Croatia’s housing market remains buoyant

Croatia’s housing market remains fundamentally strong, supported by robust property demand. In Q2 2023, the nationwide house price index rose strongly by 13.73% from a year earlier, following y-o-y increases of 14% in Q1 2023, 17.33% in Q4 2022, 14.85% in Q3 2022, 13.6% in Q2 2022 and 13.46% in Q1 2022, according to figures from the Croatian Bureau of Statistics (CBS). However, in real terms, prices actually increased by a more modest 5.71% over the same period, amidst high inflation.

Croatia’s house price annual change

On a quarterly basis, house prices increased by 3.5% (1.12% inflation-adjusted) in Q2 2023.

By major regions:

• In Zagreb, Croatia’s capital and largest city, dwelling prices rose by an average of 13.99% (5.95% inflation-adjusted) y-o-y in Q2 2023, according to CBS. Quarter-on-quarter, prices increased by 3.25% (0.87% inflation-adjusted).
• On the Adriatic Coast, prices of dwellings increased 12.76% (4.81% inflation-adjusted) in Q2 2023 from a year earlier. On a quarterly basis, prices were up 2.53% (0.17% inflation-adjusted) during the latest quarter.
• In other settlements, dwelling prices surged 17.74% (9.43% inflation-adjusted) in Q2 2023 from a year ago, and by 7.5% (5.02% inflation-adjusted) from the previous quarter.

In the first half of 2023, the average price of new dwellings in Croatia rose by 4.1% to €2,219 per square meter (sq. m) from a year earlier. In Zagreb, house prices averaged €2,623 per sq. m while it was €1,916 per sq. m 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 CBS. The housing market started to show improvements since, with house prices rising by a cumulative 68.8% (37.7% inflation-adjusted) from 2016 to 2022.

Demand is rising again. In the first half of 2023, the number of new dwellings sold in Croatia rose by 25.9% to 2,353 units from a year earlier, an improvement from the 16.4% decline seen in the full year to 2022, based on figures from CBS. Similarly, the total area of new dwelling sales also surged 25% y-o-y to 158,147 sq. m. in H1 2023.

The Croatian economy bounced back strongly in 2021, registering a real GDP growth rate of 13.1%, fully offsetting the 8.5% contraction seen in 2020 due to the Covid-19 pandemic. Then during 2022, Croatia recorded another impressive growth of 6.2%, as economic activity returned to pre-pandemic levels.

The country’s overall economy is expected to continue growing, albeit at a slower pace, amidst high inflation and heightened global socio-economic uncertainty, coupled with the country’s adjustments to its accession to the eurozone. Real GDP growth is projected at 2.6% this year and 2.5% in 2024.

Croatia also joined the Euro area on January 1, 2023.

Croatia’s high-end residential market continues to thrive

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 2022, foreign tourist arrivals in the country increased sharply by 44% to 15.32 million, following an almost 100% growth in 2021, based on figures released by CBS.

The tourism sector continues to strengthen this year, with the number of foreign tourist arrivals rising further by 9.4% to 15.6 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 components 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, the Island of Hvar, and the 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 the 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 projects in recent years. It offers 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 began in October 2020 and was officially opened in June 2023.

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

Demand is rising again, particularly in coastal areas and holiday destinations

In the first half of 2023, the number of new dwellings sold in Croatia rose by 25.9% to 2,353 units from a year earlier, an improvement from the 16.4% decline seen in the full year to 2022, based on figures from CBS. Similarly, the total area of new dwelling sales also surged 25% y-o-y to 158,147 sq. m. in H1 2023.

In Zagreb, demand is more or less steady. The number of new dwellings sold increased slightly by 1% y-o-y to 999 units in H1 2023 while the total sales area declined 1.5% to 67,777 sq. m.

In other settlements, on the other hand, demand is increasing strongly, amidst its tourism boom with its stunning coastline, clear waters, and historic towns attracting over 20 million visitors annually. In H1 2023, the number of new dwelling sales rose strongly by 53.9% to 1,354 units while the area sold surged by 56.6% to 90,370 sq. m.

On January 1, 2019, Croatia lowered the real estate transfer tax from 4% to 5%. On VAT-charged property transactions, the VAT rate remains 25%.

