BMI View: An overwhelming vote of no confidence in the Croatian Prime Minister, Tihomir Oreskovic, has sent ripples through the Croatian parliament - delaying much-needed structural reforms and affecting investor sentiment. Additionally, continued growth in public debt, high levels of unemployment and headwinds from the volatile EU market post-Brexit will add further strain to the economy. We therefore anticipate low levels of demand to continue across the commercial real estate sector, as investors remain vigilant to the economic situation - which we believe will see rentals stagnate or see marginal declines.
Structural problems are plaguing the Croatian economy, alongside fiscal vulnerabilities such as growing public debt and rising interest payments that look to impede the Balkan nation's economic recovery. As a result, foreign direct investment flows are down significantly from levels seen prior to the financial crisis in 2008, slow corporate sector restructuring is further dragging on private sector growth, and high unemployment, coupled with inactivity, is seeing poverty rise across the state - subsequently dwindling consumer demand and restricting greater growth in spending that is needed to boost economic growth. Owing to internal issues and external headwinds, the Croatian economy is considered less appealing than its regional peers in the Central and Eastern European region - which has seen investors look to these nations in order to mitigate the risk posed by investing in Croatian assets. This has effectively shackled the commercial real estate market; with already established and domestic companies undergoing the majority of activity. As a result, industry players predict that rentals for all three sub-sectors we cover in our forecast will be subject to stagnation, and in some cases marginal decreases in rates.
The outlook is not completely bleak. While the nation may be drowning in debt, EU accession in 2013 has allowed Croatia access to vital EU structural funding, which will help to alleviate some of the debt issues that are detrimentally affecting the economy; and access to the single market will ensure greater business relations with neighbouring nations in the years to come. Although, it is important to note that the EU market post-Brexit is fragile, especially considering that the European Central Bank is scrambling to avoid contagion in other EU nations and protect the single currency from collapsing - in this respect, Croatia maintaining the kuna would actually help to avoid some of these issues.
Croatia is considered to have a geopolitical advantage in the Bulkan region - a result of being located along three pan-European transport corridors. Hence, Zagreb benefits from this and is regarded as a key tourist and business hub of Croatia with good trade links. Being the largest city in the nation, and the capital, Zagreb offers some stability concerning the three cities we cover in our forecast in terms of real estate growth. The main industries in Zagreb are the production of electronic machines and devices, chemicals, pharmaceuticals, textiles, food and drink. Split, the second largest city in Croatia and an important nautical trade hub, is located on the Adriatic Coast and as such has a strong industrial link across the sea. The city benefits from its locality in the Adriatic and has a strong standing in shipbuilding, as well as in the food, chemicals, plastics, textiles and paper industries. Zadar, the third city we cover and the smallest of the three, also benefits from its location and proximity to the coast with major industries in seaborne trade, fishing and fish farming. The city also has a strong tourist trade and metal manufacturing industry, as well as positive mechanical engineering, chemicals and banking sectors.
Concerning the commercial real estate sub-sectors, the office sector looks to be the most stable of the three in terms of real estate rental rates. This can be attributed to the significance of the tertiary sector in the country and the improving relations the country has with other EU nations. However, poor economic growth, high unemployment, fiscal issues, and ample availability of quality space coupled with moderate-to-low demand undermine stability in this area. Zagreb will maintain investor interest in this sub-sector, with overseas conglomerates such as IBM progressing with moves into the market - which we expect will boost business confidence. Split and Zadar, on the other hand, will remain stagnant for 2016 and into early 2017, as more economic reforms are needed before companies look for space in these localities.
The retail sub-sector is currently suffering from a lack of consumer demand and low household spending, affecting retailer confidence in the market across all of the cities in our forecast. The turbulent economic situation has thrown uncertainty into the market and, as a result, consumers are spending less and saving more in order to weather the storm. We anticipate vacancies remaining higher in Split and Zadar due to the economic conditions, however Zagreb is seeing maintained demand for prime units from both domestic and foreign companies, as the recession comes to an end and the nation continues its tentative recovery. Tourism remains a key component of this sector, which is likely to be affected by the Brexit vote, as fewer Europeans are likely to travel due to the headwinds the vote has caused to the broader EU market. Nonetheless, there may be opportunity for market growth in 2017 when the economy is expected to record greater growth, and reforms are implemented that will boost spending and potentially see wages rise marginally. Expect to see rentals remain at current levels across each of the three cities until early 2017.
