Real Estate Risk/Reward Ratings
Real Estate/Construction Risk/Reward Ratings
|Table: Real Estate Risk/Reward Ratings|
|RE Market||Country Structure||Returns||Market risks||Country risks||Risks||RE Rating||Rank|
|Bosnia & Herzegovina||47.5||38.8||44.4||90.0||33.3||70.1||57.3||10|
|Scores out of 100, with 100 the best. Source : BMI|
Croatia Business Environment
IntroductionCroatia benefits from a relatively high GDP per capita, a stable democracy and the lure of EU accession, scheduled to happen on July 1 2013. The chief business environment constraints are the unreformed judiciary, a large and wasteful public administration as well as still-high state subsidies to ailing industry.
|Table: BMI Business And Operation Risk Ratings|
|Infrastructure Rating||Institutions Rating||Market Orientation Rating||Business Environment|
|Scores out of 100, with 100 representing the best score available for each indicator. Source: BMI|
Croatia's judicial system is considered highly inefficient. The number of judges per capita is among the highest in Europe, and the system is also one of the most expensive. The country has a huge backlog of about 800,000 cases-already reduced from 1.3mn as a result of EU pressure-with particular problems in land registry. The legal framework is still seen as being biased towards insiders. Successive surveys cite judicial problems as the primary obstacle to doing business in the country. Overly lengthy court proceedings are one of the system's most fundamental failures. Specific improvements required include effective monitoring of judicial performance to improve competence and ensure impartiality; restructuring of the court system; and legal personnel training (including that of judges). Particularly weak areas outlined by the IMF and the European Bank for Reconstruction and Development (EBRD) include corporate governance, especially shareholder protection, and party/electoral financing. With such a large, poorly monitored system, corruption is a problem.
That said, EU accession talks have been a major spur to overhaul the legal system and sparked the 'Strategy of Reform of the Judicial System' programme in September 2005. The EU is helping both financially and strategically on all the areas outlined above and has noted some improvement since talks began. Laws on capital markets are now in line with developed markets. The Bankruptcy Law was amended in 2006, meaning greater transparency of proceedings as well as greater protection of employee rights. Legislative improvements to data protection were also completed that year. The constitution calls for an independent judiciary, and while the court system was vulnerable to political influence in the past, the adoption of constitutional amendments has improved judicial independence.
|Table: BMI Legal Framework Rating|
|Investor Protection Score||Rule of Law Score||Contract Enforceability Score||Corruption Score|
|Scores out of 100, with 100 representing the best score available for each indicator. Source: BMI|
The right to own private property is enshrined in the national constitution. Foreign investors can buy and own property without restriction, as long as their country of origin also allows foreign buyers the same rights. However, foreigners require permission from the Ministry of Justice and Foreign Office to buy-a process that can drag on for up to a year. Regulations concerning land ownership are often complicated and sometimes unclear. A backlog of land registry cases and difficulties enforcing property rights, with many problems at the local level, are also pitfalls for foreign buyers. The law also permits the government to expropriate property under various economic and security-related circumstances. On the positive side, the real estate sector is improving, and foreign investment is slowly returning. The World Bank's 2012 Doing Business survey found that registering a property in Croatia takes 104 days.
Intellectual Property Rights
Croatia has now adopted up-to-date intellectual property rights laws, including the WTO Agreement on Trade-Related Intellectual Property Rights. However, enforcement can remain an issue. Legislation effective from January 2004 includes the Patent Law, Trademark Law, Industrial Design Law, the Law on Copyrights and Related Rights, the Law on the Protection of Layout Design of Integrated Circuits and the Law on the Geographical Indications of Products and Services. Croatia signed up to the European Patent Organisation in January 2008.
Corruption has long been a problem in Croatia, as it has been in the wider Balkan region. The government has made efforts to clamp down in recent years - particularly since the advent of EU accession talks - and these have paid off, although the country still has a long way to go. Transparency International's 2011 Corruption Perceptions Index put Croatia 66th out of 183 in the world rankings. Corruption and judicial reform remain the two most significant obstacles to EU accession.
