Croatia Real Estate Report Q2 2012

The centre-left coalition government formed on December 4 is faced with a rough year and toughdecisions. Exposure to the eurozone sovereign debt crisis is impacting export demand and will alsomanifest itself as ever-important tourist figures fall in 2012, while severe austerity measures will squeezeconsumer and government spending alike. Foreign direct investment will slow and credit streams willtighten as domestic banks feel the knock-on effects of EU banking regulations. We also highlight thepotential risks to the economy stemming from the bloated banking sector and have revised down our realGDP forecast for Croatia, expecting the country to enter recession with negative growth of 1.5% in 2012.

The property market is inevitably being impacted, last year saw stagnant or falling rents in all cities, whileyields fell across the board. Rents were also under pressure from a strong supply pipeline. Retail was abright spot, with rents increasing in all cities boosted by strong tourist arrivals and consumer confidencepicking up slightly as the country emerged from recession.The key news in recent times has been the decision by the EU to close negotiations on accession. Croatiais now scheduled to join the EU on July 1 2013. EU membership will have a number of positive impactson both the economy as a whole and the construction/real estate sector in particular.

Key Opportunities In The Real Estate Market:

.. Pre-accession funding from the EU for infrastructure development should become available inthe coming months. We continue to expect that infrastructure will be a key sector for investment.

.. Croatia's business environment has received huge gains from carrying out reforms required bythe EU. As one example, the country has jumped five spots on Transparency International'sCorruption Perceptions Index since 2004, from 67th to 62nd out of 178 countries.

.. Developments for the tourism industry in particular are necessary to support this critical part ofthe Croatian economy.

.. A consumer market which, although currently restrained, is high spending in nature and, oncethe economy finds a more stable and consistent footing, will seek more opportunities and highervalue products. This should only be good news for retailers, high street/mall developers andinternational labels.

.. Non-traditional routes may be needed to fuel growth now that investment from Europe isslowing.Key Risks To The Real Estate Market:

.. Economic problems specific to Croatia: Most likely is a delay to (or cancellation of) majorpublic works projects as a result of the government’s rather constrained budget. However, westress that major projects have been completed over the last two years.

.. Economic problems that are general to the eurozone: This could result in a contraction of exportsthat largely negates the benefits of EU accession. High unemployment and low consumerspending mean economic growth is dependent on an export-led recovery that is narrowly centredon the tourism sector.

.. Large amount of office space due to come online in 2012, but the risk rests on whether there willbe significant demand to match.

.. Essential fiscal austerity measures will do little to prevent an expected ratings downgrade thisyear. They will also erode consumer confidence and see squeezed public spending.