Croatia’s housing market remains buoyant, despite a struggling economy battered by the COVID-19 pandemic, as well as two deadly earthquakes that struck Zagreb in March 2020 and the central region in December 2020.

In 2020, the average price of new dwellings in Croatia rose by 3.1% to HRK12,724 (€1,678) per square meter (sq. m.) from a year earlier, following y-o-y rises of 7.6% in 2019, 6.8% in 2018 and 7% in 2017, according to the Croatian Bureau of Statistics (CBS). When adjusted for inflation, prices increased 2.8%.

During 2020:

• In Zagreb, Croatia’s capital and largest city, new dwelling prices rose by 9.2% (8.9% inflation-adjusted) to an average of HRK 14,013 (€ 1,848) per sq. m., according to the CBS.
• In Split, the country’s second largest city and one of Adriatic’s most vibrant port cities, asking prices rose by 3.6% to HRK22,640 (€2,985) per sq. m., according to Njuskalo.hr and eNekretnine.
• In Rijeka, Croatia’s third largest city and a principal seaport located on Kvarner Bay in the northern Adriatic Sea, asking prices increased 9.1% to HRK13,099 (€1,727) per sq. m.
• In Osijeck, a Drava River cruise port and Croatia’s fourth largest city, asking prices rose by 6.6% to HRK8,017 (€1,057) per sq. m.
• In other areas of the country, new dwelling prices fell by 4.6% (-4.8% inflation-adjusted) to an average of HRK 11,198 (€ 1,476) per sq. m.

Before the recent surge there was a long period of declining house prices - 2.13% in 2015, 1.44% in 2014, 1.68% in 2013 and 5.88% in 2012, according to the CBS.

Croatia’s property market is expected to strengthen again in the second half of 2021, as the economy returns to growth.

The Croatian economy slumped by a record 8.4% in 2020 from a year earlier, in contrast to an annual expansion of 2.9% in 2019.  This was worse than the 7.3% fall seen during the global crisis, according to the CBS. The European Commission expects Croatia to have real GDP growth of 5.3%.

On January 1, 2017, Croatia lowered real estate transfer tax from 5% to 4%. On VAT-charged property transactions, the VAT rate remains 25%.

The right of non-EU foreign nationals to buy a property in Croatia depends on reciprocity agreements between Croatia and the foreign buyer’s home country.

Croatia’s high-end residential market still thriving

Croatia’s high-end residential market, which is primarily buoyed by foreign buyers, continues to thrive despite a plunge in tourist arrivals due to pandemic-related restrictions. During 2020, foreign tourist arrivals in the country fell sharply by 68% to 5.55 million.

The main reason for its resilience is limited supply.

“There are only a few large-scale resorts with residential component on the entire Croatian coast,” said Colliers International. “Most renowned mixed-use resorts on the coast are Sun Gardens in Orašac near Dubrovnik, Punta Skala in Petrčane near Zadar and Skiper resort in Savudrija near Umag.”

More than 70,000 foreigners own property on the Adriatic Coast. Only 3% of foreign buyers chose Zagreb City. The most popular locations for foreigners are Dubrovnik, Split, Opatija, Istria, Island of Hvar and Island of Brač.

“The demand is strongest for the seafront properties. The most popular destinations are those in developed destinations with good infrastructure and relative vicinity to the airport,” Colliers noted.

Most foreign homebuyers are Germans, Austrians, Britons, Slovenians, Slovaks, Czechs, Dutch, Hungarians, and Russians.

Luxury properties in Istria are popular among Germans, Austrians, and Slovenians. In Dalmatia, most luxury demand comes from the Croatian diaspora: Sweden, Slovakia, and the Czech Republic. Luxury homebuyers in Opatija are mostly Russians.

In recent years, no new large-scale tourist resorts have been built. Most developments were small projects, usually waterfront projects with up to 10 units or less. These small-scale projects are mostly in Dalmatia (the islands of Brač and Hvar, Makarska Riviera, and Rogoznica) and in Kvarner region’s Krk Island.

Last August 2020, the Maslina Resort in Stari Grad was finally opened – only the second 5-star hotel on the island of Hvar in Maslinica Bay. The property offers private villas, a resort and luxury hotel suites.

PetraM Resort in Savudrija, Istria is now under construction. It will offer 179 apartment units, 55 luxury villas and three apartment buildings with 18 flats, all of which will have a 4 or 5 star standard. The construction begun in October 2020 and is planned for completion in 2022.

Demand is slowing

In 2020, despite the pandemic, the number of new dwellings sold in Croatia was the second highest since 2006, falling by only 6.8% to 3,222 units from a record 3,458 units sold a year earlier, according to the CBS. The total area of new dwelling sales was down 9.5% y-o-y to 213,731 sq. m.

Overall, residential property transactions in Croatia fell by 13.7% to 19,600 units in 2020, according to eNekretnine transaction database. Zagreb accounted for about 44% of all transactions.

“Demand is mainly driven by the local population in need for permanent residence with a mild share of foreigners or diaspora buying on the coast and in highend projects in Zagreb,” said Colliers International.