Croatia's infrastructure is relatively well developed for the region. The country has 28,344km of roads, including 742km of motorways and 207km of 'rapid roads'. However, particularly with regard to road links between coastal and inland cities, substantial further investment is needed. Improving infrastructure is one of the EBRD's top priorities in Croatia, and motorway projects have been a major beneficiary of government investment over the past four years. This is particularly important since road transport is responsible for more than 50% of goods transport. Croatia's motorway construction plan for the period 2005-2008 envisaged investments worth HRK33bn (US$5.9bn) and spending on motorway construction averaged nearly 2.5% of GDP for the 2002-2006 period.
Second in importance to road transport is the maritime sector, with a share of 28.5% of all goods transport. This, too, is an area in which huge investments are being made. These include port reconstruction and modernisation at Rijeka, Sibenik and Zadar, upgrading of the ferry terminal at Split and construction of a bulk cargo and container terminal at the port of Ploce.
The total labour force was estimated at 1.71mn as of Q212, with the three largest areas of employment in the economy being manufacturing, wholesale and retail trade, and public administration. Croatia has a relatively high unemployment rate (17.7% in August 2012) and particular problems with long-term and youth unemployment. An employment rate of 56% for the 15-64 age group is below the EU average of 65%. Wages have been rising quite quickly: in July 2012, the average net wage was HRK5,424, a 1.2% nominal year-on-year decrease. Typical employer's wage costs are approximately 110% of an employee's net wage. Croatia has a minimum wage for full-time work at around EUR385 per month.
Primary and secondary school enrolment ratios and spending per student are not far off the rest of Europe, and Croatia has long had one of South East Europe's best-educated and trained labour forces. However, largely due to migration, a lack of skilled workers is now beginning to become a problem.
The low labour force participation rate (which has been falling in recent years) is usually ascribed to one of southern and central Europe's most inflexible labour markets, although labour organisations have been fairly positive over efforts to draw in foreign investment and improve the competitiveness of the economy. Reforms were introduced in 2003 to aid labour flexibility, but strict employment protection legislation remains a disincentive to new job creation; and, in some areas, a lack of affordable housing is a major issue. In October 2007, the Croatian Democratic Union and Social Democrats parties both agreed that further legislation to make the labour market more flexible was imperative and reforms needed before EU accession will be a major spur.
Under the Law on Labour, the maximum working week for full-timers is 40 hours, while 18 days of paid leave a year is mandatory. The Law on Labour also aims to add protection for workers in dangerous occupations and for workers aged 15-18. There is no limit to the number of foreigners who can be employed in a Croatian enterprise. Work permits are required.
Croatia is not especially prone to industrial unrest, but strikes do occur in several economic areas, including state-owned or former state-owned industries (eg, shipbuilding) where protests against job losses sometimes result in militant action. Union membership is a right under the law. Unions are generally independent from political parties. Anti-union discrimination is illegal. Unions can take dismissal cases to court.
|Table: Labour Force Quality|
|Literacy Rate,%||Labour Market Rigidity Score||Female Labour Participation, %|
|Source: BMI, World Bank, ILO. Labour Market Rigidity score from Ease of Doing Business report, 0 = highest score|
Foreign Investment Policy Foreign direct investment (FDI) flows to Croatia have mostly hovered around US$3bn over the past five years. However, the 2009 and 2010 final figures fell significantly short of that seen in 2008 as a result of a collapse in foreign capital inflows. Between 2002 and 2005, net FDI as a percentage of GDP was only a fraction below the regional average of 4.6%, although the country lagged the region significantly in attracting green field FDI. Nonetheless, the prospect of EU membership in 2013 is a big draw to foreign investors.
The government is very open to foreign investment and has a stated aim of increasing inflows. It is also working to improve the business environment by getting tougher on corruption and cutting bureaucracy, which are the key complaints from businesses. There is now a one-stop shop for starting up a business and a regulatory guillotine has been introduced to halt unnecessary regulations. However, despite recent signs of progress, much more needs to be done, including addressing legal inconsistencies and tackling graft.
The national constitution guarantees equal treatment of all companies, domestic or foreign, as well as the rights of foreign investors to transfer and repatriate profits and capital invested. In practice, however, some businesses have found local opposition to foreign investment, particularly for tourism developments in coastal areas, where opposition to development has at times taken the form of excessive bureaucracy being used to thwart investors.
