Croatia’s commercial Property Sector Has Stabilized, But The Lookout Remains awfully Flat At This Stage, And As Such Lags Most Property Sectors In Eastern European, Which Have Begun To show Signs Of Recovery.

Croatia’s commercial property sector has stabilized, but the outlook remains very flat at this point, and as such lags most property sectors in Eastern EU, which have begun to show indicators of recovery. The commercial property sector has failed to rebound as the business recovery in Croatia continues to be extraordinarily muted and essentially export-driven.

The economic sector, which noticeably has effects on demand for commercial sector space, remains puny. Indeed, the industrial production index in Croatia fell by 4.1% y-o-y in February, marking the 3rd consecutive month of decline. Given that Croatia’s business recovery is only in its nascent stages, it is unsurprising that industry still has to pick up. We are predicting 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 principally 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 business growth and it is therefore inspiring to see that traveller arrivals have just reflected back strongly. The rebound in service exports will, in turn, reduce unemployment, which we see moderating in 2011 as seasonal employment picks up. We forecast 2.0% growth in private consumption in 2011, following a 0.9% drop in 2010.

Logically, demand for office space and retail space is barely growing. Economic space demand has additionally barely ticked up. We saw falls of 20-30% in rental costs for office space between the first half of 2009 and the second 1/2 2010. Retail rents fell by 30-40%. Business properties bucked the trend, with rents recovering 20-30% in the same period. But commercial property rents have now stalled. We see leases and yields remaining essentially flat thru 2011 and 2012. Broadly, we think that rates are moderately vulnerable in the Zagreb area, will remain unvaried on low activity in the Zadar area, but have upside potential in the area around Split where some new commercial properties are going to be developed by foreign backers. Hence you continue to can buy some Croatia real estate if you interested in life in Croatia.

It is tricky to imagine any pronounced recovery in the prediction period. The business recovery will be slow and export-oriented. Unemployment remains stubbornly high. With its economy on a slow growth path there is no reason to expect a major recovery for Croatia’s commercial property sector at this point.

Some of the key opportunities currently in the real estate market are :

- The business environment improves more than anticipated, assisted by export growth, tourism growth and a difference in purchaser demand. Unemployment would need to begin to fall.

- Extension of credit availability to both developers and home house purchasers, adding more space and more demand. This can indeed be boosted if Croatia’s accession talks are positive.

- Strength in the office sector implies that vacancy rates have dropped but that projects coming online in 2011 will make sure that demand can be met. Some key risks to the present real estate market are :

- If Croatia does not complete ECU accession this can indeed prove a negative for investor sentiment and in investment in Croatia, which would have a negative follow-on effect on the commercial property sector.

- Should continuing widespread political protests return to violence, as was seen in February, this would probably weigh heavily on Croatia’s appeal as a tourism hotspot, as reported tagza.com.
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