ABSOLUTE gUIDE sERIES to Investment Property
Croatia
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Date of Publication: October 2008 © Obelisk 2
ABSOLUTE G UIDE SERIES - CROATIA
Contents 5. Welcome to Croatia
Dedicated to providing impartial information.
6. Economic Growth & Stability Promising prospects for further economic growth.
7. Currency & Banking Banking is one of the best performing sectors in the country.
8. Foreign Investment An integral part of Croatia’s EU accession.
9. Political Situation & Stability A return to democracy has brought about political stability.
10. Tourism
16. Mortgage Market
A fledgling industry with improving accessibility to foreign buyers.
17. Market Risks
High inflation is to be combated through government intervention.
18. Purchase Process
New legislation scheduled to increase opportunity to
Croatia’s tourist sector is booming.
foreign investors.
11. Infrastructure
19. Investment Costs
EIB investment of €1.26 billion to improve transport infrastructure.
12 - 13. Property Market
House prices expected to increase between 100% and 150% over the next 3 to 5 years.
14 - 15. Secondary Market
Demand for housing continues to outstrip supply.
Off-plan property is exempt from real estate transfer tax.
20. Summary
Further deregulation to increase growth in the mortgage market.
21. Verdict
Croatia has fewer market risks than same other CEE countries.
22. Obelisk Advantage
Obelisk approaches its projects purely from an investment perspective.
3
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Varazdin Bjelovar
Zagreb Sisak Pula
Osijek Vukovar
Rijeka Omisalj
Zadar Sibenik Split Ploce Dubrovnik
4
ABSOLUTE G UIDE SERIES - CROATIA
Croatia forms part of the Obelisk Absolute Guide Series, dedicated to providing impartial information to numerous property investment destinations worldwide.
Welcome
to Croatia
As the market leader for overseas investment property,
with in-depth, clear-cut knowledge on the most important
we are committed to providing cutting edge information
factors influencing your property investment decision in
for property investors, one aspect that has earned us the
Croatia.
award of International Property Specialist 2008 by Business Britain magazine.
In this guide you will find recent economic performance and predicted growth, a profile of the current property
We are therefore pleased to present our latest Property
market and its future potential, along with tourism trends
Investment Guide to Croatia, an essential tool for the
and infrastructure improvements. The guide also includes
investor planning to buy property in this country. This guide
information about Croatia’s mortgage market, the buying
forms part of the Obelisk Absolute Guide Series, dedicated
process and buying costs.
to providing impartial information about numerous investment destinations worldwide.
Obelisk’s Absolute Guide to Croatia offers investors objective and authoritative information to facilitate an
At Obelisk, we are only too aware of the importance of
informed decision about investing in Croatia. We trust that
extensive research into an investment destination and, as
you, as an investor, will find this guide indispensable.
part of our policy to offer investors the definitive service, this guide has been rigorously researched to provide you
Here’s to Successful Investing!
5
ABSOLUT E G U I D E S E R I E S - C R O AT I A
GDP Growth (Q2 2008): 4.6% GDP Per Capita (2007): US $15,348 Unemployment (2007): 11.8% Inflation (Q2 2008): 8.4%
Economic Growth
& Stability Croatia’s scheduled EU membership is set to
Unemployment remains around 11.8%, but this high
accelerate fiscal and structural reform and improve the
rate is expected to fall as the country moves towards
country’s economic situation. The State retains strong
EU accession and in turn reduce inflation which in Q2
involvement in the economy and supports the move
of 2008 had risen to 8.4%.
towards privatisation of industry which will further strengthen macroeconomic stability and provide
Despite the relative slow economic progress in Croatia
attractive opportunities for foreign investment. The
compared with other CEE countries, low public sector
Croatian government is committed to a programme of
debt provides a balance and there is a promising
legislative reform which aims to address the issues of
future for investment. Confidence in this high growth
unemployment and the high rate of inflation to drive
potential is reflected in the BBB (Stable) investment
forward economic progress.
rating awarded by Standard & Poor’s.
Historically, there has been widespread political resistance to economic reform within Croatia but in order to achieve EU membership, the government recognises the need to implement change.
