Zagreb (Croatia) [Photo credits to Zlatan.M on Flickr]
Easier Property has been recommending people considering property as an investment to look at Zagreb rather than Croatia’s Dalmatian coastline, even though the latter has a lot to recommend it. The pluses for the coast are stunning scenery, many historic centres, lower costs than elsewhere in the Mediterranean and a relatively small number of holiday homes. Currently most holiday villas are not new build and, although beginning this summer there will be some holiday developments coming on to the market, the property market is relatively small and purchasers may run into problems if they need to liquidate their asset.
By contrast to the coastal regions of Croatia, Zagreb is the focus of attention for aspiring Croats and the city has a significant housing shortage, which King Sturge predict won’t be overcome until 2010. Prices, which averaged 2,215 euros a square metre at the beginning of 2007, are rising at 10 to 20% a year and the rental market is sound.
However, Global Property Guide does not quote rental values for the city. Dublin’s Sunday Business Post quoted rental yields of 6 to 10% in 2006 when highlighting the development by Croatian Sun of ‘garden city’ development at Santa Domenica, 15 minutes outside Zagreb. It sounds just the right of development to meet the lifestyle requirements of the city’s burgeoning middle class according to croatiansunuk.com. King Sturge’s 2007 report (pdf) forecasts that residential price increases will moderate to 5% over the next few years.
Croatian enjoys a relatively low inflation rate and reasonably stable exchange rates, especially against the euro in the last six years. The country is supposed to be joining the EU in 2010 (but see below).
When it comes to practicalities there are two routes into the Croatian property market. Citizens of other European countries are allowed to purchase residential property in their own name but the process can be time consuming (obtaining official authorisation seems to be the main hold up). Alternatively, purchasing through a company is faster but there are extra administrative costs. Whichever method the investor chooses there is normally a 5% real estate transfer tax to pay. In addition, landlords owning property in their own name pay 25% of rentals in tax but avoid capital gains tax as long as the property is held for three or more years.
If the property is held through a company, 20% tax is levied on capital appreciation, which rises to 35% if profits are to be repatriated. However, there appears to be a tax loophole which makes the best solution selling the company with the property as an asset of the company, although one wonders how long that exit route will be allowed to continue.
Although Croatia has highest ratio of mortgage debt to GDP in the CEE (Central and Eastern Europe), it is not possible for non-nationals to obtain mortgages from Croatian banks at present. The only option is to borrow in another country using existing assets as collateral. Clearly, this brings with it a certain degree of exchange rate risk as there is no way to borrow in Croatian Kuna for your purchase. Given that the Kuna tends to be more in step with the euro than other currencies, this may be the best currency for your loan.
One area of concern in the last few days has been the decision by the Croatian National Bank to prevent the Bayerische Landesbank from acquiring the Croatian assets of Hypo Alpe Adria Bank, itself owned by the Austrian Province of Carinthia (Karnten). This is bad news for those investing in Croatian property because the move could spark a banking crisis, Hypo Alpe Adria is one of the main mortgage banks and the decision could delay Croatia’s accession to the EU.
Presumably, this hiccough will be overcome in due course. The prospects for Croatia look good in the medium term whether one considers Zagreb or Dalmatia. Personally, I would opt for one of the historice centres if investing in the latter. Another option might be to look at residential properties in the important port cities of Rijeka and Split to tap local demand for good quality property.