The industrial sector represents 27% of Croatia's total economic output and is imperative to development of the economy into an innovative and competitive EU nation. Significant investment into the transport network and railway sector from European and Croatian authorities has allowed the economy greater trade capabilities and has considerably improved its operational efficiency and financial sustainability. However, the downturn in the EU market has had a large impact on trade here, with demand dropping across the board and affecting developer confidence due to the macroeconomic situation. We forecast trade volumes improving in the years to come, as long as external economic issues do not interrupt infrastructure projects. The industrial real estate sector should witness marginal growth further down the line; however, for the time being, we anticipate little activity in the market, and see focus revolving around capital Zagreb, which will see rentals remain fairly stable.
Concerning the overall outlook of the market, we believe that the turbulent economic situation in Croatia, coupled with headwinds from a struggling parliament and an uncertain EU market, will leave little room for investment opportunities in the short term as risks will outweigh the potential benefits. There may be some room for new players in the office market as the economy picks up over 2017; however, we advise vigilance when approaching the commercial real estate market until structural reforms are made and the rising public debt has been rectified.
The Croatia Real Estate Report features BMI Research's market assessment and independent forecasts of major construction projects in the residential and commercial markets, plus rental prices and yields in major cities. The report critically analyses the prospects for real estate within the broader economic and financial context - both domestic and global - via our econometrically-modelled and clearly explained banking and economic forecasts and follows this through to evaluate the implications for REITs.
BMI's Croatia Real Estate Report provides industry professionals and strategists, sector analysts, business investors, trade associations and regulatory bodies with independent forecasts and competitive intelligence on the real estate industry in Croatia.
- Benchmark BMI's independent real estate industry forecasts for Croatia to test other views - a key input for successful budgeting and strategic business planning in the Croatian real estate market.
- Target business opportunities and risks in Croatia through our reviews of latest industry trends, regulatory changes and major deals, projects and investments.
- Assess the activities, strategy and market position of your competitors, partners and clients via our company profiles (inc. SWOTs, KPIs and latest activity).
BMI Industry View
Summary of BMI’s key industry forecasts, views and trend analysis covering real estate and construction, regulatory changes, major investments and projects and significant national and multinational company developments.
Industry SWOT Analysis
Analysis of the major Strengths, Weaknesses, Opportunities and Threats within the real estate sector and within the broader political, financial, economic and business environment.
Industry Forecasts Outlook
Historic data series (2010-2013) and forecasts to end-2019 for the domestic real estate industry and for the local and global finance industry.
- Real Estate: Office, retail and industrial real estate yields for all major cities (%); short term forecasts on minimum and maximum real estate rental prices by sub-sector (USD per square metre and local currency per square metre).
- Construction: Industry value (USDbn); contribution to GDP (%); employment (‘000); real growth (%).
- economy: Economic growth (%); nominal GDP (USDbn); unemployment (%); interest rates (%); exchange rate (against USD).
BMI’s Real Estate Risk Reward Index
BMI’s Risk Reward Indices provide investors (real estate vendors, construction companies and financial investors) looking for opportunities in the region with a clear country comparative assessment of a market’s risks and potential rewards. Each of the country markets are scored using a sophisticated model that includes more than 40 industry, economic and demographic data points to provide an indices of highest to lowest appeal to investors, with each position explained.
Overview of the real estate sector, including analysis of existing/planned real estate developments and emerging industry trends in the office, industrial and commercial sectors
Features detailed city-level data and analysis on rental prices, yields, contract terms and real estate availability with separate chapters covering the office, retail and industrial sub-sectors.
Examines the competitive positioning and short- to medium-term business strategies of key industry players. Strategy is examined within the context of BMI’s industry forecasts, our macroeconomic views and our understanding of the wider competitive landscape to generate Company SWOT analyses. The latest financial and operating statistics and key company developments are also incorporated within the company profiles, enabling a full evaluation of recent company performance and future growth prospects.
*Company profiles are not available for every country. Those reports instead contain information on the current activities of prominent companies operating in the market.