Foreign investors have built about US $two thirds of a billion-worth of villas in the past several years - if not a great deal more. The costs have all gone into Croatian treasury coffers and to Croatian builders, architects, land owners, etc.
 
Croatia's tourism base is growing. The Ten Year tourism plan implemented by Istria is starting to bear fruit. Accolades from the world tourism industry are already under the tourism ministry's belt.  But, Croatia just shot itself in the foot, giving tourism prospects a distinct limp!

Integral to Croatia's tourism plans, as exemplified in the innovative Ten Year Plan for Istria (north western Croatia), are luxury villas. Really, Croatia has no choice, having very few luxury hotels, especially in the bonanza region of Istria.

Croatia encouraged inward investment by promising, in law, special deals to foreigners who built villas. But now, an old law has been foisted on villa owners by the Office of Categorisation (Ministry of Tourism) that contradicts promises made to investors. And it is causing havoc.

Until this month, villa owners only had to apply for residential usage permits to enable them to rent their villas. In itself this was a long process (one villa owner told me he waited three years, from foundations to final permit. If he has to wait for another permit, it means he will have waited five years for any ROI, which is rather excessive) and many owners have already lost rental incomes for last year, because municipal authorities are so slow.

All existing villas were ready to rent-out, and had bookings for 2008. Then, suddenly, a law passed in 1991 was implemented without warning. It requires them to apply for business permits as well.

One local office advises it could take up to two years to obtain a permit. This means all rentals are on hold until permits are granted… a process that involves repeating the applications made for residential permits! On top of that, local offices do not know how to proceed, so they have frozen applications!

Everyone has been caught by this sudden imposition of a law that has never been used. Lawyers were unaware of it and argue that foreigners should not be penalised for what is now ‘use-by-custom'.

Local offices had not heard of this new-old law. They have tried getting clarification from Zagreb, to no avail. When in Istria recently it was suggested to me, by Croatians, that Croatia still suffers a communist frame of mind. Perhaps this is why the three Ministries I contacted refuse to answer!

The Minister for Tourism would answer none of my questions, but I get the distinct impression that he is now embarrassed by the civil servant who created this mess. In a letter to the Minister I proposed that an instant solution is to give temporary business permits to all villas that have already obtained residential permits. The owners can still apply for business permits, but will be able to cover their 2008 (and maybe 2009) rentals, avoiding financial; hardship. After all, the government already has all necessary details on file.

Unless such a concession is made, several hundreds of villas will remain unrented. A luxury villa loses £2000 a week in the high season, and not much less the rest of the time. If they are not rented, there are no tourists in that locality, and businesses lose money, too. And if villas cannot be rented, people who want them do not buy ‘plane tickets to get to Croatia. So, for Croatian tourism, stakes are high. For owners, not only are rental incomes lost, but mortgages, maintenance, and other costs still have to be paid by them, and their marketing costs are wasted.

This has a knock-on effect, because anyone wanting to build or buy a rental villa should be very cautious, or lose money. The Croatian government now has a duty to work this out very quickly, or lose its investment credibility. There are behind-the-scenes activity already, but until assurances are given officially, the simple warning is – ‘Buyer Beware'! I hope to give better news soon, but inward investors should hold back for a while.

April 2008, Barry Napier
barry.napier@ntlworld.com
Hotel and Travel Journalist