The Trade and Investment Promotion Agency previously operated with the aim of attracting investment projects across a range of economic activities. However, since 2010, all activities of the Agency have been transferred to the Investment Promotion and Export Directorate at the Minisry of Economy. The Investment Promotion Act has been in force since 2007, including tax and tariff preferences and incentive measures for large projects. There is a 0% profits tax for investments over EUR8mn. Online business registration at www.hitro.hr now means a new company can be registered in four days.
Croatia's privatisation programme has somewhat stalled recently. Despite setbacks, with a major corruption scandal effectively abolishing the State Privatisation Fund in June 2007, a privatisation programme remains in place through the Croatian Privatisation Fund to divest the country of stakes in around 600 companies. Shipyards, agricultural and tourism companies are among those being sold.
Austria, Germany and the Netherlands are the top three foreign investors in the country, and investment has been concentrated in the financial, telecommunications, pharmaceutical, tourism and retail sectors. In addition to Barr's acquisition of Pliva, Hungarian oil and gas company MOL's investment in INA and Deutsche Telekom's stake in Croatian Telecom are some of the major deals of the past decade. Large foreign banks now own more than 90% of the domestic banking system: Italy's Unicredit and Banca Commerciale Italiana have been key investors.
|Table: Emerging Europe - Annual FDI Inflows|
|US$bn||Per Capita||US$bn||Per Capita||US$bn||Per Capita|
|Source: BMI, UNCTAD|
Foreign Trade Regime
Croatia's most important trading partner is the EU (about 60% of all external trade in 2011). Under the EU's Stabilisation and Association Agreement (a precursor to accession), agreed in 2001, the EU has almost entirely lifted tariffs and other restrictions to imports from Croatia. Quotas remain only for certain types of beef, certain fish products and wine. In 2002, Croatia lifted tariffs and restrictions on most industrial products coming into the country from the EU. Other tariffs are progressively being lifted in advance of the entirely free movement of goods and services it expects following accession.
As well as a free trade agreement (FTA) with the 27 members of the EU, Croatia has signed a number of regional trade agreements. As of 2010, the Central European Free Trade Agreement comprises Croatia, Macedonia, Bosnia-Herzegovina, Moldova, Serbia and Kosovo, Albania and Montenegro. Other FTAs include those with the European Free Trade Association (Norway, Iceland, Liechtenstein and Switzerland) and a bilateral agreement with Turkey. Croatia has been a member of the WTO since November 30 2000.
Croatia operates 13 free trade zones (FTZs), in which the restrictions of the Trade and Foreign Exchange Act do not apply. These zones are located in Krapina-Zagorje; Osijek; Rijeka; Slavonski Brod; Split; Splitsko-Dalmatinska; Ploce; Pula; Kukuljanovo; Varazdin; Zagreb; Vukovar; and Ribnik. Goods may be freely exported and imported, and customs duties and taxes are not levied on goods stored in a zone. There are tax breaks on infrastructure projects worth more than HRK1mn carried out within the zones. FTZs are exempt from any emergency measures or other restrictions relating to foreign trade or hard currency transactions.
|Table: Trade And Investment Ratings|
|Openness To Investment Score||Openness To Trade Score|
|Scores out of 100, with 100 representing the best score available for each indicator. Source: BMI|
Taxes are generally high in Croatia, especially compared with lower flat rates in regional peers Macedonia and Romania. The coalition government formed in December 2011 raised the VAT rate from 23% to 25% and introduced a withholding tax at a 12% rate for payments of dividends under the corporate profit tax regime, effective March 1 2012.
Corporate Tax: Charged at a flat rate of 20%. Resident firms pay tax on global income and receive a credit for tax paid in another country. Non-resident firms pay tax on Croatian-sourced income only. A withholding tax at a 12% rate was levied starting March 1 for payments of dividends.
Individual Tax: Charged progressively at four rates: 15%, 25%, 35% and a maximum 45%, plus surcharges levied by local government. Residents pay tax on global income. Non-residents pay tax on Croatian-sourced income. Dividends to individuals are exempt from personal tax.