6
ABSOLUTE G UIDE SERIES - CROATIA
Currency
& Banking The currency in Croatia, the Kuna (HRK), is strong due to the Croatian National Bank’s intervention in the foreign exchange market to maintain exchange rate stability. The Kuna is performing 22.98% stronger against sterling, according to a report in the Independent in April 2008. At the end of 2007, approximately 90% of banking assets were controlled by foreign-owned institutions and banking is one of the best performing sectors in the country, accounting for around 80% of total financial sector assets with continued profitability and improved efficiency. Regulatory and supervisory frameworks have been strengthened to improve the business enabling environment in Croatia and encourage further international investment. The predominance of foreign-owned banks in Croatia has improved the financial sector infrastructure to harmonise with EU directives.
7
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Foreign Companies Investing in Croatia GlaxoSmithKline, IBM, Siemens, L’Oreal, Nestle
Foreign Investment In 2007, Croatia’s total foreign direct investment (FDI)
Croatia has introduced enforcement and bankruptcy
was €3.5 billion. In Q2 of 2008, actual FDI inflows
legislation to protect creditors and shorten bankruptcy
reached €1.8 billion. Since 1999, Croatia has shown
procedures and a reform initiative, the Regulatory
steady growth in FDI revenues and as the country
Guillotine, was initiated in 2006 to reduce the cost of
accelerates toward Euro-Atlantic economic integration,
doing business in Croatia.
further growth is anticipated in the next few years making this an exciting time for investment.
The World Bank’s ‘Doing Business 2008’ report ranked Croatia as the second top reformer in the world and the
The Croatian government has recognised the country’s
introduction of deregulatory legislation and improved
weakness in the areas of public administration and
financial systems will continue to encourage the
judiciary and as a consequence has introduced considerable
introduction of new businesses, both domestic and
reforms to improve the investment climate. A key reform
international, and attract further foreign investment. In
has been the introduction of a one-stop shop for business
the Ernst & Young South East Europe Attractiveness
registration, taxes and customs and digital land registry
Survey 2008, Croatia ranked fifth.
which has been in operation since 2005.
8
ABSOLUTE G UIDE SERIES - CROATIA
WTO Member: Since 2000 NATO Member: Ratification ongoing EU Member: Estimated to be 2011 Political System: Parliamentary democracy Ruling Party: Centre-right Croatian Democratic Union (HDZ) Next Parliamentary Election: 2011 Next Presidential Election: 2010
Political Situation
& Stability Croatia is governed by the party achieving a majority vote in parliamentary elections. The current government is led by the Croatian Democratic Union (HDZ) and supported by an alliance of the Croatian Peasants Party and the Croatian Social Liberal Party (HSS-HSLS).The Prime Minister is usually appointed by the President and approved by parliamentary assembly. The President is elected by popular vote with the next presidential elections taking place in 2010. Croatia joined NATO’s Membership Action Plan in 2002 and in April 2008, the country started accession talks with the Alliance. In July of this year, NATO Allies signed protocols with Croatia and the ratification process is ongoing. To meet its objective for EU membership, the Croatian government recognises that important changes to the economic and social infrastructure will have to be made to bring it in line with other EU members.
9
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Visitor Numbers (2007): 11.16 million Tourism Expected Contribution to GDP (2008): 25.5%
Tourism Croatia has long been regarded as one of the most beautiful parts of Europe. The booming tourist industry that was interrupted by war in the early 1990s has now returned in full force with visitors flocking to the country’s string of Adriatic coastal resorts. Travel and Tourism in Croatia currently accounts for 25.5% of GDP and is expected to contribute 32.7% to GDP by 2018. Travel and Tourism is an integral part of the government’s plans to achieve further economic stability within the country. For 2008, tourism is expected to contribute 28.7% to total employment. By 2018 it is forecast that 1 in 3 jobs (equal to around 452,000 jobs) will be within this sector indicating promising growth particularly for investors in holiday rental accommodation. ‘The Strategic Goals of Croatian Tourism by 2010’ programme includes the construction of transport infrastructure to improve the quality of supporting facilities and terminals and to optimize transportation services to support the tourism sector.
