An invitation to heaven

Three small countries or three big opportunities? There are two ways of looking at Montenegro, Macedonia and Bosnia & Herzegovina. While some investors still believe that ‘big is better’, others are discovering the potential of these three Balkan beauties

Mladen Petrov

“Invest in Macedonia! The new business paradise in Europe” – so reads an ad in a prominent Western magazine, before going on to provide its readers with some basic information about this small Balkan country. Today, as it gets ready to join the EU, the Former Yugoslav Republic of Macedonia, with a population of around 2.1 mln people and recognized as an independent country in 1993, is fighting for the attention of investors. And, according to the ad, there are a few persuasive arguments in its favour, including its young population, attractive geographical location and lower taxes, to list but a few.

The Balkan train

There are also things the ads don’t tell you. Irena Panzova of the Skopje office of consultancy firm Forton International doesn’t need much time to identify the country’s biggest problems: “Corruption and red-tape are slowing the growth of the real estate sector. However, I also see positive things happening,” she feels. One of them is a new law according to which foreign companies and citizens can directly own land for development in Macedonia.       

More hot news from the region – Colliers International had opened a branch in tiny Montenegro. By the end of the year, CB Richard Ellis will also be there. Jovica Jakovac, the managing director of Colliers International Serbia, gets rather excited when it comes to describing Montenegro: “Really, it is a little miracle. All the real-estate sectors are now booming.”

And last – but not least – there is Bosnia & Herzegovina, another country in transition which, due to its turbulent past (it was recognized as an independent country only in 1992) is still often perceived by companies as a risky investment destination. 

Why bother to invest?

There are less than 7 mln people living in these three markets (app. 678,000 in Montenegro and 3.8 mln in Bosnia & Herzegovina, with GDP ranging between 4-7 pct in 2007), less than  the population of Bulgaria. However, with the three countries applying for the EU membership and the small size of these markets, the message seems to be clear: those that move in early are going to be the ones raking in the profits. “Real development is now starting to take place, with a lot of large-scale projects in Bosnia & Herzegovina currently at the planning stage,” says Jovica Jakovac. Aida Soko of PricewaterhouseCoopers in Sarajevo adds that: “Over the last few months, the number of real estate clients has grown significantly. This might be the next big thing for the country.”

In all the larger towns outside Sarajevo (around 420,000 people inhabit the Sarajevo Canton area), including Banja Luka (around 200,000 inhabitants), Tuzla (greater municipal area with 170,000 inhabitants) and Mostar (population of 130,000), it is residential and retail that are seen as the most promising real estate sectors by Colliers International’s analysts. The large-scale development of modern office buildings only seems to be an attractive proposition for investors only in Sarajevo. The capital’s shopping centre market has experienced significant evolution in recent years. The existing stock by the end of 2007 was slightly above 40,000 sqm of GLA, with the largest investors being Slovenia-based Merkator, and local investors Merkur Otoka, Robot, Konzum-Wisa and TOM. New openings planned for 2009 include Alta Shopping Centre (developed and financed by US-based Triland and Horizonte) located in the city centre, BBI Centre (financed by a group of UAE and local banks) in the old downtown, and Importanne Centar (developed by Teloptic with Croatian finance) on the main city boulevard. Among the big box retailers present on the market, Croatian-based Konzum, French company Interex and Mercator of Slovenia have the highest share. A new opening in 2008 will be from Slovenian company Tus. In addition to these, the German retailer Metro Cash & Carry is also about to expand. Industrial and logistics facilities, however, remain on the small side and are owned by local investors.

Good and bad news

The main investors up to now have been mainly local and regional, but UK-based and American investors are also sniffing around for opportunities. In the capital, the roads towards Tuzla and Zenica are lined with stand-alone retail facilities, such as Merkur, Velpro and Euromax. Besides the area of Vrazici, where a regulation plan is in process of being adopted, and the area of Stup (on the road towards Mostar), the most popular area for development is the airport corridor.

With demand remaining consistently high, land prices have been increasing steeply in the last two years, according to Colliers’ analysts. The intense development process and demand for plots is pushing up prices in east Sarajevo by 50 pct every year. In the first few months of 2008, the price of plots in such districts averaged EUR 50-60 per sqm; while it is difficult to buy the few small plots available along the main boulevard in Sarajevo for less than EUR 250 per sqm. The average price of land in the regulation zones located along the traffic arteries at the city exits (Rajlovac, Stup, Vrazici and the area around the airport) are between EUR 50-100 per sqm. New possibilities for the development of retail zones in the city will come with the construction of Corridor Vc, the main north-south road to be opened soon. Foreign citizens may buy land in the country without any restrictions. Potential buyers in Montenegro are also faced with no restrictions.

Things in Bosnia & Herzegovina might look slightly better if it wasn’t so bogged down in bureaucracy – still a serious problem in the Balkans. The registration of a company can take up to three months, but this is just the beginning of the red-tape shenanigans. An organization called the Foreign Investors Council, uniting the biggest foreign investors in the country, is trying to discuss with the government the need for further reforms. As it turns out, the government is not always so eager to listen, leaving problems such as double taxation unresolved. “In the opinion of some of investors, doing business in the country is still a very time-consuming process,” Aida Soko says. And then there is the grey economy, which according to estimates generates 35 pct of Macedonia’s GDP and probably even 50 pct of the GDP of Bosnia & Herzegovina.

