Does rental housing in Slovakia have a future?

The National Council of the Slovak Republic approved a new Act No. 222/2022 Coll., on State Support for Rental Housing and on Amendments and Additions to Certain Acts (the "Act") on 5 May 2022. Having entered into effect on 1 July 2022, the Act contains a framework for how the rental housing system should work.

Since Slovaks typically own their dwellings, rental housing is rather marginal. Slovakia is among the four countries in the European Union with the highest share of owner-occupied housing, mainly due to the sale of state flats at the end of the Communist era. Rental housing should fill the gap between social housing and commercial housing, while providing housing with regulated rent. However, the Act contains obstacles both for future tenants and future investors.

The first obstacle concerns the payment of the security deposit by tenants. Prior to the commencement of the lease, tenants are obliged to pay a deposit of up to three to six times the monthly rent and monthly service fees. Even where rents are lower, such deposits may be prohibitive.

For investors, the biggest obstacle presented by the Act is the reduction of VAT on the supply of construction, renovation and reconstruction of buildings intended for rental housing to 5 %, which could lead to market imbalance. Depreciation over 40 years will apply. Accelerated depreciation as well as the tax credit for investments in mutual funds have been deleted from the Act.

The Act assumes that investment agreements will be concluded for a minimum of 25 years. The investment partner and the landlord are obliged to ensure the operation of the building for the duration of the building operation agreement, even if the investment agreement has already expired. At the end of the term of the building operation agreement, the landlord is obliged to maintain the lease pursuant to the Act only with tenants with whom they have concluded an agreement pursuant to the Act. Tenants will not be able to buy the rental flats.

In view of soaring inflation and interest rates offered on fixed deposits, it will be interesting to see whether private investors will be able to invest in rental housing and whether the status quo on rental housing in Slovakia will be overturned.

authors: Tomas Silhanek