Sunny disposition

Nathan North

Croatia would seem to have everything going for it in terms of real estate potential: a country in need of investment, with a beautiful coastline and Mediterranean climate. But things were not always so rosy

It has been a long and painful road for Croatia since Yugoslavia began to disintegrate in the 1990s, followed by years of nationalistic conflict. However, in the early part of this decade, the country finally emerged into the sunshine as a relatively stable democratic state intent on joining the EU, something which could possibly happen as early as 2010. The economic fundamentals are also sunny, with GDP growth expected of 4.9 pct for 2008, albeit less than the 5.8 pct recorded for 2007. Unemployment is still high at around 12 pct; but it seems that the pros very much outweigh the cons for those thinking of investing in this country.

Capital domination

The office sector is the most dynamic at the moment in Croatia, with the capital Zagreb dominating the country, both in terms of the quantity and quality of the stock available. However, this also means that the other main cities – such as Split, Rijeka, Osijek, Dubrovnik and Pula – are undeveloped and thus have substantial investment potential.

The office market in the capital is generally divided into five districts: the CBD, downtown, the wider centre, Novi Zagreb and ‘out-of-town’. The current stock of modern office space in Zagreb stands at around 770,000 sqm, of which 280,000 sqm is class ‘A’ and 220,000 sqm is class ‘B’. More than 320,000 sqm of this space came on to the market in 2006-7, with 95 pct of the existing class ‘A’ and 45 pct of class ‘B’ stock having been developed in this time. However, the new supply has tailed off somewhat this year, which will only see around 50,000 sqm of new office space delivered, leading to a stabilization of rents – although prime properties are still experiencing increases in rents along the lines of 5-10 pct. Take-up grew last year from 75,000 sqm in 2006 to around 100,000 sqm, with the office occupancy rate reaching 93 pct. Indeed, Colliers International is at the moment predicting that the vacancy rate could fall to around 5 pct by the end of the year. Much of this demand was a result of tenants moving from the city centre to larger higher quality space in the suburbs. Monthly office rents are in the region of EUR 16-EUR 20 per sqm in the CBD, EUR 13-EUR 16 mln in the wider centre and EUR 12-EUR 14 out-of-town.

There have been some large leasing deals agreed recently, most of which have been for space in the Almeria business centre – an app. 45,000 sqm 3-building office complex, completed in the spring by local developer Trius. Siemens signed the largest deal of the last four years for 9,500 sqm of space in the complex, while Société Générale has signed up for 4,500 sqm and Agrokor for 3,500 sqm.

As far as projects still in the pipeline are concerned, there is only one remaining significant development scheduled to be completed by the end of this year: Grand Svetice (15,000 sqm) in the Donje Svetice area of the wider central zone, with the investor being the Austrian-owned construction group Porr. Also in the same district is the Cimos building, work on which originally began in 1988, only to be abandoned during the Yugoslav wars. The project has since been held up by a legal tussle (now resolved) over shareholding rights between the developer, Berny Commerce, and the former owners. The 23,000 sqm office centre is located on Ljublijanska Avenue and should be completed around the turn of next year. Gradska kavana (also known as the Ban centar project) just off Ban Jelacic square in the city centre is a 32,000 sqm mixed-use apartment, retail and office project (15,000 sqm of offices). The EUR 80-100 mln development by Konstruktor, IGH and ZaBa is scheduled for completion next year. Warsaw-listed company Globe Trade Centre is developing Avenue Park – GTC business centre in Žitnjak in the wider centre. Construction work on the 36,700 sqm complex begins this month and is due for completion in 2010. Work has also started on another large development, Sky Office Tower, scheduled for 2010. The 30,000 sqm building is located in Rudeš (wider centre) and will probably have 30 storeys, with the developers being Zagrebmontaža and Dalekovod. The largest project on the horizon is Centar Črnomerec, a revitalization scheme for the former TKZ industrial site next to Pravade square in the city’s ‘legal district’ in the wider centre. The 115,000 sqm development by Konstruktor will feature 55,000  qm of office space and a 26-storey central tower. The remainder of the space will be taken up by app, 630 apartments in 3 other buildings. Construction work is expected to get off the ground early next year and to be completed in 2010.

