Guy Norton in Zagreb -
It speaks volumes about the parlous state of the Croatian economy that in May the country’s justice ministry announced plans for investor-friendly legislative changes designed to ease the purchase of Croatian real estate by Russian citizens.
While the EU is coming under increasing pressure from the US to further tighten the existing sanctions on Russia over the Kremlin’s machinations in Ukraine, the EU’s newest member Croatia, whose economy has been mired in recession since 2009, is preparing to roll out the red carpet for cash-rich Russians looking to buy their own piece of holiday heaven on the country’s stunning Adriatic coastline.
Explaining the reasoning behind the move, Justice Minister Orsat Miljenic told Croatian daily Vecernji List on May 15 that Croatia was looking to remove an anomaly whereby an ordinary Russian citizen would in practice have faced just as many legal hurdles when buying a vacation property in Croatia as a major Russian corporate titan such as oil and gas titan Gazprom would when mulling the theoretical takeover of its Croatian equivalent INA.
“We were an absurd country in that we were seeking foreign investors, but when they turned up and wanted to buy a vikendica [holiday home] of 50 square metres, then we wouldn’t just let them and we forced them to form a limited liability company through which to buy the property... In fact, we have been forcing them to play legal games and have made them feel unwelcome,” admitted Miljenic.
As a result of the hitherto unhelpful legal environment in Croatia, Russians have in the past often bypassed Croatia, flocking to buy properties in neighbouring Montenegro instead, where it is estimated that over 60% of all holiday home sales have been to buyers from Russia. What’s more, when Croatia joined the EU last July it was forced to tighten its visa regime for Russian tourists, something that caused a 30% drop in the number of visitors from Russia in 2013, further narrowing the potential for holiday home sales to ordinary Russians.
Time to buy
Paradoxically, in the wake of the outbreak of violence in Ukraine and the economic backlash against by Russia the Croatian daily Novi List reported that local real estate agents have recently been receiving an increasing number of enquiries from both countries about potential buying opportunities in the residential property market in both the coastal regions of Istria in the north and Dalmatia in the south of Croatia.
Any pick-up in Russian or Ukrainian demand in the country’s moribund housing market would be hugely welcome, given that in the latest regional economic prospects report from the European Bank for Reconstruction and Development published on May 14, Croatia was highlighted as one of the countries in Emerging Europe whose economic prospects could be most damaged by financial contagion from the crisis in Ukraine. While in January the EBRD forecast that GDP in Croatia could grow by 1% this year, the London-based development bank is now predicting the country’s GDP will actually shrink by 0.5%. “Croatia is the only country in the transition region, other than crisis-hit Ukraine, that continues to remain in recession,” noted the EBRD, adding: “Croatia will continue to remain in recession on the basis of depressed investment and credit.”
Furthermore, even a relatively small number of house sales to Russian or Ukrainian clients could help boost the headline foreign direct investment (FDI) numbers in Croatia this year. According to the Croatian National Bank, in 2013 FDI in the country fell almost 60% on year to around €436m, marking a three-year low since 2010 when Croatia attracted just €370m in FDI.
Big players arrive
In May the Croatian media was abuzz with the news that Russian billionaire Viktor Vekselberg had bought Hotel Belvedere in the Croatian tourist hotspot of Dubrovnik. Destroyed in 1991 during Croatia’s battle for independence against Serbian forces, the disused property was reportedly sold to Vekselberg’s Croatian-registered Vila Larus property investment vehicle for just over €12m – a 50% discount to the starting price at a previous public auction last March that failed to attract a single bid. It is hoped that Ukrainian-born Vekselberg, whose fortune is estimated by Forbes magazine at $17bn, making him the third richest person in Russia, will now return the hotel to its former five-star glory. Vekselberg was already a well-known devotee of Dubrovnik, having previously bought the private residence Villa Lozica for a reported €5m and acquiring the luxury restaurant Labirint in the Unesco World Heritage port city.
Vekselberg may be near the top of the tree when it comes to wealthy Russians, but it is hoped that a more investor-friendly environment will enable the recession-hit Croatian residential property market to benefit from a combination of investment/flight capital from more modestly wealthy individuals and businesses from both Russia and Ukraine. According to the recently published spring economic outlook report by the European Commission, Croatian housing is among the most favourably priced in the EU relative to the country’s underlying economy, with residential property in Croatia selling for as much as 20% below the so-called equilibrium point.
That however has failed to convince cash-strapped Croatians to dip into their hard earned savings, with Croatia registering the largest fall in house prices in the EU last year, dropping by 17.8%. Given the country’s straitened economic circumstances, Croatian house prices have fallen by around 35% in the last three years and, according to the Commission's report, there’s little or no prospect of any recovery in sales growth or price increases based on domestic demand.
So a little help from Russian and Ukrainian buyers could be just what the crisis-hit Croatian housing market needs to put it back on the road to recovery.
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