During 2020:

• In Zagreb, the number and area of new dwellings sold fell by 9.6% and 10.8%, respectively;
• Elsewhere the number of new dwelling sales fell by 3.5% while the area sold dropped 7.9%.

Residential construction falling

In January 2021:

• The number of dwelling permits fell by 6.9% y-o-y to 1,059 units
• The total floor area of dwelling permits rose by 4.3% y-o-y to 102,595 sq. m.

Projects under construction

According to Colliers International, some of the major upscale residential projects under construction in Croatia include:

• VMD Park Kneževa – a high-end 120-unit apartment complex in Zagreb, with an estimated selling price of more than €3,400 per sq. m. Completion is scheduled in Q1 2022.
• VMD Kvart Heinzelova-Darwinova – residential complex offering more than 400 apartments, with prices ranging from €2,600 to €3,000 per sq. m. Construction is expected to be finished in Q1 2022.
• Alfastan development – an upscale apartment project located in Bužanova. 130 units are expected to be offered for about €3,500 per sq. m.
• Vrtovi svjetla – a residential complex on former TEŽ site, in Sigečica, Zagreb. The first phase consists of 163 apartments and is scheduled for completion by end-2022. Prices start at €2,600 per sq. m. The entire project, which will offer a total of 463 units, is expected to be completed by end-2024.

Moderate to good rental yields in Zagreb, but very limited rental market

Gross rental yields in Croatia’s capital, Zagreb, are moderate to good, ranging from 5.4% to 6.1%, based on Global Property Guide research. In Split, rental yields are lower, at around 3.2% to 4.7%. Smaller-sized apartments tend to have higher yields than larger ones.

Most Croatians are owner-occupiers. About 89.7% of Croatian households are currently living in an owner-occupied home or apartment, according to the Eurostat.

The country’s long-term rental market is very small. Most long-term rental properties are in Zagreb, Dubronik, and Split. In Zagreb, the demand for rental properties partly comes from students studying at the University of Zagreb, as in Split, where the greatest demand is in the city centre and around the university campus.

The Adriatic coast is the core of short-term demand, concentrating on short-term holiday rentals for foreigners and tourists.

According to Global Property Guide research:

In Zagreb a 90 sq. m. apartment rents for around HRK 6,600 (€870) per month; while a 120 sq. m. apartment is offered for around HRK 8,148 (€1,074) per month.

In Split a 120 sq. m. apartment rents for around HRK 6,335 (€835) per month.

Mortgage interest rates continue to fall

In January 2021, the average interest rate for housing loans indexed to foreign currency stood at 2.73%, down from 2.98% in January 2020 and 3.53% in January 2019, according to the Croatian National Bank (CNB), the country’s central bank.

Rates for housing loans indexed to foreign currency (January 2021):

• Floating rate and interest rate fixation (IRF) of up to 1 year: 3.06%, down from 3.18% a year earlier and 4.63% two years ago
• IRF over 1 and up to 5 years: 2.77%, down from 3% in January 2020 and 3.32% two years ago
• IRF over 5 years and up to 10 years: 2.53%, down from 2.85% in the previous year and 3.19% two years ago
• IRF over 10 years: 2.74%, down from 2.96% a year earlier and 3.6% two years ago

Rates for housing loans not indexed to foreign currency:

• Floating rate and IRF of up to 1 year: 3.22%, down from 3.71% in both January 2020 and January 2019
• IRF over 1 and up to 5 years: 2.99%, down from 3.18% a year ago and 3.6% two years ago
• IRF over 5 years and up to 10 years: 2.58%, down from 2.9% a year ago and 3.32% two years earlier
• IRF over 10 years: 2.69%, down from 2.96% in January 2020 and 3.33% in January 2019

Only about 10.4% of all new housing loans in January 2021 are floating rate (or with interest rate fixation (IRF) of up to 1 year), while 25.6% have an IRF between 1 and 5 years. The remaining 64% of all new housing loans have an IRF of more than 5 years.

Mortgage market strengthening

Buoyed by very low interest rates, Croatia’s mortgage market started to strengthen in 2017, when economic conditions improved. Outstanding housing loans rose by 8.2% to HRK 62.17 billion (€8.2 billion) in 2020, up from y-o-y rises of 6.3% in 2019, 2.3% in 2018 and 0.6% in 2017, according to the CNB.

One interesting trend has been the rise of kuna-denominated loans in the past four years. From a share of below 10% of the total outstanding housing loans from 2010 to 2015, the share of kuna-denominated housing loans not indexed to foreign currencies rose to 31.3% in 2020, according to the CNB.

According to Igor Ljubaj and Suzana Petrović of the CNB the rise of kuna loans was due to:

• The decline of interest rates on kuna loans as a result of the drop in the general level of interest rates;
• Households’ negative experience with Swiss franc-indexed loans
• CNB regulatory changes that raised the consumers’ awareness about currency risk;
• Strong competition among banks granting new loans, and;
• Banks’ reduced reliance on foreign currency financing.

