CROATIA MARKET VIEW

A cacophony of cocktail shakers and clinking glasses conjure up life on the Costa del Sol, a region long top of the charts for northern Europeans seeking a ‘des res’ abroad. But from Amadora to Valletta and Cyprus to Sardinia, there is no shortage of other popular southern European property destinations. The list is long and ever increasing. Amongst the newcomers – and considered by many as one of eastern Europe’s major emerging market hotspots – is the Republic of Croatia.

Croatia was part of the Austro-Hungarian Empire until the end of World War I, at which time the Croats, Serbs and Slovenes merged to form what would become Yugoslavia. Like most parts of the world, Croatia has had a chequered political history. Unlike most parts of the world, the country is just emerging from the debris of a bloody civil war started in 1991 when Croatia declared independence from Yugoslavia. Croatia is now a sovereign state, and after declaring its wish to join mainstream Europe, in June of this year the country was declared an official candidate for European Union membership. According to a recent Reuters survey of 37 economists, full ascension is forecast for 2009. Although the picture is looking rosy, there remain numerous obstacles to overcome over the next five years including various issues of human rights abuse and unsettled land disputes with the Serbs.

Even so, the region is slowly being re-discovered as the idyllic tourist haven it once was when the likes of Noel Coward and Sophia Loren frequented its shores. With nearly 6,000 kilometres of Adriatic coastline including an archipelago of over 1,000 islands – plus medieval villages, Venetian villas, picturesque fishing ports and crystalline seas – no wonder. And following suit in the tourist wake, come the property seekers. Nowadays Croatia is hailed as an upcoming international property Mecca – a description especially apt for parts of the Dalmatian coast such as Dubrovinik.

Purchase Proclivities
Discussions are rife about John Malkovich and a certain Venetian villa in need of expensive restoration near Dubrovnik. But we can’t all aspire to ‘being John Malkovich’. For starters, not everyone is worth his purported Hollywood millions. The good news though is that you do not have to be high net worth to enter the Croatian property market. What sets the region apart from other international property destinations is that as an emerging market, properties cost a lost less than in the more established southern European destinations.

Emerging markets, however, are not for the risk averse and Croatia is no exception.
A certain sense of adventure and business acumen will help any prospective buyer. Estate agents, for instance are not regulated. “The Croatian property market is delicate, and one where those who enter naively can get their fingers burned on price and legal issues such as gaining clear title,” warns Christian Kalin, partner at Henley & Partners in Switzerland. Professional advice is essential.

Although Croatia is not well served by international estate agents, there are a growing number of experts on the ground. Zurich based international tax and property consultants Henley & Partners, the only international advisers on the coast, have an office in Croatia’s second largest city Split. And UK estate agents FPD Savills joined forces in April with Dubrovnik estate agents Crotiansun. London law firm John Howell & Co. specialise in the global property market, including Croatia.

When it comes to buying property, there are two ways to proceed. A foreigner can purchase property in Croatia either as an individual or through a company. While an individual must be approved by the Ministry of Foreign Affairs – a process that may take six months and more – company ownership does not require Ministry consent, and is quicker.

“If the property is bought by a Croatian company, it will be entirely owned and controlled by the foreign buyer,” explains Dr Nenad Saljic, director of Henley & Partners in Split. “Using a company for this purpose also avoids capital gains tax and the 5 per cent transfer tax on the subsequent sale of the property.”

Properties
Luxury properties are in short supply along the Dalmatian coast. But a new development on Croatia’s sixth largest island Korkula – birthplace of 13th century explorer Marco Polo – is the Marina Marco, flagged up as a five star investment development by FPD Savills.

A total of 148 two bedroom apartments with terraces and sea views overlooking a private island have been designed as optional leaseback properties that can be let out in an owners absence by an on-site management company. Prices for phase one, launched in June, range from E246,750 to E288,750. Due for completion in 2006, the resort will include a five star Crowne Plaza Hotel and a word class 149 berth marina.

Two further FPD Savills projects include a development of 20 apartments on the Ciovo peninsula, a short drive from Split International airport and close to the UNESCO heritage town of Trogir in Okrug Gornji. Prices range from E39,000 for a studio to E67,000 for two bedrooms. Or on the island of Brac, the only Croatian island with an airport, eighteen two and three bedroom FPD apartments are on offer in the village of Sutivan for E78,000 to E146,000.

If an apartment is of no interest, modest island houses can be bought for as little as E57,000 according to Dr. Saljic or recently a Venetian villa in need of restoration was on the market for E405,000. What is sure is that prices are rising rapidly, but so far they remain far less than the in the popular developed coastal areas of Western Europe.

Tax Haven
Seen by many as a second home destination or an area for property investment, Dr. Saljic goes a step further when he describes Croatia as one of the most attractive locations for residence and retirement in Europe: “Croatia offers the possibility of tax-free residence in a country not perceived to be a ‘tax haven’.” Although considered to have a high tax regime, certain fiscal advantages exist. For example, income is tax-free on pensions received from abroad. So too are capital gains from trading securities and other financial assets. Also inheritance and gifts are exempted from taxation in the first line of succession and other cases where there is a single rate of only 5 per cent. “To take advantage of these, it is necessary to have a residence permit which can be obtained through renting or owning an apartment or by mooring a yacht,” says Mr. Kalin.

Future Perfect?
Croatia is not the easiest place in the world to purchase property. Bureaucracy is cumbersome, estate agents are unregulated and backhanders are not unknown. But in light of future EU membership, Croatia is already adjusting its laws and regulations to comply with EU standards. For instance, current restrictions on foreign real estate ownership are set to be abolished in two years, a fact that will no doubt make Croatia even more attractive for foreigners in the future.

Meanwhile, neighbouring Montenegro shares the same unspoilt coastline, and has even cheaper properties. Could it be the next Croatia?

Contacts:

FPD Savills
www.fpdsavills.co.uk

Henley & Partners
www.henleyglobal.com

John Howell and Co.
www.europelaw.com