Residential construction continues to increase

During 2022, the total number of dwelling completions surged by 26.9% to 15,875 units from a year earlier, an acceleration from y-o-y growth of 4.7% in 2021 and 2% in 2020, based on figures from CBS. It was the sixth consecutive year of annual expansion.

Likewise, the total floor area of dwelling completions also increased by 23.2% y-o-y to 1,462,000 sq. m. over the same period.

By no. of rooms:

• One-room dwellings: the number of dwellings completed for permanent residence surged 41.3% y-o-y to 1,795 units in 2022 while the total floor area increased 48.1% to 80,000 sq. m.
• Two-room dwellings: the number and floor area of dwellings completed increased by 41.5% to 5,099 units in 2022 and by 47% to 316,000 sq. m., respectively.
• Three-room dwellings: dwellings completed were up by 36.1% to 4,131 units while the total floor area rose by 45.4% to 346,000 sq. m.
• Four-room dwellings: the number of dwelling completions increased by 14.5% to 3,050 units and the total floor area rose by 23% to 374,000 sq. m. last year
• Five or more-rooms dwellings: the number of dwellings completed fell by 8% y-o-y to 1,738 units in 2022 while the total floor area declined by 8.1% to 340,000 sq. m.

The number of dwellings for which permits were issued also rose by 14% to 18,991 units during 2022, following an increase of 18.3% in 2021 and a decline of 8.4% in 2020, according to CBS. In the first three quarters of 2023, dwelling permits were almost unchanged at 13,645 units.

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

“Development activity has never recovered from the last recession. From 2004 to 2008, on average 22,000 apartments were built p.a.,” said Colliers International.

Recent residential developments and projects in the pipeline

Some of the recent major upscale residential projects 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. The project was completed last 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 started last year.
• Project Bužanova – Štrigina – an upscale development by Alfastan comprising 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 was completed in 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.
• Lukoran Resort – an upscale tourism resort located in Ugljan Island on 7.7 hectares of seaside land. The said resort, which is set to be completed in 2024, will comprise 126 residential units, including villas, townhouses, apartments, a beach club, and a marina.
• Prim Bay Resort – an upscale resort to be developed in a secluded bay of Marina Lučica, with an unobstructed view of the Old Town of Primošten, near Split. The development will consist of a hotel with 250 rooms, 141 branded residences, beach bars, and restaurants, an ethno village, pool, and wellness facilities, and sports and entertainment areas.

Moderate rental yields in Zagreb, but very limited rental market

Gross rental yields in Croatia are moderately good, at an average of 4.59% in Q2 2023, based on a Global Property Guide research conducted in August 2023.

By major city:

• In Zagreb, Croatia’s capital, gross rental yields for apartments ranged from 3.39% to 6.3% in Q2 2023, with a city average of 4.89%.
• In Rijeka, apartment rental yields ranged from 4.35% to 4.9%, with a city average of 4.62%.
• In Split, apartment rental yields ranged from 3.63% to 4.45%, with a city average of 4.1%.
• In Osijek, gross rental yields for apartments ranged from 4.37% to 5.27%, with a city average of 4.75%.

Most Croatians are owner-occupiers. About 91.1% 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 Eurostat figures.

The country’s long-term rental market is very small. Most long-term rental properties are in Zagreb, Dubrovnik, 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 center 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 rising gradually

In September 2023, the average interest rate for new housing loans in Croatia was 3.54%, up from 2.89% in January 2023 when the euro was newly adopted as its official currency, according to the Croatian National Bank (CNB), the country’s central bank.

Over the same period:

• Floating rate and IRF of up to 1 year: 2.96%, slightly up from 2.89% in January 2023
• IRF over 1 and up to 5 years: 2.84%, slightly down from 2.9% in January 2023
• IRF over 5 years and up to 10 years: 3.14%, up from 2.77% by early 2023
• IRF over 10 years: 3.67%, up from 3.02% over the same period

Only about 9.6% of all new housing loans in the first nine months of 2023 are floating rate (or with interest rate fixation (IRF) of up to 1 year), while 17.4% have an IRF between 1 and 5 years. The remaining 73% of all new housing loans have an IRF of more than 5 years.