Indirect Tax: VAT was raised to 25% from 23% effective March 1 2012 as part of the government's fiscal austerity drive. Housing rent, financial and insurance services are among VAT-exempt items. Registration is compulsory for firms with an annual turnover of more than HRK85,000. Under this threshold, voluntary registration is possible.
Capital Gains: Individuals do not generally pay capital gains tax. Gains made by individuals from sales of immovable property are subject to a 25% flat rate tax, although there is no tax payable if the seller has owned the property for more than three years or lived in it prior to sale. Gains on intellectual property rights are also subject to a 25% flat rate tax.
Security risk to foreign investors in Croatia is very low. The greatest threat in the country, as across much of Europe, is from international terrorist groups following the 2001, 2004 and 2005 attacks in the US, Madrid and London respectively. However, the risk to Croatia is minimal; the country has no active presence in Iraq and only a small peacekeeping contingent in Afghanistan. Domestic crime level is low and foreigners are not particularly targeted.
Disputes following the war of independence during 1991-1995 are chiefly limited to territorial wrangles with neighbouring Serbia and Slovenia, which are being handled diplomatically. There are a very small number of attacks based on ethnic tension following the war. The country has no known domestic terror groups, but a number are believed to pass through the region on their way to Western Europe. In this respect, the country's long maritime borders, which are poorly guarded in places, are a useful conduit for smuggling drugs, arms and people. Government efficacy in dealing with all of the above is increasing, with looming EU accession a major spur to improving border and customs supervision.
In general terms, the competitive landscape of Croatia's real estate sector is shaped by three factors. One is common to most other countries in Central and Eastern Europe; the other two are (fairly) specific to Croatia.
First, and like most other countries in Central and Eastern Europe, the leading protagonists see Croatia not just as a stand-alone opportunity, but as a part of a broader region. The major developers are multi-national organisations, which are often diversified across types of real estate, usually across activity (ie development, management, long-term property investment and hotels/other ventures) and always by geography. Some of the companies have significant interests in the developed countries of Western Europe. All have the advantages of absolute size, especially relative to the opportunities in any one city in Central and Eastern Europe. They all also have access to long-term funding; whether through stock-market listings (often in Western Europe) or through deep-pocketed investors who are prepared to take the long-term view. These companies have survived the massive dislocations of the economy and real estate sector of Central and Eastern Europe following the global financial crisis in 2008-09, although some did so only as a result of a wholesale restructuring.
Major regional developers that are active in Croatia - typically in prestigious retail or commercial properties in Zagreb, or resort developments on the Dalmatian coast - include Orco Property Group, TriGranit, Landmark Property Management and GTC Real Estate.
The second factor that shapes Croatia's real estate sector is a significant and well-established tourism industry, particularly along the Dalmatian coast. Although Croatia is not the only country in Central and Eastern Europe to offer opportunities to resort developers (given that, for example, significant projects exist on the Black Sea coasts of Romania and Bulgaria), it has the advantages of greater proximity to Western Europe and a local population with relatively high income levels. Orco, for instance, is widely diversified in terms of where it is operating and the kind of properties with which it is involved. However, in Croatia its main activities relate to hotel/resort property in Hvar. Landmark, too, is focused on resorts.
The third factor, which is unique to Croatia, is its accession to the EU following the closure of negotiations at the end of June 2011. At this stage, it seems likely that Croatia will gain full EU membership on July 1 2013. Relative to Bulgaria and Romania, which joined the EU in 2007, Croatia has the advantages of location, superior infrastructure, higher income levels and a better general business environment. EU membership should provide greater access to EU funding for infrastructure and may provide a significant boost to overall investment. An obvious beneficiary is Split-based Konstruktor- inzenjering, a long-established construction company and manufacturer of building products.
Konstruktor has weathered the political and economic storms associated with the break-up of Yugoslavia and the global financial crisis. It has proven expertise in a very wide range of building and non-building projects and has expanded beyond Croatia. It is building a hydro-electric power station in Mostar, Bosnia/Herzegovina and has interests in the Middle East and North Africa, as well as in other countries that previously formed part of Yugoslavia.