10
Tourism Expected Contribution to Employment (2008): 28.7% World Ranking in terms of forecast growth: 9th out of 176 countries
ABSOLUTE G UIDE SERIES - CROATIA
Infrastructure Since 2001, EIB funding of €1.26 billion for transport projects. World Bank funding of $2.27 billion (approx. €1.77 billion)
Expansion of Zagreb as the commercial hub of Croatia The European Investment Bank (EIB) has provided
the business climate, public administration,
€1.26 billion in funding since 2001 to improve the
infrastructure and environment.
transport infrastructure in Croatia. In 2008, €100 million was allocated to the Port of Zadar Authority to
A series of new shopping centres are planned for
finance construction of a new ferry port together with
construction in Zagreb which combined with the
€120 million from Germany’s KfW and the Croatian
presence of international businesses already established
government providing the remainder of the finance.
in the city will create promising opportunities for
This funding, in cooperation with Croatia’s Ministry of
commercial development and future investment.
Sea, Tourism, Transport and Development, has supported the modernisation of the country’s road and rail system
There are currently 6 airports in Croatia to which there
which will have an advantageous impact on the economy.
are now a total of 37 flights from the UK and Ireland including budget airlines such as Easyjet and Ryanair.
The World Bank is supporting Croatia’s European
Additional flights have been introduced to Croatia
integration through the funding of 37 projects
in 2008 following the increase in its popularity as a
providing a total of $2.27 billion (approx. €1.77
holiday destination.
billion) to strengthen and improve market institutions,
11
ABSOLUT E G U I D E S E R I E S - C R O AT I A
“The Istrian Region represents a highly attractive investment opportunity. It has excellent transport links, and those seeking rental opportunities will be encouraged by its growing tourism market.� Average Annual Capital Growth: 5.8% to 15% Average Annual Rental Yield: 5% to 7%
12
ABSOLUTE G UIDE SERIES - CROATIA
Property
Market
According to the Knight Frank 2008 Annual Wealth
Zurich-based international property consultants,
Report, Croatia is one of the ten up and coming
Henley & Partners, are expecting “average rises in
residential markets to keep an eye on. In 2007,
Croatian real estate prices of 100% to 150% over the
residential prices grew by 5.4% at a national level
next three to five years”.
and by 13.4% on the Adriatic coast. Q2 2008 price growth was 5.8%, according to Knight Frank’s
There are few restrictions on foreign ownership but as
Global House Price Index. In Zagreb, due to the
Croatia moves towards EU accession, deregulation on
establishment of international businesses together with
foreign investment in property will continue, increasing
improved transportation links and a more affluent
opportunities for international buyers.
lifestyle, prices of residential properties have grown by 15% on an annual basis over the past few years.
The Croatian economy is currently based on
Described by The Times as “one of Europe’s best kept
the real estate market will be the engine that drives the
secrets”, Croatia’s real estate market enjoyed
economy towards EU accession and the government has
exceptional performance in 2007 with the average
prioritised reforms in this area.
manufacturing industries and tourism but it is felt that
price of newly built homes surging by 26%.
13
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Secondary
Market
Croatia has experienced significant developments within
The tourist areas of Croatia still offer good investment
its employment market which has been influenced by the
returns for longer-term buy-to-let purchases. It should
growing number of foreign businesses establishing
be noted that thorough due diligence is required with
commercial centres in the country, particularly in
all purchases in Croatia due to a historically inefficient
Zagreb. As a result, demand for quality housing has
property registration system. This is a result of homes
been outstripping supply for the last few years as the
having been bought and sold without registration, land
number of expatriates working for international
confiscated during the communist years and rural
companies in Croatia grows. A negative consequence
properties inherited by multiple owners but registered
of the shortage of property supply has been that prices
solely. A failure to check the registration history of a
have escalated beyond the reach of many Croatians,
property prior to purchase could result in a legal battle
which could eventually lead to some stagnation in the
over ownership title and it is recommended to appoint a
secondary property market. The surge in demand from
Croatian lawyer to undertake these checks.
foreigners working in Croatia could artificially inflate property prices further, particularly in the cities, which will limit short-term investment opportunities.
14
ABSOLUTE G UIDE SERIES - CROATIA
“According to the Global Property Guide, average gross rental yields for Croatia were at 5.29% in Q2 of 2008”
15
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Mortgage
Market The Croatian government has scheduled reforms in the mortgage market for 2009, in order to increase availability to foreign property buyers. The old state-owned banks have been privatised and restructured and Austrian, Italian and German banks have also entered the market, leading to improved capitalisation and increased competition. As a result, housing loans have increased from ₏1.16 billion in 2000 to ₏6.64 billion in 2007 which shows an average growth in outstanding mortgages of 28.3% per annum. In 2008 mortgage interest rates were reasonably conducive to borrowing at 5.85% despite the interest rate hikes implemented by the EIB. Relatively low interest rates have contributed to housing finance growth with the majority of mortgage products being on a variable rate, indexed to the Euro and Swiss Francs. The mortgage market is still relatively new in Croatia and despite a limited range of mortgage products available to international borrowers, the market is improving. Further deregulation within housing finance is planned as part of Croatia’s move towards EU membership.
