overall level of unemployment among the population aged 15-64 years decreased by approximately 5%

compared to the data indicator in 2013. Nowadays, unemployment rate in the Czech Republic is one of the lowest in the European Union. It is only 2.4%.

Unemployment is at the lowest point of all the time. According to OECD Economic Survey labour market in the Czech Republic is shifting towards higher-skilled employment. The service sector has expanded and

manufacturing has become tightly integrated into global value chains, leading to employment shifting from medium-skilled to higher-skilled jobs.

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29 Providing workers with the right skill-set and training to adapt to a changing environment would increase their resilience to automation. More developed vocational training and childcare facilities could help reduce the skill

mismatch and augment women’s labour supply.

Year 2017 2018 2019 2020 2021

Unemployment

rate in % 2.89 2.4 2.47 *2 *2

Table 4 Unemployment rate in CZ; Source: Plecher, H. (2020, February 11).

Czech Republic - Unemployment rate 2019.

• Risk free rate - Czech Republic 10Y Bond Yield was 1.19 % in 2020, according to Tradingeconomics.com

• Average market risk premium, according to Tradingeconomics.com – 6.4 %

• Corruption - In 2018, the Czech Republic improved its position in the global corruption perception ranking compiled by the Transparency International organization. Czech Republic rose four places to 44th place. 180 countries are represented in the ranking. They are ranked on a scale from 0 to 100 points, where zero denotes a seriously corrupt state, and one hundred-the complete absence of corruption. Czech Republic showed a result of 56 points.

2.1.2 Real Estate market

The post-crisis period from 2008 to 2012 was not easy for Czech real estate. The real estate market did not collapse, but the number of buyers has decreased

significantly, several large construction companies went bankrupt, some well- known real estate agencies ceased their activities. In 2013, there was a stabilization in this area, and 2014 was already marked by the activation of market participants and weak price growth in some of its segments. (World Bank, 2019)

In 2015, the pace of recovery accelerated. There was a record in the number of transactions with new buildings, sales in the segment of secondary housing were active. If, starting around 2009, it was more difficult to sell than to buy, that is when, supply exceeded demand, and prices logically decreased, then in 2015 it is quite obvious that demand exceeded supply, it became more difficult to buy than to sell, and prices accordingly began to rise. (Czech residential real estate market study, 2018). The graph below shows how price for a 60 m2 flat has grown in Prague.

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30 Correspondingly, if you have bought a flat in early 2016, you could win a double selling price today. (Czech residential real estate market study, 2018) In 2018, living units prices rose strongly by 18.5% comparing the previous year, following annual increases of 4.6% in 2017, 8.9% in 2016 and 4.8% in 2015, according to the Czech Statistical Office.

The Czech Republic’s housing market is expected to remain tight in the coming years, with house prices projected to continue rising strongly. Experts at Globalpropertyguide.com believe that prices for real estate in Prague are now at the maximum level. So investors should not be afraid of a decline in prices on the Czech Real estate market - rising wages and low unemployment, will keep the demand for real estate traditionally high, which will prevent property prices from falling.

Figure 1 Growth of apartments prices and rent prices growth; Source:

http://www.conbiz.eu/information/articles/czech-residential-real-estate-market- study-2018-trends-and-predictions

During the last decades, the real estate market of the Czech Republic recorded a rise in all directions, but the cost of housing differs depending on the region. Real estate in the West and East of the country is characterized by

significantly lower prices, in the North there is stagnation, while in Prague prices are growing rapidly. The most popular region among foreign investors is of course Prague. This city attracts many tourists during whole year. Despite the fact that real estate prices are higher here than in other cities of the Czech Republic, this choice is reasonable: the liquidity of housing is higher in Prague as well as returns. Certain popularity is enjoyed by real estate in famous resort cities, such as Karlovy vary. In small cities such as Liberec, Kladno, Tabor and even in the second largest city of the Czech Republic - Brno, real estate prices and the cost of housing are significantly lower.

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31 However, demand for buying an apartment in Czech Republic is still high, the issue can arise in the demand for rent of apartments. Prague has poor gross rental yields, based on Global Property Guide research released in July 2019. A 120 sq. m.

apartment has an average yield of 3.7%, while a smaller apartment of around 70 sq.

m. has a slightly lower rental yield of 3.6%. Current yields are much lower than the pic yields during 2000-2005, when the average rental yield in Prague was 6.8%.

Moreover, the demand for rental housing in Prague fell to almost zero in recent days. There is simply no people to rent all the apartments on the supply market:

foreigners left Prague considering the situation with COVID-19 and the big question is when they will return to the Czech Republic in same amount, if it will happen at all.

2.1.3 Taxation in CZ

The tax system of the Czech Republic is similar to that of other European countries.

As a rule, taxes are divided into direct taxes related to income earned by the subject of taxation, and indirect taxes related to the consumption or purchase of goods and services. Each type of tax is defined in a specific legislative act. The management and collection of taxes is described in the records of the Ministry of Finance of the Czech Republic and its subordinate administrative bodies, primarily local tax authorities.

Czech tax code is well structured and one of the main benefits is that Czech government is informing the taxpayers about incoming changes in time, before a year or two of implementation. On the other hand all tax code innovations are comparably rare and usually make the situation better. Current tax code fulfils all the main principles of the fiscal policy for EU countries. It supplies the government budget with funds by means of flexible management of tax revenue, ensures the growth of GDP and creates good conditions to support entrepreneurship. All the taxes related to business operations are listed in the Czech law №586/1992.

