The power of Perception

After years of negotiations, towards the end of January a referendum on EU membership was held in Croatia in which 67 pct voted in favour. With this final hurdle cleared, the country is now set to accede to the EU on July 1st, 2013. If it's possible to cast our minds back to previous waves of EU accession (it was eight years ago that the Visegrád countries and the Baltics joined, followed two years later by Romania and Bulgaria), the new countries and their real estate markets immediately benefitted from a massive investment boom, coupled with soaring property prices. The question that naturally arises is whether something similar is going to happen in Croatia. The Adriatic country, however, is joining in a rather different climate and set of circumstances.

To boom or not to boom?
Maruška Vizek, a research associate at the Institute of Economics in Zagreb, is firmly of the view that the boom in investment and prices is not going to be repeated: "We are not likely to see the price rises for real estate that happened in earlier waves of EU enlargement in Croatia because the timing is different. When Poland, the Czech Republic etc. joined in 2004, it was during a boom in asset prices. So prices in those countries increased significantly after EU accession. However, this will not be the case in Croatia because it is joining during an asset slump." In fact, the global nature of the boom that was experienced by the first wave of countries meant that it also happened in Croatia at the same time. "When Poland joined," points out Arn Willems, the Croatia country manager of Globe Trade Centre (GTC), a Polish-based developer active in Croatia for a number of years, "money was flowing at an amazing pace, as it was in Croatia at the time." In Croatia's case, the price rises and investment volumes have in fact already been and gone prior to EU accession. The asset slump that followed is also now taking place in the country, where, for instance, the difference between the asking and achieved price last year in the residential segment was as much as 20-30 pct. Any boost from EU entry would therefore seem to be limited. "The Croatian market was already liberalised in 2009, since when foreign investors have been allowed to buy property freely. But there has been no increase in prices since then and none is expected in the near future," predicts Maruška Vizek.

Sentimental value
However, EU accession is nevertheless providing some scope for optimism. According to Vedrana Likan, the managing director of Colliers International in Croatia: "Prices for real estate are at the moment based more on feelings and historical value. After joining the EU a private person will after some time know the real rather than the emotional value of their property. Joining the EU will lower the investment risk a bit, and added to this the new government has begun creating incentive packages and reforming the legal framework for investors."
Where do the opportunities exist for foreign investors and companies thinking of entering the country as it joins the European club? In Maruška Vizek's view, "the obvious niche that developers and investors could move into is logistics." Croatia is well-placed in geographically at the N-S/E-W crossroads of the major EU corridor projects, so it would be logical to have logistics centres built in the country. "Probably there isn't a need for any more malls as such retail space is now saturated. Maybe there is more need for niche residential projects, for example, for the elderly or disabled," adds Maruška Vizek. But as she points out: "There are still 10,000 unsold residential units in the country, and I don't see what could reverse the trend. Even though EU citizens can now buy here, they won't be getting any bargains."
As for the office sector, in the opinion of Mariusz Kozłowski, a member of the board of GTC: "The biggest impact will be on the office market, as there will be more demand for EU-related activity and the Zagreb office market is still very small." GTC, which has already completed two shopping centres in Croatia - Avenue Mall Zagreb and Avenue Mall Osijek - is now looking away from further retail development into other sectors. "Retail is saturated, but we are expecting more office occupier demand and opportunities for investors such as ourselves," claims Mariusz Kozłowski. He adds to this that "in tourism there is little activity now and it is under-developed - so here is where the most opportunities exist." This, as he reveals, is reflected in GTC's pipeline portfolio for the country, where they have plans to develop the Avenue Park Zagreb office park and have already received all the permits for a golf resort with apartments in Pula on the coast. Maruška Vizek of the Institute of Economics agrees that it is such coastal plots that are "the most interesting property for foreign investors," - but she adds that the prices for such land "are similar to those in Spain and Greece and are already higher than in Portugal. So prices have nowhere to go." It remains the case that despite Croatia's potential as a holiday destination, the tourist infrastructure is still under-developed, and in a country where tourism provides around a third of the GDP, this would appear to present foreign investors with a golden opportunity. However, according to Maruška Vizek, the poor state of holiday facilities is no accident. "It might seem strange that there has been so little investment in the tourist industry, but this becomes clearer when you look at the reasons. A command fee has to be paid to local government to pay for the infrastructure for such projects, and the cost of this is comparatively higher than in other countries, discouraging a lot of investors," she explains.

Tied up in red tape
Indeed, it is the red tape and the general complexity of the investment and development processes that are cited most often by foreign companies as the biggest problem they are faced with when entering this market. For GTC to buy the land and obtain all the permits for its golf resort project it has taken around seven years, and because the land is located on the coastline, this process was even more difficult. IKEA, which has had plans to enter the Croatian market since the early 1990s, bought a plot in 2008 at the eastern end of Zagreb for a store and a shopping centre. Nevertheless, the company has still to receive the final permits needed for the project to go ahead. Igor Štefanac, IKEA South East Europe's PR manager for Croatia, provides us with this insight into the company's experience so far: "We are introducing a new format and concept to the market and we will be unique, so this a big opportunity for us. There have been some, let us say, challenges along the way, but now we are going in the right direction and are hoping to soon receive all the necessary permits." Once this has been done, IKEA should be able to open the store in 12 months and the shopping centre six months later. "Since we bought the plot," he adds, "we have experienced a number of challenges and frustrations in terms of the legislation and the slowness of the administration. Of course, all countries have their specificities, but the slow pace and bureaucracy can be similar even in Western Europe." Arn Willems concurs: "It is a challenging country to work in. If a problem arises, resolving it can be hard. The authorities have a very short term view and the competence of officials could be better. But in other EU states things are not so very different."

More coordinated
Igor Štefanac feels that EU accession is nevertheless having a positive impact in this regard. "In 2008 membership was still being negotiated, so the government was implementing a lot of laws for this," he explains, "but the process of doing this and knowing how to go about it itself created some problems. We consulted with the government and other relevant bodies, and now the project is moving forward successfully. When you develop a project of this size, you have to talk to central and local government, and so we made the point that it would good to be able to go to a special body with the authority to make the necessary decisions." The government did, however, appoint a coordinator last year who supervised and dealt with all the issues connected with the project, which Igor Štefanac feels was a very important move when a lot laws were being changed. The government has also recently introduced a novel internet platform for permitting. "They are aware of the problems investors face, so they are embarking upon comprehensive reform," claims Vedrana Likan. Arn Willem of GTC agrees that the situation for permitting is improving, but feels that "the biggest problem and lengthiest still remains ownership titles." Maruška Vizek explains: "In the time of the former Yugoslavia, registries were not well maintained - one plot can be ?owned' by 15 people, who are still in court tussling over it. So ?clean' ownership is very much needed to encourage more development projects."
Perhaps the main impact of EU accession will be psychological. "Why are we still optimistic?" says Vedrana Likan of Colliers, "because of the psychological effect - we won't just feel part of Europe, but will be operating within it." However, for Mariusz Kozłowski of GTC, "the risk perception of the country has already changed, and this is maybe more beneficial than EU entry itself."