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Could Real Estate Once Again Become the Trigger to the Investment Cycle in Croatia?

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Following the Croatian parliamentary elections in November 2015, a new Government was formed at the end of January, spearheaded by Prime Minister Tihomir Oreskovic.

The new Government is taking over a state with an economy showing signs of recovery following many years of recession, with yearly growth recorded at approximately 1.8%. However, in spite of these positive signs, Croatia undoubtedly has a long, heavy, and uncertain road ahead in order to achieve complete economic recovery. As a result, the Government has introduced guidelines to encourage further growth by increasing the country’s economic competitiveness and credit rating, decreasing its public debt, and increasing its attractiveness for new investors.

In the Prime Minister’s announcements, as well as in the drafts and proposals issued by governmental authorities responsible for management of state assets – above all the State Office for State Asset Management (DUUDI) – the need to divest more than EUR 500 million in state assets is consistently pointed to as a necessary measure. The country’s previous experience with selling state-owned shares in companies makes it questionable whether the proposed model will be successful and attractive to buyers this time, especially as state-owned shares in valuable companies – because they have been declared “strategic” – are not on the market. However, the state’s real estate portfolio might potentially be recognized by investors as a sound opportunity to invest in Croatia.

The state intends to put on the market and thus “activate” a large amount of state-owned real estate which currently represents merely unused potential and only generates expenses. A substantial amount of this real estate takes the form of state-owned apartments, business premises, and construction land. What could be especially interesting for investors is the formerly military-owned real estate, the management and disposition of which DUUDI took over from the Ministry of Defense upon its declaration that it had no value from a military perspective. So far DUUDI has recovered more than 320 separate pieces of this former military real estate, located throughout Croatia and encompassing significantly large plots of land and a whole range of buildings and other premises, several of which are located on the coast or in the vicinity of larger towns. These features in particular are the reason that this military real estate offers a great investment potential, especially in the tourism and industrial sectors. And indeed, a number of foreign and domestic investors have apparently already shown their interest in several sites from this portfolio. 

However, before placing this real estate on the market it is necessary to resolve its legal status and to make certain interventions within the legal framework and spatial planning documentation. In particular, because of the military-related status of the real estate, in most cases the ownership of the real estate has not been updated and buildings on the land have not been recorded either in the cadaster or in the land registry. Furthermore, former military facilities have mostly represented “holes” in spatial planning documents, with zoning designations yet to be determined – though this could also be an advantage, providing a flexibility to adapt the designation to investments needs. 

With respect to the means of disposing the former military real estate, it is the state’s intention to primarily assign the real estate to investors on the basis of rights limited to a certain period of time (building rights, leases, concessions, etc.) for a maximum period of 99 years. The disposition should be carried out by way of a public tender, and only under exceptional circumstances, if certain legal conditions are met, could the state property be disposed of by way of a direct agreement.

To conclude, in order to lower the deficit and encourage investment into the country the state intends to reach into its treasure chest and offer to investors former military real estate, some of which has exceptional touristic and industrial potential. It remains to be seen whether investors will recognize the potential of this currently “dead” property and whether the state will have enough strength and wisdom to see this reanimation process through.

By Marin Vukovic, Partner, Divjak, Topic, Bahtijarevic

This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.