16
ABSOLUTE G UIDE SERIES - CROATIA
“When reforms have been achieved and inflation returns to a reasonable level, the potential for economic growth and future stability may present some interesting investment opportunities for investors in Croatia”
Market
Risks
Property investment into emerging markets may carry
inflation in line with other CEE countries. When this
some degree of risk. However, the degree that market
has been achieved and inflation returns to a reasonable
risk in a particular country affects a property
level, the potential for economic growth and future
investment depends largely on thorough due diligence
stability may present some interesting investment
conducted prior and during the purchase process.
opportunities for investors in Croatia.
Despite areas of significant growth within Croatia,
Property transactions are currently expensive in Croatia
particularly in Travel and Tourism and foreign
and range from 13.6% to 21.5% for older proper-
commercial investment, the country has a stubbornly
ties. The bulk of this cost is accounted for in real estate
high rate of inflation which will require further
agent’s fees, at 6% to 12% which is split between buyer
financial reform to reduce. Political reticence has
and seller. Real estate transfer tax is 5% but does not
been responsible for impeeding the progress of reform
apply to the first sale of new buildings which are subject
with an electorate cautious of the changes that EU
to 22% VAT on net construction value.
membership will bring to their country. However, as Croatia’s planned EU accession gathers pace towards
Again, the expense relating to property purchase will
2011 and the results of existing new international
reduce in years to come particularly as competition in
business in the country shows impact on the economy,
the sector increases and taxation reforms are
it is anticipated that reforms will be smoothly
implemented by the government.
implemented by the government in order to bring
17
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Purchase Process Croatia’s laws and legal processes may be very different to what you are used to and Obelisk strongly recommends that independent legal advice be taken during a property purchase. Below is the standard purchase process in Croatia and issues that may affect a property purchase. From the beginning of 2009, Croatia is expected to remove restrictions on European property buyers in an attempt to streamline the process and bring it in line with other EU member countries. The new legislation will give foreign buyers the same rights as Croatian citizens although some agricultural and environmentally protected land will be excluded from this. The acquisition process commences with a pre-contract agreement between the buyer and seller at which point a down payment of 10% is made by the buyer. The next stage is to apply for consent from the Ministry of Foreign Affairs (MOFA) together with the submission of documents such as the purchase agreement; seller’s proof of title; certificate of build legality; proofs of citizenship of the buyer and seller and power of attorney if appropriate. A binding contract is then prepared by a lawyer and signed by a notary. Once consent is granted by MOFA, the contract is registered in the Municipal Cadastral Department’s Land Books and the purchase tax will become payable.
18
ABSOLUTE G UIDE SERIES - CROATIA
Investment Costs Croatia’s taxation is complex and subject to change. You are therefore recommended to take expert and up-to-date advice on taxation issues affecting the purchase and ownership of property in Croatia. The costs of a standard property purchase in Croatia may include the following: Capital gains tax is charged at a flat withholding rate of 25%. The sale of real estate is exempt from capital gains tax if the sale took place more than three years from the date of purchase. VAT is only levied on properties constructed after 31st December 1997 and is charged at 22% of the net construction value of the building. Rental income, excluding deductible expenses, is considered as ordinary taxable income and is taxed at 20%. Real estate transfer tax is only levied on buildings constructed before 1998 and is charged at 5%.
19
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Summary The following summary provides key highlights to consider when investing in Croatia. Croatia is an emerging economy with GDP
Property prices have been predicted by
growth at 4.6% in Q2 2008.
experts to rise up to a staggering 150% over the next 3 to 5 years.
Following the successful establishment of a number of foreign businesses in Croatia,
Demand for housing – both resale and
the government is anxious to encourage
rental – remains higher than supply and this
further international investment ahead of the
situation is set to continue over the next few
country joining the EU.
years.
