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Croatia Real Estate Report Q3 2011
Business Monitor International, May 2011, Pages: 60
Croatia’s commercial real estate sector has stabilised, but the outlook remains very flat at this stage, and as such lags most property sectors in Eastern European, which have begun to show signs of recovery. The commercial real estate sector has failed to rebound as the economic recovery in Croatia continues to be very muted and primarily export-driven.
Economic Outlook:
The industrial sector, which significantly affects demand for industrial sector space, remains weak. Indeed, the industrial production index in Croatia fell by 4.1% y-o-y in February, marking the third consecutive month of decline. Given that Croatia's economic recovery is only in its nascent stages, it is unsurprising that industry has yet to pick up. BMI is forecasting that the Croatian economy will emerge from two years of recession in 2011, but the forecast is for weak real GDP growth of 1.9%.
The recovery will be largely export-driven, benefiting from a positive eurozone growth story, as consumer demand remains constrained by high unemployment of 19.6% in February and weak credit growth. One positive aspect for the growth outlook for Croatia is tourism. Croatia is heavily dependent on tourism for economic growth and it is therefore encouraging to see that tourist arrivals have already rebounded strongly. The rebound in service exports will, in turn, reduce unemployment, which BMI sees moderating in 2011 as seasonal employment picks up. BMI forecasts 2.0% growth in private consumption in 2011, following a 0.9% drop in 2010.
Demand for Office & Retail Space:
Logically, demand for office space and retail space is barely growing. Industrial space demand has also barely ticked up. BMI saw falls of 20-30% in rental prices for office space between the first half of 2009 and the second half of 2010. Retail rents fell by 30-40%. Industrial properties bucked the trend, with rents recovering 20-30% in the same period. However, industrial property rents have now stalled. The research sees rents and yields remaining essentially flat through 2011 and 2012.
Broadly, this report demonstrates that rates are somewhat vulnerable in the Zagreb area, they will remain unchanged on low activity in the Zadar area, but have upside potential in the area around Split where some new commercial properties are to be developed by foreign investors.
Future Outlook:
It is difficult to envisage any pronounced recovery within the forecast period. The economic recovery will be slow and export-oriented. Unemployment remains stubbornly high. With its economy on a slow growth trajectory there is no reason to expect a significant recovery for Croatia’s commercial real estate sector at this stage.
Some of the key opportunities currently in the real estate market are:
- The economic environment improves more than expected, assisted by export growth, tourism growth and an improvement in consumer demand. Unemployment would need to begin to fall.
- Extension of credit availability to both developers and residential house purchasers, adding more space and more demand. This may indeed be boosted if Croatia’s accession talks are positive.
- Strength in the office sector means that vacancy rates have dropped but that projects coming online in 2011 will ensure that demand can be met. Some key risks to the current real estate market are:
- If Croatia does not complete EU accession this may indeed prove a negative for investor sentiment and in investment in Croatia, which would have a negative knock-on effect on the commercial property sector.
- Should ongoing widespread political protests return to violence, as was seen in February, this would likely weigh heavily on Croatia's appeal as a tourism hotspot.
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