In late 2007, Croatia hit property investors hard, with a new interpretation of a previously unused 10-year old law, it requires that owners of private properties must apply for a business permit if they rent.
It took most of them about three years just to get the residential permit. So they now have to apply all over again. It means they still have to pay off their mortgages and maintenance costs, but cannot rent out. This is not just about private ownership… the impact is being felt throughout tourism in Croatia.
Property developers and investors, including Croatians, a Hong Kong group, and other foreigners, have tried to unravel what is a very odd move by the government, which has resulted in some investors either moving out from Croatia, or halting their property deals.
On the one hand, Croatia promises attractive deals for all foreigners who invest in Croatia. But, on the other hand, it has blasted them with a law that stops them renting their properties. But it does not stop there, for hoteliers, too, are prevented from moving their developments forward, because of similar slowness by government agencies who give out permits.
Those who decide to ignore the law (because they are forced to, or lose huge amounts of money) are in danger of having their properties closed by police, and, if they continue to rent, face 60 days in prison! Owners of properties who have already waited several years to get permits and certificates, were slammed by the new legal attack, and whilst they have to apply all over again, they are losing huge amounts of potential income, which also affects local economies.
Last year, when writing my first article on this subject, I sent full details to relevant Ministers, in the hope of receiving an explanation. This year, they claim they are 'unaware' of any problems! And when contacted, each department passes on the buck to other departments, saying it is not their remit. Whilst they close their eyes to the enormous strain it places on both foreign and Croatian investors, they are making Croatia a no-go area for inward money. This is a great pity, for, to my mind, Croatia is a wonderful place to be, with huge investment potential.
One major international German investor, Andreas Dussman, has had enough, and has put his property development business on hold in Croatia. This means villas already built are moth-balled, because he can't sell them to investors who are unable to rent them out. Other developers are in the same position, whether owned by foreigners or Croatians. As one highly-placed ex-politician exclaimed to me: "It is just stupid, plain stupid!"
Dussmann likens his uphill struggle to "running against windmills for the last six years". This, he says, has "lowered (his) motivation to stay in Croatia to rock-bottom. I could have completed whole resorts in any other country, in the same time as it took to build just 20 villas in Croatia." He says other investors "went bust" because of the law, coupled to the recent financial crises.
It is a mistake to think this is all about individual rental villas and apartments, because it goes much farther than that. A large property fund listed at the London Stock Exchange has owned a bay in Split ready for development, but have so far waited five years just for a location permit! To call this absurd is an understatement. "In all other countries a red carpet is rolled out for property investors… but not in Croatia"; a country so reliant on tourism and tourism investors, from individual rental-villa owners to large-scale hotel groups.
Another Stock Exchange listed development company invested heavily along the Croatian coast, but they have been unable to start even one project over the past five years! It is generally felt by foreign investors that they are not treated with respect, but like criminals, simply for wanting to conduct normal business.
As Dussmann says: "This attitude has to change! Many investors will only come back if changes are made. Maybe Croatia needs to be on its knees to understand that." Bear in mind that those words come from a fan of Croatia!
He likens the attitude of Croatia to that of Greece in the 1980's and 90's, when all investors left. It has taken the past 15-20 years for Greece to repair the damage it did, and to bring investors back again. If Croatia plays the same game, even if it manages to join the EU, investors will give the country a very wide berth.
Dussmann believes the whole categorisation system is out-of-date and useless, adding that he knows of no other country that categorises private accommodation in the same way as they categorise hotels. To apply for a business permit will take about three years (maybe), even though such a permit has no true value. He also makes the valid point that as a developer he does not know who the end-user is or what the buyer intends to do with his property, so he cannot apply in advance for permits. Added to this fiasco is the fact that business permits are usually not given to ‘businesses' in residential areas – where most villas are located!
As it now stands, potential property owners are refusing to invest in Croatia, because they cannot rent out. This has had a major impact on local and international developers, who have pulled out of the country. This then has a knock-on effect on Croatian builders, furniture suppliers, gardeners, pool specialists, and cleaners. And, properties already built remain unsold, because they cannot be rented. This means a drop in tourists. Many restaurants are hovering on the edge of closing because they fear for the future.
Last week, one local craftsman said that he had only worked one day in a whole week, because of the problem. Other local builders have laid-off workers for the same reason. Property owners want to do everything legally and want to pay due taxes. But, the new law interpretation makes this impossible. If enough investors refuse to go into Croatia, then the country will slow down infrastructure investments, and local economies will suffer drastically, even if Croatian-owned hotels manage to open.
20% of Croatia's income comes from tourism, so its odd legal move cannot be justified. Many have tried to get the problem sorted out, but Government is not interested. As Dussmann says: "This is very strange."
If Croatia is determined to drive out developers like Andreas Dussmann, whose properties are in the luxury class, employing local craftsmen, then perhaps those responsible need a reality check. The loss of countless developers, and foreign property owners, damages the general tourist trade and local economies as word gets around the international investment market. It would not take much to turn this folly into a tourist-necrosis with fatal results. Is Croatia copying the previous Greek fiasco? If so, Croatia can expect its people to lose out big-time as foreigners avoid the country in favour of countries with a better attitude.
Croatians I have spoken with for the past two years have a mixed view of their government. Some believe nothing has changed, because leaders still have a communistic mind-set. Others think the problem is being used by regional leaders in some kind of power-struggle, as a way of getting Croatian hoteliers on their feet first, even though the hotel market is different from the villa market. Yet others think leaders are just incompetent. Which is it? If anyone knows, maybe they can let me know, because none of it makes sense and Croatia is going to suffer greatly if it does not sort the mess out!
The situation is now so bad that a Consortium of villa owners has been formed. They are at their wits end and will also pull out of Croatia if they cannot see any movement by government.
I remain convinced that Croatia is a potential hot-spot for investors, but, for now, it is best to avoid putting your money there. Once it frees up its ideas, and shows it is serious about its own promises to foreign investors, inward money will flow again. Until then, it seems there is no return on investment for property owners.
© April 2009, Barry Napier
barry.napier@ntlworld.com
Barry Napier
Hotel/Travel Journalist & Tourism Consultant |