M is for Macedonia

The Macedonian real-estate market is another market waiting for its own fifteen minutes of fame. The general outlook is  promising – Macedonia has a stable GDP growth of around 4 pct a year, a low inflation rate of 2-3 pct on average and it is fiscally disciplined – as confirmed by international financial institutions – with a well-coordinated fiscal and monetary policy. “I believe that one of the most attractive but as yet underdeveloped sectors in real estate in Skopje and Macedonia is retail. In Skopje we have 7-8 old shopping centres, usually built 
30 years ago, some of which have been renovated, and one new centre – the Ramstore Mall, which was opened in 2005,” says Forton’s Irena Panzova.

The list of international players on the Skopje hotel market remains very short – it includes Holiday Inn and Radisson, which is now under construction on state land which was bought at public auction. The prices of land for development usually vary from EUR 200 per sqm outside the capital to EUR 1,000 per sqm in the centre of Skopje, where there is a very scarce supply combined with high demand. 

Skopje, a city of 600,000 inhabitants, has room for more modern projects. According to data supplied by Forton International, the city still has quite a limited stock of modern office space. By the end of 2008, three new buildings will have been delivered in the capital, bringing more than 
18,000 sqm of modern office space on to the market. 
   “The list of unsolved problems includes the slow process for denationalizing plots and buildings,” claims Irena Panzova. Looking at the FDI for 2007, there is lots to be done as only EUR 215.2 mln was invested in the country. The first half of this year, however, brought some good news: the National Bank of Macedonia reported that FDI from January to May reached nearly EUR 231 mln, up from EUR 83 mln in the same period the previous year.

Israeli-based developer Gazit Globe is shaping up as a leading foreign investor after announcing its intention to invest around EUR 200 mln. The company’s first project will be a mixed-use development in Skopje. Another foreign investor, the Slovenia-based Era group, is investing in Era City Skopje – an 85,000 sqm mixed-use project in Macedonia, at a cost of around EUR 150 mln. In August Elan Properties started the construction phase for a 30,000 sqm shopping mall. The company is invest EUR 45 mln in this Skopje project. Despite the government’s good will, there is still a lot to be done, as Gvido Omladič, CEO of Era puts it: “We wish that the procedures could move along faster when it comes to such large-scale developments.”

The Balkan pearl

Montenegro is a country which doesn’t have problems attracting foreign investors. According to data from the Central Bank of Montenegro, 51 pct of FDI attracted last year went into real estate projects. The figure is impressive – EUR 514.4 mln. However, despite the 56 pct increase of FDI in the country (EUR 1 bln), the Central Bank has also announced that in H1 the year-on-year FDI actually fell 12.5 pct to EUR 465.76 mln.

In 2006, the country peacefully split with Serbia. “Many investors believe Montenegro is going to be Monte Carlo of the Balkans and I can understand why,” Colliers’ Jovica Jakovac says. Judging by the number of luxury projects along the coastline, it seems that this day might not be too far away. The improving infrastructure (eg. the Sozina tunnel, connecting the capital with the coastline in less than 30 minutes, is now ready, Podgorica and Tivat airports are undergoing extensive upgrading, and the Adriatic motorway is being upgraded) will increase the accessibility to Montenegro massively. This is why investors are already gearing up for when this happens. The Russian-based company Vas Invest has acquired a 20-ha plot in Smokvica, with plans to invest EUR 100 mln in a resort development which will feature a 250-room Kempinski hotel. Competitor Hilton is also working on a project in Montenegro. The holiday properties market is one that is enjoying rapid growth, with exclusive apartments being sold for as much as EUR 10,000 per sqm.

Less projects, bigger profits

Podgorica, the capital of Montenegro, is also an investment magnet. Atlas Capital Center, the biggest mixed-use project (85,000 sqm) in Montenegro, should be completed in the city’s CBD in 2010 by Serbian-Montenegrin Atlas Group and UAE-based Capital Investment. The list of projects includes the Delta City shopping centre (opening this September) and Gintasmont’s Mall of Montenegro. 

The government itself is determined to avoid over development. Instead, it is focusing on the development of marinas, golf courses and luxury hotels.  Velika Plaza (Long Beach) – one of the most attractive development locations in the Mediterranean – is now being tendered by the government, with investors such as TriGranit, Greek company Prufrock Investments, UAE-based Hydra Properties and Bloom International Properties already having expressed their interest in participating. The winning company will get to develop, construct and operate a resort on an almost 1,450-ha site in a unique waterfront location. 

Is it only the country’s beauty that attracts foreign capital? Montenegro has also adopted the euro as its national currency, rendering prices more transparent and removing the danger of currency fluctuations. Added to this is the low corporation tax rate of 9 pct and the excellent image the country has abroad.

Leave the money under the table, please

When realizing a large-scale project, investors might turn to big international banks such as Raiffeisen Bank, UniCredit Bank and the European Bank for Reconstruction and Development, which is also co-financing real-estate projects.

Of course, there is also the question about the unannounced additional costs, such as bribes. “You hear things every now and then, but observing the situation in Montenegro I think that corruption is a minor problem. At least, when compared to how it was in the past,” Jovica Jokovac believes.  Analysts from Macedonia and Bosnia & Herzegovina partly share his optimism. Transparency International’s 2006 Corruption Perception Index for example ranked Bosnia and Hercegovina 96 out of 163, on a par with countries such as Armenia and Argentina.

The glass is half full

And yet, the glass seems to be only half full. Having seen the positive changes in Bulgaria and Romania and being so close to one of the EU’s best performers (Slovenia), Macedonia, Montenegro and Bosnia & Herzegovina certainly have no reason for getting down-hearted. We can only keep our fingers crossed for them, as some of the figures such as the unemployment rate – 34.9 pct in Macedonia and 28 pct in Bosnia-Herzegovina – are far from encouraging.  And, of course, we can always book our holidays there. ν