Each entrepreneur operating in Czech Republic have to conduct accounting and financial statements for taxation, all this documents have to be collected and have to be available for any time control. Tax period of limited liability companies oblige companies to pay their tax duty once a year before the 1^stof April, in case if a company succeeds to pass an audit control it can pay its taxes up to the end of April.

Taxes:

• Personal income tax is 15%;

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• Real Estate tax – annually paid tax for the land, buildings or offices; can be calculated on the Czech governmental web “Daňová kalkulačka: daň z nemovitostí – výpočet”

• There is also a 4% tax on the transfer (sale) of real estate. This tax is paid only by legal entities, so it is much better to register the ownership of real estate, which occurs after the acquisition, as individual account property ownership.

In case you purchased the property as a legal entity and the property is listed on the balance sheet of some corporation, the rental income will be taxed on profits from business or other corporate activity.

• Exemption from the taxation – income from a sale of house or flat is

exempted from taxation, if the seller has a permanent residence for at least 2 years before the sale. Income from a sale of immovable asset is exempted from taxation, when the period of ownership of the asset exceed 5 years before the sale. Income from sale of movable property is also tax exempted (some exceptions apply).

2.1.4 Acquisition of Real Estate

According to Czech legislation foreigners in the Czech Republic can acquire both living (including under construction) and commercial facilities (offices, shops, restaurants, hotels, warehouses). Since 2011, the law also allows the purchase of agricultural and forest land. Property or land can be bought in all regions of the country. Any real estate in the Czech Republic is typically acquired via:

• Direct purchase (asset deal or purchase contract)

• Acquisition of shares in the company holding the real estate (share deal).

A purchase contract is the most frequent title for the transfer of the ownership right to real estate. Real estate is transferred to a new owner after registration of purchase agreement in the Real Estate Register. Since registration with the Cadastre of Real Estate usually takes from two to five months depending on the real estate’s location, however the purchaser is registered as the owner of the real estate as at the date of filling the relevant application with the Cadastral Office.

The acquisition of real estate via a share deal is used more often due to tax implications as such transfer is not subjected to real estate transfer tax (4% of the price or 75% of its deemed value as determined by an expert). The disadvantage of the share deal is that the buyer also acquires the company with all its liabilities.

Share deals generally become effective upon execution of the share purchase

agreement. Subsequent registration of the agreement with the Commercial Register is necessary but does not affect the transfer of the shares. When transferring shares

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33 in a joint stock company, the shares must be endorsed and handed over to the

purchaser.

If desired, investor can make a deal and buy an apartment house as a legal entity. But, for example, investor can’t buy property for a foreign company, he will need to open a representative office of the company or a new legal entity in the Czech Republic.

Calculations Czech Republic

An apartment 2+kk with an area of 52 m2 on the second floor of the residential project apartments Dělnická in Prague 7 Holešovice. The apartment is located near the centre of Prague with all civic amenities and excellent transportation

connection. Holešovice is separated from one side by the Vltava River, from the other by the Stromovka Park and the Letensky kits. Within walking distance of the project site is Prague market and Holešovice Exhibition Centre.

Following factors need to be included in the calculation:

• Initial cost or purchase price

• Financing costs — 0%

• Holding period — 10 years, building will be sold in the 11^th year

Purchase price: 5 463 650,00 CZK Additional costs for furniture 500 000,00 CZK

Useful area 52 m2

Table 5 Source: Excel author

• Additional year-by-year costs— 30 % is the portion of income that will be assigned to property operational expenses.

• Real estate tax = 1260 CZK

• Discount rate = 9,59 %

• Depreciation: acquisition cost was divided by 30 years, according the law.

Depreciated amount was multiplied by depreciation rates, to estimate the amount that can be deducted from tax base. (Tax Guideline for Czech Republic, 2020)

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34 Period of ownership Depreciation rate Depreciated amount

First year 14,2% 28 227,94 CZK

Next years 28,6% 56 853,46 CZK

Table 6 Source: Excel author

• To estimate the cash flow of annual rental income average rental prices for similar 5 to 10 objects were investigated on the web portal of real estate (Sreality.cz) and in the end was multiplied by 12 to estimate the annual rental income.

• Tax base and cash flow after tax: in this part tax was calculated, considering the operational and depreciation expense that reduces the tax burden. After the tax amount is estimated – the annual cash flow after tax can be

calculated. * Be aware that depreciation, tax base and tax itself are different in the first year, due to Czech Law.

Tax base calculation

First year Other years Annual rental income 249 000,00 CZK

Operating Expenses:

Utilities Insurance

Supplies Advertising

Maintenance & Repairs Real estate tax

75 078,00 CZK

Depreciation expense * 28 227,94 CZK 56 853,46 CZK Tax base * 146 072,06 CZK 117 446,54 CZK

TAX 17 560,28 CZK 21 854,11 CZK

CFAT 213 215,18 CZK 152 067,89 CZK

*First year has different values due to Czech Law Table 7 Source: Excel author

Hlavní práce69395_shym00.pdf, 801.1 kB Stáhnout

University of Economics, Prague

Bachelor’s Thesis

2020 Mykhaylo Shynkarenko

University of Economics, Prague

Evaluation of investment decisions for residential rental property in three different

countries: Czech Republic, Poland and Slovakia.

Table of contents:

Table of Figures

1 Theoretical part

Discount rate = Risk-Free Rate + Inflation + Average country Risk Premium rate

2 Practical part - Analysis of Investment environment and calculation of investment returns in CZ, Poland and Slovakia