All relevant financial institutions in the EU and Croatia do not announce changes in the market.
The total transaction volume of commercial real estate was around €700 million in 2021, which represents 40% growth y-o-y, says Filip Vučagić , Partner and director at Colliers Croatia, Slovenia And Bosnia And Herzegovina. Volumes, though robust, failed to underscore the true scope of demand, as investor interest is meeting limited supply.
- Croatian real estate market is entering 2022 with great results. The increase in real estate transactions in comparison to 2021 has been significant?
Supported by V-shape economic recovery, strong commercial real estate market fundamentals and inflation scare, we are seeing high investor demand and continued downward pressure on yields.
Geographically, transaction activity was strongest in Dalmatia region with approx. 40% of total volume, while Zagreb accounted for approx. 25% of total commercial real estate transaction volume. Core and core+ properties were most sought after, however, a substantial share in 2021 volume was taken by value-add properties.
2. Which segment of the commercial real estate were predominantly interesting to investors in 2021?
Office and logistics assets are still the primary focus for many investors, but majority of transaction volume was recorded in hotel and retail sectors where there was more supply. Retail sector was especially vibrant in H2 with several portfolio and single-asset deals.
Resilience and quick recovery of Croatian tourism was reflected in high demand for hotels, albeit at highest bid-ask spread among all property types. The gap in expectations between owners and prospective buyers has not materialized in real property prices. On contrary, achieved prices remained similar to pre-covid levels, showing disconnect to stock market prices and proving strong investor confidence in HTL sector.
3. Where did the investment capital come from?
In 2021 foreign capital accounted for 75% of transaction volume. The largest transaction was the acquisition of Sunce Hoteli (BlueSun Hotels and Resorts brand) by UAE-based private RE investment and development company, Eagle Hills. Investors from CEE countries were also quite active, especially in the retail sector.
Domestic institutional investors (pension funds and insurance companies) continued increasing allocation to commercial real estate. Last year they made almost 20% of total market transaction volume, with several deals in office, hotel and logistics sectors. There is still a lot of room for higher allocation to CRE, which can offer excellent risk-adjusted returns, particularly in the long run. Domestic institutional investors entry to CRE is a sign of market becoming more mature.
3. When it comes to yields, it seems like Croatian has reached the levels of CEE countries?
Indeed, prime net yields in Croatia for all commercial real estate segments are within the spread between 6,5 and 7,5. The yield compression has continued due to competition as too much money is chasing too few deals, inflation panic, low (or even negative) interest rates on bank deposits and preference for real estate as an asset class since it offers more stable returns and capital appreciation potential, relatively to other asset classes.
We need to keep in mind the rising construction costs might further delay development of new supply and product, which should strengthen existing core and core-plus property values in particular and reinforce the seller’s market. We do expect though the distressed opportunities/new NPLs, primarily for some small and medium-sized hotels which were overinvested prior to Covid-19 outbreak and temporarily “saved” by moratoriums and government subsidies.
4. Continuous increase in residential real estate prices has been a fairly common topic lately. Are we facing new real estate bubble, or is the increase of prices in Croatia consequence of inflation and low interest rates common to all European markets?
After the last financial crisis, we have witnessed reduced developers’ activity and accumulated demand, and at the same time, strong growth of tourism. As a consequence, we record strong price growth primarily in Zagreb and on the coast, while in the rest of Croatia prices did not rise to such an extent. In addition to inflation, which was not high until a year ago, and low interest rates, price growth was also influenced by the subsidized housing loan program, the so-called APN. We believe that such high rates of price growth are not sustainable over a long period of time, and we expect price growth to stabilize, which does not mean that prices will not have an upward trajectory during the course of this year.
Price growth in the medium and long term usually accompanies the rates of inflation and growth of the economy, and it must be accompanied by both wage growth and demand. The latest census showed a sharp decline in the population in Croatia, and a slight decrease was also observed in Zagreb, with a higher total number of apartments. Demographic trends indicate that demand is not unlimited, although it should be noted that real estate in Croatia is purchased by both foreigners and the Croatian diaspora.
5. Recently, there has been increasing talk of rising interest rates. Will rising interest rates reverse trends in the Croatian real estate market? Or will investing in real estate be a good investment in 2022, as has been the case for the last few years?
According to the latest announcements, the European Central Bank (ECB) will not touch interest rates until 2023, and even after the announced raisings of benchmark rates, interest rates should not, seen in a broader historical context, be very high.
Further, albeit referent rates might (or will) increase Croatia has one of the biggest spread between risk-free rates and yields in real estate in EU, which gives certain comfort that with strengthening real estate market – yields will stay unchanged. Therefore, if rental incomes stay similar, we will not see any major downward capital value corrections.
Also, message that comes from Croatian Central Bank is that it is reasonable to believe that financing rates in Croatia will stay the same or even drop slightly due to growing domestic economy and euro-zone entry.