June 21 (Bloomberg) -- Seven years after a group of investors represented by Barclays Plc and Equity Trust (Jersey) Ltd. bought land for building on Croatia’s coast, their plan to build 26 villas in the hills above Dubrovnik remains on hold.
Three levels of government must still sign off on the 36 million-euro ($46-million) project. The biggest obstacle: The development mustn’t be visible from anywhere else in the city, according to the district government’s interpretation of the building code in the nation’s most-visited Adriatic Sea resort.
The experience shows how difficult it can be for foreign investors in Croatia, where tourism accounts for one-fifth of the economy, to see a return on their money. Croatia, which is set to become the European Union’s 28th member in July 2013, needs foreign investment after two years of recession and a period of stagnation in 2011.
“It’s not unreasonable to expect to be able to build in a building zone, and we are open to cooperating with the authorities over how it should look,” said Craig Cameron, who directs the project, Fenestra Village, for project manager CMC Global. “We believe Croatia has great potential for investment in tourism, but after seven years, we are frustrated.”
In another example, Israeli businessman Aaron Frenkel and Australian golfer and entrepreneur Greg Norman have been trying for five years to get the green light for a golf resort, also near Dubrovnik, after spending 90 million euros for land zoned for sports.
Europe’s sovereign debt crisis caused 2011 foreign direct investment in Croatia to plummet to a quarter of the $4.2 billion in 2008, according to the central bank. Prime Minister Zoran Milanovic is trying to lure investors with an 8 billion kuna ($1.3 billion) infusion from reconstruction banks and EU funds for infrastructure.
Still, as a six-month-old Cabinet led by Milanovic’s Social Democrats seeks to ease access for foreign investors, red tape remains one of the biggest obstacles. Potential investors are repelled by long processes and “uncertainty,” Finance Minister Slavko Linic told a business forum in Zagreb on June 13.
In tourism, potential investors are also faced with obsolete deed books and a lack of transparency in land ownership. That is further complicated by privatization deals in the early 1990s, when leaders of the newly independent country presided over hasty sales of Communist-era property to selected individuals.
Croatia’s development laws include “a number of regulations that are complete nonsense,” said President Ivo Josipovic.
“We cannot boost investment while we have ancient deed books, while we require 40 to 50 permits for a single project, while local plans are not adapted to requirements, while there is a divide among various levels of government, and while local governments with their requests can obstruct investment,” Josipovic said on June 4 at a World Bank panel in Zagreb.
Dubrovnik, on the far south of Croatia’s 5,800-kilometer (3,600-mile), island-dotted coast, has styled itself as a high-end tourist destination. Blackstone Group LP’s Hilton Worldwide Inc. and Rezidor Hotel Group AB’s Radisson Blu Hotels operate in the town and the vicinity, while Chile’s Grupo Luksic owns the Adriatic Luxury Hotels chain. Past visitors to the city include Microsoft Corp. founder Bill Gates, singer Beyonce and Britain’s Prince Charles.
The old town, built with white stone and marble during the Renaissance at the height of Dubrovnik’s era as an independent republic, is listed as a World Heritage site by UNESCO, the United Nations Educational, Scientific and Cultural Organization. Pine trees and pebble beaches below its limestone cliffs offer respite after sightseeing.
The city of 40,000 has grown beyond its ancient walls, along the coastline and toward the lower slopes of Srdj, a stony hill that rises above the old town. The project’s 28,000-square-meter plot lies east of the peak.
CMC Global Ltd. is a British development manager specializing in tourist and residential projects in the U.K. and southeast Europe. Barclays is manager and trustee of the R2R Croatia Country Funds, which ultimately invest in the Fenestra development, said spokesman Will Bowen from London.
Equity Trust is a minority shareholder in the project, said Richard Asquith, spokesman for TMF Group, which merged with Equity in June 2011.
On a clear day at the site in May, the white walls of the Old Town, about 1.5 kilometers to the west, glistened in the afternoon sun, set off by a deep blue sea and the darker contours of the nearby Elafiti archipelago.
This view is a key selling point for Fenestra, Latin for “window.” Yet the view has become the focus of contention between the district and municipal governments. Citing a 2005 “invisibility” clause in the urban plan designed to safeguard the city’s historic views, the district government, controlled by the main opposition party, the Croatian Democratic Union, says no new construction should be visible from the city, including its more recent annexations.
Mayor Andro Vlahusic, from a coalition led by the premier’s Social Democrats, says the rule is meant to protect the beauty of vistas from the Old Town.
Nikola Dobroslavic, head of the district government, said he feels “very sorry” for the Fenestra Village investors.
“Yes, they bought land in the residential building zone, but that doesn’t necessarily mean they can build there,” Dobroslavic said on May 28 in his office in a baroque palace in Old Town. “A building zone may mean you can build a park there, or a road, and this is not clear until it’s specified by a detailed urban plan. Perhaps the investors should have ordered an expert study before making the purchase.”
A detailed urban plan has yet to be completed, according to Vlahusic and Dobroslavic. Several mandatory public debates, in which architects’ associations, citizens groups and local land owners have voiced their opinions, have taken place. A report from the last debate is expected by mid-June. The Ministry of Construction and Physical Planning will then weigh in on the plan before it is submitted for approval to the city council.
“This is a normal process that happens in countries all over the world, but in Croatia it takes four or five times longer than anywhere else,” Cameron said, adding that his group did projects in Poland and Montenegro that took 12 months from start to completion.
He also said planning officials from the municipal government assured them in 2005 they would be able to build a park of luxury villas.
Dubrovnik Mayor Vlahusic said the Fenestra Village project should go ahead as it fits regional and municipal plans.
“The biggest obstacle to investment in Dubrovnik is the district government and the politics behind it,” he said in an interview on May 30. “We have a choice: we can either build, invest and develop, or we can be eminently poor.”
With lower prices than Mediterranean rivals Greece, Italy and Spain, Croatia is looking to increase revenue from tourism after it becomes an EU member next year.
Funds are also needed to repair destruction still noticeable from the regional war that began in 1991. Dubrovnik and its surroundings, only miles away from Montenegro and Bosnia-Herzegovina, were badly damaged during Croatia’s struggle for independence from the former Yugoslavia.
The visibility issue is also blocking a project to build a golf resort on the northern slopes of Srdj, where a field of low-growing bush stretches to the mountainous border with Bosnia-Herzegovina. The area was zoned as a golf resort when Frenkel, later joined by Norman, bought 765 acres in 2007, planning to invest about 1 billion euros.
“The project hit a stone wall over whether it would be visible from the Old Town,” Ivan Kusalic, head of Razvoj Golf d.o.o., said in an interview. “We believe we fully comply with the rule. We never expected the procedure to last this long.”
Dobroslavic, head of the district government, said the project wouldn’t satisfy the invisibility clause, and that there was a disagreement over how many villas should be built in the golf resort. Mayor Vlahusic said the district government’s requests have halted the project “for political reasons.”
The government forecasts 0.8 percent growth this year, while the World Bank and Central Bank Governor Zeljko Rohatinski predict a 1 percent contraction. Prime Minister Milanovic said June 1 that a good tourist season would boost the economy after gross domestic product fell 1.3 percent in the first quarter. Unemployment was 18 percent in May.
In April 2011, Robert Benmosche, chief executive officer of insurer American International Group Inc., spoke at an investors’ forum on how he’s frequently questioned why he bought a villa in Croatia, with its socialist past.
“Now that you’ve been here, you understand,” he said, pointing from the Palace Hotel’s conference room to the Elafiti islands in the morning sun. “It’s a most beautiful place in the world, but it comes with some challenges.”
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