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Investment Analysis of Croatian Real Estate Market

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Croatia Residential Real Estate Market Analysis 2022

Lalaine C. Delmendo | November 27, 2022

Croatia’s housing market remains buoyant, amidst low interest rates and robust economy. During the year to Q2 2022, the nationwide house price index rose strongly by 13.6% from a year earlier, up from a y-o-y increase of 6.48% in Q2 2021 and the highest growth recorded in recent history, according to the Croatian Bureau of Statistics (CBS). However in real terms, prices actually increased by just 1.39% over the same period, amidst surging inflation.

On a quarterly basis, house prices increased 3.74% in Q2 2022, but declined 1.48% when adjusted for inflation.

Source: Croatian National Bank

By major regions:

  • In Zagreb, Croatia’s capital and largest city, new dwelling prices rose by 14.8% (2.45% inflation-adjusted) y-o-y in Q2 2022, according to the CBS. Quarter-on-quarter, prices increased 3.85% (-1.38% inflation-adjusted).
  • In Adriatic Coast, prices of new dwellings increased 12.79% (0.66% inflation-adjusted) in Q2 2022 from a year earlier. On a quarterly basis, prices were up 2.88% (-2.3% inflation-adjusted) during the latest quarter.
  • In other settlements, new dwelling prices surged 15.25% (2.86% inflation-adjusted) in Q2 2022 from a year ago, and by 6.41% (1.05% inflation-adjusted) from the previous quarter.

In 2021, the average price of new dwellings in Croatia rose by 7.8% to HRK 13,713 (€1,821) per square meter (sq. m.) from a year earlier, following y-o-y rises of 3.1% in 2020, 7.6% in 2019, 6.8% in 2018 and 7% in 2017. In Zagreb, house prices average HRK 14,672 (€1,948) per sq. m. while it was HRK 12,577 (€1,670) in other settlements.

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 remain robust, primarily driven by strong demand and still limited supply.

The Croatian economy bounced back strongly last year, registering a real GDP growth rate of 10.2%, fully offsetting the 8.1% pandemic-induced contraction seen in 2020. Then in Q2 2022, the economy grew by 7.7% year-on-year, its fifth consecutive quarter of strong growth, buoyed by robust household consumption and a surge in exports.

Croatia house price indices

The Croatian National Bank, in its Macroeconomic Development and Outlooks report in July 2022, projects the Croatian economy to expand by a healthy 5.5% this year, despite heightened global economic uncertainty and rising consumer prices.

Croatia is set to join the euro area on January 1, 2023.

Croatia’s high-end residential market thriving

Croatia’s high-end residential market, which is primarily buoyed by foreign buyers, is growing again, buoyed by the recovery in the tourism sector. During 2021, foreign tourist arrivals in the country increased sharply by 91.9% to 10.64 million, in contrast to a y-o-y decline of 68% in the prior year, based on figures released by the CBS.

Croatia tourist arrivals

The recovery continues this year, with the number of foreign tourist arrivals rising further by 77.6% to 8.37 million compared to the same period last year.

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.

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.

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 and Residences in Savudrija, Istria is one of the largest tourism project currently under construction. It will offer 179 holiday 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.

LIOQA Resort, located on the west coast of Ugljan, is also being built. It will comprise of 21 deluxe villas, a private beach and marina. This modern, fully serviced resort is due for completion by end-2023.

Demand is rising again

In 2021, the number of new dwellings sold in Croatia rose strongly by 45.2% to 4,678 units from a year earlier, following a 6.8% fall in 2020, amidst the Covid-19 pandemic, according to the CBS. It is now considered as the highest recorded in recent history. Similarly, the total area of new dwelling sales also surged 42.3% y-o-y to 304,232 sq. m. last year, in contrast to a 9.5% decline in 2020.

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

Croatia dwellings sold

Overall, residential property transactions in Croatia rose by 12% y-o-y to about 24,150 units in 2021, in contrast to an almost 14% fall in 2020, according to eNekretnine transaction database. Zagreb accounted for about 45% of all transactions.

During 2021:

  • In Zagreb, the number and area of new dwellings sold soared 52.1% and 42.4%, respectively.
  • Elsewhere the number of new dwelling sales rose by 37.4% while the area sold increased 42.2%.

“Main drivers and fundamentals that have an impact on demand are condition of the economy, mainly wages and employment levels, as well as availability and cost of financing,” said Colliers. Lower tax has also contributed to robust demand.

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

Residential construction increasing

During 2021, the total number of dwelling completions rose by 4.7% to 12,514 units from a year earlier, following annual increases of 2% in 2020, 15.6% in 2019, 19.4% in 2018, and 8.8% in 2017, based on figures from the CBS. Likewise, the total floor area of dwelling completions also increased 6.6% y-o-y to 1,187,000 sq. m. over the same period.

By no. of rooms:

  • One-room dwellings: the number of dwellings completed for permanent residence surged 25.4% y-o-y to 1,270 units in 2021 while the total floor area increased 25.6% to 54,000 sq. m.
  • Two-room dwellings: the number and floor area of dwellings completed increased modestly by 4.6% to 3,603 units and by 4.4% to 215,000 sq. m., respectively.
  • Three-room dwellings: dwellings completed fell by 4.6% to 3,035 units while the total floor area declined 2.9% to 238,000 sq. m.
  • Four-room dwellings: the number of dwelling completions increased 5% to 2,664 units and the total floor area rose by 8.2% to 304,000 sq. m.
  • Five or more-rooms dwellings: the number of dwellings completed rose by 11.4% y-o-y to 1,889 units in 2021 while the total floor area increased 11.8% to 370,000 sq. m.