International shopping centre constructor Sonae Sierra will be responsible for the development management of the new Vbrani shopping centre in northwest Croatia, reports Balkans Business News. This site is investment management firm Bluehouse Capital's latest venture and the completed commercial centre will have a lettable area of 1,800 square metres and be next to a top tourist attraction in the area, Lake Jarun. Igor Hrzic, general manager at Bluehouse Croatia, said the companies would collaborate together to produce 'a high quality and innovative shopping centre'.
Standard & Poor's has affirmed Croatia's credit rating at BBB - with a negative outlook. The rating was given over concerns that an overhaul of the country's labour market and public sector will not be achieved and this will hamper economic growth. On the positive side, the rating was supported by political stability and relative prosperity, the country has a per capita GDP of more than US$13,000 and net general government debt burden of just under 50%. We expect Croatia to maintain its investment grade rating this year given our belief that fiscal consolidation and structural reforms will be implemented successfully. However, we caution that the challenging macroeconomic backdrop and public discontent could render these tasks difficult and lead to policy slippage.
Croatia's infrastructure was damaged during the 1991-1995 war, with the value of destruction estimated by the government at US$27bn. As a result, the second half of the 1990s saw major reconstruction activity. Indeed, post-war investment has been strong, particularly with pan-European institutions engaging with the country. This created strong growth for the construction industry in Croatia with y-o-y growth as high as 18% in 2006. However, this was hit dramatically by the global recession, with many international companies postponing projects in the country or pulling out to focus on their home markets.
A serious lack of investment inflow left infrastructure financing in a bad state in 2011. Croatian politicians have described the country's accession to the EU as the only way for the country to survive economically.
In September 2010, Prime Minister Jadranka Kosor said: 'Accession to the European Union is for Croatia no longer a political issue, insomuch as it is the key prerequisite for economic survival. There is less and less doubt that it is the only way for Croatia to get out of the economic crisis soon. It is evident that the Croatian economy is currently in long-term stagnation, and the only way to launch a new cycle of economic growth is investment. Croatia clearly lacks the money for these investments, there are ever fewer foreign investors as a result of the crisis, so that the money from EU funds targeted to Croatia as a new member are practically the only funds your Government can count on in the coming years. At stake are EUR3.5bn in the first two years of membership, and Croatia needs to do all it can to try to make use of as much of this money as it can.
We believe EU accession could further speed up infrastructure activity in the country, as Croatia will have access to funding to be able to support such projects. The European Investment Bank (EIB) estimates that it has provided some EUR2.5bn (US$3.2bn) in loans (including current loans) to Croatia since 2001, to help implement projects that will support its accession. Another EUR85mn (US$109.1mn) was provided by the EIB in September 2011 to help support infrastructure projects in the country.
Key projects have included opening up the country's motorways to private investment, restructuring Croatian Railways and the modernisation of the Port of Ploce. Major projects undertaken by the government include the road-building programme, with new highways being built to link the capital, Zagreb, with Rijeka, on the Istrian peninsula, and with the south western hinterland, including Split. Indeed, investment in the country's road network has been substantial. The rail network will receive a substantial boost, including the building of a high-speed line for both cargo and passengers between Zagreb, Rijeka and Botovo by 2013.
The Croatian government is also undertaking projects, but again these have been affected by cuts in government departments' budgets. There are still a wide range of projects under way, including privatisation of hotels by foreign investors experienced in hotel management, facilitating plans for development of golf courses, giving tax relief for foreign tour operators, incentives for investments, subsidies to air carriers and removing administrative barriers.
Viadukt is the leading Croatian company in the construction and reconstruction of pavement structures for airports. Another major player is the public limited Rijeka-Zagreb Motorway, a company that specialises in the construction and operation of motorways.
The Croatian infrastructure sector has a number of state-owned companies, including Hrvatske autoceste for the maintenance of highways and Hrvatske ceste for maintaining the roads. Railways infrastructure in the country is managed by the government-owned company Hrvatske Å¾eljeznice. Other companies include Croatian road construction and maintenance firm Rijekapromet, Konstruktor inÅ¾enjering, Pomgrad Engineering and Montmontaza Group.