The mortgage market has developed significantly during the past decade, as the old large state-owned banks have been privatized, and commercial banks have been restructured, and Austrian, Italian and German banks have entered the market. There was a significant increase in building societies’ share of loans, from 1% in 2003 to 5% recently.

Economy contracts by a record 8.4% in 2020

The Croatian economy slumped by a record 8.4% in 2020, according to the CBS, but the European Commission expects the economy to partly recover this year, projected GDP growth of 5.3%.

“It is expected that in the course of 2021 the pandemic will be relatively successfully controlled and, if an effective vaccine is deployed, a gradual recovery of economic activity might begin in the second quarter,” said the CNB in its December 2020 Macroeconomic Developments and Outlook.

From 2009 to 2014, Croatia’s economy lost more than 12% of GDP, Europe’s second-biggest contraction after Greece. Since the beginning of 2014, Croatia has been in the European Commission’s Excessive Deficit Procedure (EDP) due to its high budget deficits and public debt.

Croatia’s economy began to turn around in 2015 and gained momentum in 2016, expanding by 2.4% and 3.5%, respectively. The country exited the EDP in June 2017. The economy grew by an annual average of 2.9% from 2017 to 2019.

The country’s budget deficit climbed to about 8% of GDP in 2020. The budget shortfall is projected to narrow to 3.5% of GDP this year and to 2.2% of GDP in 2021, according to Fitch Ratings. Croatia’s public debt increased to 87.7% of GDP in 2020, up sharply from 73.2% of GDP in 2019.

High unemployment remains one of Croatia’s most serious problems. In January 2021, unemployment stood at 9.8%, up from 9.5% in December 2020 and from 8.4% a year earlier, according to the CBS. It was the highest jobless rate since April 2018, as many businesses remained temporarily closed amid the extension of lockdown and travel restrictions.

In January 2021, inflation stood at -0.3%, from 2% in the same period last year.

The presidential elections in December 2019 and the parliamentary elections in July 2020 placed Prime Minister Andrej Plenkovic at the head of a stable majority led by his right-wing Croatian Democratic Union (HDZ), with the presidency in the hands of his political rival Zoran Milanovic. This has resulted in an uneasy power sharing between the two leaders, and animosity is rapidly intensifying.

Sources:

• Price Indices (Croatian National Bank): https://www.hnb.hr/en/statistics/statistical-data/selected-non-financial-statistics/price-indices
• World Economic Outlook Database, October 2020 (International Monetary Fund): https://www.imf.org/en/Publications/WEO/weo-database/2020/October
• Croatia: reasonable prices, reasonable yields (Global Property Guide): https://www.globalpropertyguide.com/Europe/Croatia/Rental-Yields
• Distribution of population by tenure status, type of household and income group - EU-SILC survey (Eurostat): http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_lvho02&lang=en
• Interest rates (Croatian National Bank): https://www.hnb.hr/en/statistics/statistical-data/financial-sector/other-monetary-financial-institutions/credit-institutions/supervisory_indicators
• Consolidated balance sheet of OMFIs (Croatian National Bank): https://www.hnb.hr/en/statistics/statistical-data/financial-sector/other-monetary-financial-institutions/consolidated-balance-sheet-of-omfis
• Economic forecast for Croatia (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/croatia/economic-forecast-croatia_en
• Macroeconomic Developments and Outlook, December 2020 (Croatian National Bank): https://www.hnb.hr/documents/20182/3398618/eMKP_09.pdf/c5ec0745-662b-9d71-93e0-1de6f429f987
• Market Overview Croatia H2 2020 (Colliers): https://www.colliers.com/en-hr/research/market-overview-croatia-h2-2020
• Croatia’s GDP contracts by record 8.4% in 2020 (Croatia Week): https://www.croatiaweek.com/croatias-gdp-contracts-by-record-8-4-in-2020/
• Croatia´s General Government Debt Reaches €43.7 Billion at the End of November 2020 (Total Croatia News): https://www.total-croatia-news.com/news/51110-croatia-s-general-government-debt-reaches-43-7-billiom-at-end-of-november-2020
• Croatia’s share of public debt in GDP increases to 86.4 pct in Q3 2020 (N1): https://hr.n1info.com/english/news/croatias-share-of-public-debt-in-gdp-increases-to-86-4-pct-in-q3-2020/
• Fitch Affirms Croatia at ´BBB-´; Outlook Stable (Fitch Ratings): https://www.fitchratings.com/research/sovereigns/fitch-affirms-croatia-at-bbb-outlook-stable-04-12-2020
• Croatia Unemployment Rate (Trading Economics): https://tradingeconomics.com/croatia/unemployment-rate
• Outlook 2021 Croatia (Intellinews): https://www.intellinews.com/outlook-2021-croatia-199121/
• Foreign tourist arrivals in Croatia down 68% in 2020 (SeeNews): https://seenews.com/news/foreign-tourist-arrivals-in-croatia-down-68-in-2020-731302