Dwelling permits also rose strongly by 18.3% to 16,654 units last year, following a decline of 8.4% in 2020, according to the CBS.

Croatia dwelling permits

Despite this, construction activity remains below the previous peak seen before the global financial crisis.

“Although development activity increased in the residential sector in the last few years, it is still much below pre-GFC level,” said Colliers International. “In the last few years, around 2,500 – 3,000 newbuilt apartments were brought to market annually in Zagreb and around 9,000 – 11,000 in Croatia.”

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 125-unit apartment complex in Zagreb, with an estimated selling price of around €5,000 per sq. m. Completion is scheduled this year.
  • VMD Kvart Heinzelova-Darwinova – residential complex offering more than 400 apartments, with prices ranging from €2,600 to €3,000 per sq. m. Construction of the second phase is planned for 2022 and 2023.
  • Project Bužanova – Štrigina – an upscale development by Alfastan comprising of 69 apartments. Selling prices range from €3,200 to €3,700 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.
Croatia dwelling permits

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 90.5% of Croatian households are currently living in an owner-occupied home or apartment, far higher than the eurozone average of less than 70%, 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.

Mortgage interest rates continue to fall

In August 2022, the average interest rate for housing loans indexed to foreign currency stood at 2.57%, down from 2.7% in the previous year and 2.98% two years ago, according to the Croatian National Bank (CNB), the country’s central bank.

Croatia interest rates

Rates for housing loans indexed to foreign currency, August 2022:

  • Floating rate and interest rate fixation (IRF) of up to 1 year: 2.81%, down from 2.87% a year earlier and 3.17% two years ago
  • IRF over 1 and up to 5 years: 2.57%, down from 2.75% in August 2021 and 2.94% two years ago
  • IRF over 5 years and up to 10 years: 2.51%, down from 2.54% in the previous year and 2.75% two years ago
  • IRF over 10 years: 2.53%, down from 2.86% a year earlier and 3.1% two years ago

Rates for housing loans not indexed to foreign currency:

  • Floating rate and IRF of up to 1 year: 3.18%, down from 3.23% in August 2021 and 3.52% in August 2020
  • IRF over 1 and up to 5 years: 2.84%, slightly up from 2.79% a year ago but down from 3.09% two years ago
  • IRF over 5 years and up to 10 years: 2.53%, down from 2.66% a year ago and 2.74% two years earlier
  • IRF over 10 years: 3.33%, up from 2.94% in August 2021 and 2.84% two years ago

Croatia interest rates

Only about 11.6% of all new housing loans in August 2022 are floating rate (or with interest rate fixation (IRF) of up to 1 year), while 22.5% have an IRF between 1 and 5 years. The remaining 65.9% 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. In August 2022, outstanding housing loans rose by 9.5% to HRK 72.7 billion (€9.66 billion) from a year earlier, according to the CNB, following y-o-y increases of 9% in 2021, 8.2% in 2020, 6.3% in 2019, 2.3% in 2018 and 0.6% in 2017.

Croatia housing loans

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 more than 30% in 2021, 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 remains fundamentally strong, public finances improving

The Croatian economy bounced back strongly last year, registering a real GDP growth rate of 10.2%, fully offsetting the 8.1% contraction seen in 2020 due to the Covid-19 pandemic. Then in Q2 2022, the economy grew by 7.7% year-on-year, its fifth consecutive quarter of strong growth following a pandemic-induced recession, buoyed by robust household consumption and a surge in exports.

The Croatian National Bank, in its Macroeconomic Development and Outlooks report in July 2022, projects the Croatian economy to expand by a healthy 5.5% this year, despite heightened global economic uncertainty and rising consumer prices.

Croatia gdp inflation

“The economic fallout from the Russian invasion of Ukraine, accompanied by the leap in the prices of energy and raw materials and further disruptions in global supply chains, have had no serious impact on Croatia’s economic outlook so far,” said the central bank.

The European Commission has also recently upgraded its 2022 economic growth forecast for Croatia to 3.4%, due to strong domestic demand, investments and exports.

“Despite rising inflation, private consumption is expected grow solidly given the accumulated savings, favourable labour market developments and a strong tourist season,” said the European Commission. “Investments are expected to be backed by EU funds (both RRF and ESIF), with the public sector playing a leading role. Net exports are expected to also contribute positively, especially due to the strong tourist season, which – considering current bookings – is expected to surpass the 2019 record.”

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 has fallen to a manageable 2.9% of GDP in 2021, a sharp improvement from the prior year’s 7.3% shortfall and below the 3% Maastricht threshold. The budget deficit is expected to fall slightly to 2.8% of GDP this year.

Croatia unemployment

Public debt is also projected to fall to 76.2% of GDP this year, from 79.8% in 2021 and 87.3% in 2020, according to Prime Minister Andrej Plenković.

In July 2022, Fitch Ratings has upgraded Croatia’s long-term foreign-currency issuer default rating to ‘BBB+ from ‘BBB’, with a stable outlook, after the Council of the European Union officially confirmed Croatia’s accession to the euro area on January 1, 2023. S&P and Moody’s both followed suit, upgrading their credit ratings for Croatia from ‘BBB-/A-3’ to ‘BBB+/A-2’ and from Ba1 to Baa2, respectively.

In August 2022, overall inflation surged to 12.3%, sharply up from 3.1% a year earlier and the highest level in recent history. Inflation averaged 1.1% in 2011-21.

The labour market is also improving. Nationwide unemployment stood at 6.3% in August 2022, unchanged from the previous month but down from 7.2% a year earlier, according to the CBS. The country’s jobless rate averaged 14% in the past decade.


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