Big boxes and neighbourhood centres

The retail sector has been developing less spectacularly, but steadily, with Zagreb once again dominating the country in terms of new developments, where around 250,000 sqm (GLA) of modern shopping centre space has been completed. In the next 3 years, about 6 of the proposed dozen projects should be completed, bringing an extra 400,000-500,000 sqm of space onto the Zagreb market. These include the 107,000 sqm Shopping Centre Zagreb to be completed next year by Austrian developer Red Serve, a so-called big-box style ‘power centre’ in the Zaprešić district. Another new concept being introduced to the Zagreb market is the ‘neighbourhood centre’ a short walk from residential areas; and one example of this is the 20,000 sqm Vrbani Center (to be completed in 2009), an investment by Greek fund Bluehouse Capital, which includes a variety of leisure facilities, such as a gym, a nightclub and bars. Austrian developer TriGranit will also be opening its EUR 270 mln Arena Centar in the Lanište district of the capital next year, a cultural and shopping complex with 62,000 sqm of retail space. GTC is also active on the Croatian retail market. Last year’s opening of the 33,500 sqm Avenue Mall in Zagreb (with investment costs that come to around EUR 40 mln) is to be followed in 2010 by a 26,000 sqm centre of the same name on a 4-ha plot in Osijek. Mariusz Kozłowski, GTC’s investor relations director and a member of the board, is concise when explaining the appeal of the country: “Croatia is perceived as being so attractive to foreign investors mainly because of the prospect of its accession to the European Union in the near future.”

 Prime retail rents in Zagreb currently vary between EUR 100 and EUR 120 per sqm monthly for high street shopping in the centre, going down to around EUR 40-60 in the suburbs. Shopping centre rents are between EUR 100 and EUR 20, with EUR 80 being the average for prime space. Leasing terms are generally between 5 and 10 years.

As the retail scene starts to get congested in the capital, investors are now beginning to follow the familiar road out to secondary cities. Split in particular has become one of the main recipients of this attention. The first modern shopping in the city, Kerum’s 30,000 sqm Joker centre, was completed only last year at an investment cost of EUR 70 mln – but now Split’s total supply of modern retail space stands at 90,000 sqm, with another 225,000 sqm in the pipeline. This includes pan-Balkan investors Poseidon Group’s Dalmatia Capitol Park, of which the first 105,000 sqm stage should be ready in late 2010, with another 50,000 sqm to come the following year. There are also a couple of significant shopping centres opening next year in Rijeka, developed by Italians Gruppo Zamparini (both 34,000 sqm), as well the second 27,000 sqm phase of one in Zadar – City galleria by Trgovinski centar Zadar, which is to be completed this autumn.

Arrested development

As Vedrana Likan, the general manager of Colliers international Croatia explains: “Croatia is not very good at logistics development. Land is very expensive and almost comparable to land for retail or office development. Also, utility charges are very high. Industrial parks have very high rental rates so we can expect this sector to develop.” The situation is likely to improve, with app. 260,000 sqm of new stock expected to come online over the next few years as the sector responds to the needs of the growth in retail. However, Ms Likan adds that, with all the disincentives for warehouse development, “we can expect the logistics hubs for the region to be located rather in Bosnia-Herzegovina or Serbia.”

The first modern logistics facility, Zagreb Business Park owned by Poslovni Park Zagreb, opened only in March this year. The first phase of the facility, in Sveta Nedelja west of the capital, offers 57,000 sqm of warehousing space, which will eventually be expanded to 98,000 sqm. Other attractive areas for logistics developers include: along the A2 (E59) and A3 (E70) motorways northwest out of Zagreb leading to Western Europe; to the southwest of the city towards Rijeka along the A1 (E71) and A6 (E65) motorways; and to the east along the A3 (E70). Rents for prime warehousing are currently between EUR 5.5 and 6 per sqm monthly, and between EUR 4 and EUR 5 for secondary facilities.

We do like to live beside the sea-side

There are a number of residential districts in Zagreb that are currently of interest to foreign developers. Gornji Grad–Medveščak, in the uptown of the city centre, is favoured by diplomats and business people from abroad, but since most of the buildings in the area are listed, there is less scope for modern residential projects. The most exclusive district, however, is Zagreb North, around Mt Mevednica, where Russian company Adriatic Investment is currently developing 14 luxury villas in what is the most expensive development in this part of the city. Spanish developer Habitus has finished 11 villas in the district, while Belgian company Ibervest has developed 3 apartment buildings in Graèani and Hypo Alpe Adria Consultants Group has completed 6 condominiums, with swimming and other sports facilities in Gornje Prekrižje. Zagreb West is also regarded as an attractive residential location, partly due to its convenience for the city centre. This is where Israeli company Prigan Holding is now developing apartments in the Oranice sub-district. Zagreb East and South are somewhat less exclusive than some of the other districts, being the location of a number of residential projects during the communist era. However, according to Vedrana Likan of Colliers International: “Quality projects are coming to the residential market, but the absorption rate for new apartments has been very low this year as the credit crunch continues.” At the moment, everyone is waiting to see what will happen, making it difficult to make any predictions.

Another lively feature of the Croatian residential market is the holiday home segment. Vedrana Likan believes that: “There is major interest from foreign investors in the hospitality sector, but bureaucracy and other operational obstacles are still holding back the development of this market.” She adds, however, on a positive note: “We hope that considering the potential of the sector, that there is the political will to open it up to more foreign investment.” ν