Around 90% of banking assets were
High property prices have out priced
controlled by foreign-owned institutions
locals.
accounting for 80% of the total financial sector assets in Croatia.
Croatia’s fledgling mortgage market has huge potential for growth particularly when
Tourism continues to grow and is set to
legislation is introduced in February 2009
become one of the most important sectors in
to deregulate this market further.
Croatia’s economy. Croatia’s government has a firm Infrastructure is receiving a major boost
commitment to reducing inflation and
from the European Investment Bank which
increasing opportunity for foreign
will increase the profile of Croatia within
investment ahead of the country’s plans to
Europe’s business community.
join the EU in 2011.
20
ABSOLUTE G UIDE SERIES - CROATIA
The Absolute Guide Series Rating
Based on our extensive research, Obelisk has introduced a 5 star rating system to summarise the investment potential of a country. The availability of finance, economic stability, political stability, the strength of the local market to provide an exit strategy and the potential to earn from investment are the key criteria that determine the investment grade of each country.
Verdict With tourism driving Croatia’s economy towards EU membership, opportunities to invest in holiday rental properties will increase over the next few years. A more affluent population will ensure that demand for quality housing will continue to outstrip supply, particularly in Zagreb where there is a high concentration of foreign companies. Comparatively high property prices upon resale has out priced many buyers in the local market, reducing the potential for exit and therefore returns from resale. Together with substantial purchase costs, this may reduce the appeal of Croatia to foreign investors. Another consideration is the issue of an inefficient land registry system in Croatia. A considerable amount of property may not have a complete registration history due to homes being bought and sold without registration in the past. Obelisk recommends the appointment of a local lawyer to conduct thorough land registry checks to avoid legal contention of ownership. Croatia remains politically stable and has fewer market risks than some other CEE countries. EU entry will also benefit the property market making Croatia a safe investment prospect. However, with the absence of a local exit strategy, it may difficult to realise returns on investment.
21
ABSOLUT E G U I D E S E R I E S - C R O AT I A
Obelisk
Awards Obelisk ‘International Property Specialist 2008’
Advantage
Voted International Property Specialist of the Year 2008 by Business Britain magazine, Obelisk has been recognised as the authoritative voice within the industry and its clients benefit from the company’s uncompromising high standards and professionalism. Obelisk has identified a simple and transparant purchase process for its clients as a simple, four step process: 1.
The client chooses and reserves the unit that best suits their investment requirements, and Obelisk takes the client through a compliance procedure.
2.
An independent lawyer, sourced and appointed for the client by Obelisk, will have already carried out full due diligence on the project. They will issue all purchase contracts and paperwork to the client.
3.
On receipt of this contract, the client will sign and make the first payment. The lawyer will notify the client of all further payments when required.
4.
The appointed lawyer will also represent the client in all aspects legally required within the country of purchase, ensuring that clients of Obelisk enjoy the benefits of simple and hassle-free real estate investment.
For more information about Obelisk’s investment opportunities in Croatia, contact us now on info@obeliskinternational.com, visit our website at www.obeliskinternational.com or call us FREE on 0808 160 0670 (UK) or 1800 932 514 (IRE).
22
ABSOLUTE G UIDE SERIES - CROATIA
Disclaimer The material contained within this document has been prepared for information purposes only. Information contained herein is not to be relied upon as a basis of any contract or commitment. The information is not to be construed as an offer, invitation or solicitation to invest and opinions expressed are based on market conditions at the time of print and may be subject to change without prior notice. Information contained herein is believed to be correct, but cannot be guaranteed. In case of queries or doubt you should consult an independent investment adviser. No personal recommendation is being made to you and the past is not necessarily a guide to the future. The brochure in its entirety – text, images, marks, graphics, logos, buttons, combinations of colours, and the structure, selection, ordering and presentation of its content – is protected by the legislation on intellectual and industrial property, it being forbidden to reproduce, distribute, publicly disseminate or transform it, except for personal private use. It is also forbidden to reproduce, relay, copy, assign or broadcast, in whole or in part, the information contained in this brochure, for whatever purpose and by whatever means, without written consent.
23
Call us free from UK: Tel. 0808 160 0670 Call us free from Eire: Tel. 1800 932 514 For general and international enquiries contact us at: Tel: (0034) 952 820 319 Fax: (0034) 952 825 790 Alternatively you can email: info@obeliskinternational.com or visit: www.obeliskinternational.com