Dubravko Ranilović, President, Real Estate Association attached to the Croatian Chamber of Economy
Five Stars Croatia Issue 2 — April 01, 2007.

The Croatian real estate market has been steadily growing since 1996 to date. The market is very dynamic, but not all parts of it have been developing with the same intensity. To obtain a better insight to the developments on the real estate market over the past ten years, we need to observe the respective parts of the market separately.

Housing

Housing is certainly the most active and most important segment of the real estate market in Croatia. The demand accumulated during the war years exploded in the late 1990s when the commercial banks provided better possibilities of financing citizens. The demand for purchase of apartments has significantly exceeded the supply to date. The supply and demand ratio is one of the main causes of the increasing prices. On the average, the prices have grown at a rate of 10% every year, depending on the region.

I should point out that apartments in Zagreb in better locations are normally sold for over 2,000,- euros/m2, and some apartments often go for over 3,000,- euros/m2.  In Dubrovnik, some locations achieve over 8,000,- euros/m2, but these are exceptions.

The prices have been steadily growing in cities and seaside regions, which is not the case in rural and agricultural areas where the prices have grown insignificantly over the past ten years. However, the newly built motorways did revive the regions they pass through, such as Lika. Although Croatia is well connected by its road network, the village-city migration is still present, which puts additional pressure on main regional cities such as Zagreb, Split, Rijeka, Osijek, Pula, Zadar and Varaždin. The price growth in most of Croatia has been caused by the demand on the domestic market, while the price growth in, for instance, Istria and the Dubrovnik region has been primarily caused by the interest of foreign nationals.

The average asked and average achieved prices per m2 in Croatia by region in 2006:

Source of data: Real Estate Exchange

Foreign nationals are primarily interested in properties along the Adriatic coats. Out of the total of 21 counties in Croatia, foreigners have acquired the most in the 6 littoral counties, which account for 70% of all foreigners' purchases. The City of Zagreb is way down in the 9th place.

Counties by number of foreign nationals' acquisitions:

1. Istrian

2. Primorsko-Goranska

3. Split-Dalmatia

4. Zadar

5. Dubrovnik-Neretva

6. Šibenik-Knin

The reason why more purchases have not been made in, for example, Dubrovnik and the surrounding area despite the great interest is the limited offer and high prices of real estate. Foreign nationals arriving in Croatia for the first time and intending to buy a property are quite surprised with the high real estate prices, especially those in better locations. Although the prices are relatively high, it is still recommendable to purchase a property on the Adriatic. Croatia has protected its coastal belt very efficiently, so development of larger projects by the sea is very restricted, and the prices of the existing properties in good locations will surely grow some more.

Croatia is liberal with respect to acquisition of real estate by foreign nationals. Foreigners have been able to acquire real estate on reciprocity basis for over 10 years. In other words, foreigners may acquire real estate under the same conditions applied to Croatian nationals' acquisition in the buyer's country, and Croatia has had the reciprocity established with most of the European Union countries for a long time. Efforts are made to accelerate the procedure for issuance of consent for acquisition.

Citizens of the below countries have acquired the most properties:

1. Germany

2. Austria

3. Hungary

4. UK

5. USA

German citizens have acquired over 50% of the total number of properties sold to foreigners. Over the past year, the interest in certain countries has increased, so the ratios have somewhat changed. According to the number of submitted applications for acquisition of real estate, the order is as follows:

1. Germany

2. Hungary

3. UK

4. Austria

5. Slovenia

6. Ireland

7. Sweden

8. Bosnia and Herzegovina

9. France

10. The Netherlands

Shops and shopping malls

The larger cities in Croatia have seen a great expansion in construction of shopping malls of all forms and sizes, just like the major cities in Europe. Many urban areas have been left without customers because the citizens have acquired new habits. In Croatia, the central urban zones have still retained customers' interest and remained attractive retail zones. The reason for this is the Croatian citizens' habit to spend time and socialize outdoors in city centers, so shopping as a form of leisure is still better in the city center than a suburban shopping mall. This is confirmed by the exceptionally high prices of lease and sale of retail outlets in city center.

The prices of lease per m2 often exceed 100 euros/m2, and the selling prices of some retail outlets in the city center are sometimes higher than 10,000 euros/m2. These prices primarily pertain to Zagreb, and some exceptionally well-visited tourist centers. According to the assessments, there is still room for construction of shopping malls, but those of higher quality.

Office space

When referring to the office space market in Croatia, we are actually referring to the market in the capital city of Zagreb because the figures in other cities are almost insignificant. Up to 5 years ago, there were only a few office buildings intended for the market, having a total surface area of around 100,000 m2. Most lessees leased inadequate offices in the city center.

Up to 5 years ago, there were practically no A-class offices in Zagreb. Presently, over 200,000 m2 of new office space has been completed, and around 100,000 m2 more is under construction. Zagreb will see the end of 2007 with around 500,000 m2 of office space. It is interesting to note that most of the buildings and towers were built by local investors, which is not the case in cities in other transition countries. That is why there are few vacant offices available for lease, because the local developers and investors have been careful with the planning and assessment of the overall demand for office space in Zagreb.

Of course, such turn of events influenced the price of lease of office space. 3 years ago, the price of lease in the first newly built office buildings ranged between 22 and 28 euros/m2, and the average prices are now between 14 and 17 euros/m2. Although the market has become saturated due to the sudden development and construction of office buildings, I believe the demand for office space will become reactivated in about 2 years, and cause further price adjustments.

Tourism

A few years ago, Croatia, as a tourist country, was faced with a serious task: reconstruct or develop tourist capacities as soon as possible, and adapt them to the present requirements on the tourist market. Fortunately, Croatia has not devastated its coast in the past. The islands are almost intact, so Croatia is attempting to protect the coast against excessive construction by laws. We in Croatia do not want enormous hotels. We do not allow construction of tourist capacities within a belt of at least 70 m from the sea. We are making efforts to encourage construction of smaller tourist facilities or tourist resorts incorporated in the environment. We are also trying to promote traditional architecture, although many buildings of questionable aesthetic value were built over the past 10 years. Today, we are able to face such problems in a much more efficient way.

In tourism, investments in high-quality tourist facilities will have preferential treatment. Not all hotel/tourist companies have been fully privatized, so there is room for investments in reconstruction of numerous hotels that need to be raised to a higher level. We hope all physical plans in cities and municipalities will soon be adopted, so that we could know precisely in which areas tourist projects can be developed. I should mention that other forms of tourism have appeared in Croatia, requiring construction of completely different properties, i.e. providing the opportunity of converting old buildings into properties intended for tourism. The gastro-tourism and rural tourism are particularly well developed in regions such as Istria. Lika and Gorski Kotar have a great investment potential for these types of tourism with the real estate prices still affordable, and the nature beautiful and intact.

It also pays to invest in hotels in cities. High-category hotels in Zagreb and Split proved to operate very well. Although a continental city, Zagreb has had an increasing number of tourists, and not enough quality accommodation.

Over 50% of hotels in Croatia currently have 3 stars, and only 13% of the accommodation capacities are in 4-star and 5-star facilities. This ratio will surely change in the upcoming years.

The Croatian real estate market is obviously very dynamic and diverse. Although the prices of real estate are already quite high, we expect the prices of certain properties to continue to grow. Croatia's acceptance in the European Union will certainly be a positive shock, which will increase the real estate prices some more, but not as much as many citizens of Croatia expect it to. After this, we expect the prices to become stabilized, and the real estate market in Croatia to record a small but steady growth.