2011 looks like a it could be a slightly better year than 2010 for the Croatian property market. Whilst the economic situation in Europe faces further uncertainty due to sovereign debt issues, the negative reporting of financial collapse and economic catastrophy seems to have past us. The result is private investors/buyers are returning to the market looking for sensibly priced and relatively inexpensive holiday apartments near the sea or those in the heart of coastal towns.

Properties that are next to the sea are selling well and for respectable prices, meaning not too far off peak, perhaps 5% to 10% maximum. Apartments around the €100,000 mark and not too far from the sea are also selling, largely on the mainland and in more typical locations such as Ciovo, near Trogir. This is due to an oversupply of apartments and therefore apartments are more heavily discounted and more attractive to potential property buyers. In Split, there a consistent number of enquiries for property in Split old town, as people look for a holiday home and/or investment property. As prices have come down some 20% from peak, Split real estate is now looking more affordable and yields are looking very good.

Property enquiries for the winter period of 2010 to 2011 are up from the previous year. They are still far from pre-crisis levels but a significant rise nevertheless. Transaction volumes are still low but the number of sales converted is rising and investors who have been showing interest over the last 12 months are beginning to commit. With improving economic conditions globally and a signs that confidence is returning in Europe, all be it slowly and cautiously, it would seem that the trend should continue in 2011.

One thing’s for sure, Croatian real estate agents are really working for their commission. This is no bad thing. It has reduced the number of players in the market considerably. It has also raised the standards as buyers ask considerably more questions, and in general look much more closely at value. This has forced them to be more competent, informed and armed with reasoned arguments rather than the standard sales patter. It has also helped to regulate the market a little better as prices paid are realistic. There are no men with black brief cases lurking round the corner ready to pay 5 times more than the property is actually worth. Those times are well behind us and thankfully so.

Price-wise, regardless of reports of falls of between 5% & 10%, in reality property prices have fallen more like 20% to 30%. The reason for the disparity is due to advertised and actual sales values. This is especially true for coastal locations where much of the property is purchased by foreigners and where transaction volumes are so low that data is limited, so much so it is difficult to quantify. Furthermore the current system of monitoring real estate prices is fairly ineffective due to a lack of accurate data. The main source of data is that of the tax office, where contractual prices of property sold are registered. However, the practice of manipulating contractual prices for tax purposes is still common in Croatia, making available data unreliable.

In the coastal locations, foreign property owners are much more inclined to drop prices. Many of them have experienced similar price drops in their domestic markets and have quickly become accustomed to the idea that property is worth less than it used to be and that prices are relative. For example a significant number of foreign owners have sold property in Croatia to take advantage of falling prices at home, preferring to reinvest locally. We see this trend continuing throughout 2011.

Iit is also important to look at the economic and political situation.  Currently Croatia is going through its own crisis of confidence, not least with the economy. However, considering the state of many of the other peripheral European economies as well as its comparative size, Croatia is not alone. It is certainly no worse than Greece, Ireland, Portugal, Spain and possibly Belgium and is probably better in many instances. The country certainly hasn’t been bailed out by the European Union or International Monetary Fund yet. Moreover, as the EU is attempting to introduce a more strategic and coordinated economic policy approach, Croatia, soon to be a member, should benefit.

Furthermore, Croatia is tackling the issue of corruption head on. There have been numerous high profile arrests including the arrest of Ivo Sanader, the former prime minister, as well as a number of his ex-ministers, and it looks like this is just the start. With the press now having free reign in the democratic process stories of new government officials and their unexplainable wealth are hitting the headlines on a regular basis. It would seem that Croatia is somewhat unique with regard to its open attempts to tackle corruption. Born by its need and drive to join the European Union Croatia has had to be brave and deal with this difficult problem upfront of EU accession.

This has understandably caused some negative sentiment from foreign investors short term. But then investors are being cautious for the same reasons they are cautious pretty much everywhere in Europe at the moment. We only really see this changing once the banks begin to lend again bringing with it a change in sentiment. This is especially the case for the second homes market. However, medium to long-term, and more specifically after Croatia joins the EU end of 2012, things are sure to improve.

How does this affect the property market? Short term we expect there to be continued downward pressure on real estate prices. However, with transaction volumes rising as buyers and investors look to take advantage of bargains, as well as some solid property investment opportunities, things are improving. Medium term we expect to see Croatia join the EU, but it remains to be seen how much of an effect on real estate prices it will have. There are two distinct possibilities, a moderate and stable effect or an inflationary drive. It will largely depend on the EU itself and whether it is able to resolve its own issues and repair confidence in its own ability to manage and unify it’s members on the necessary financial regulation so as to prevent the same sovereign debt issues some of it’s members are currently facing, and more importantly the impact that has on it’s other members and the EU itself.

Realistically, it is likely to be somewhere in the middle and in which case we don’t expect to see the same property price inflation of the countries that joined in 2004, but we do expect to see confidence returning and expect moderate but stable price rises.  If the alternative scenario were to be true, we could expect excitement and interest as property prices will be bottoming out, EU regulations will have been implemented, there will be ongoing economic and judicial reform and corruption will be under control. In this instance we could see some significant price inflation, especially in the locations for real estate. This does however assume that the banks are willing to lend.