June 20 (Bloomberg) -- If Austrian developer Helmut Wiesmeyer’s car hadn’t broken down along a windswept beach on Croatia’s Istrian peninsula, he might not be poised to cash in on the country’s European Union membership.
Stranded near the town of Rabac in 2007, Wiesmeyer spotted a pair of dilapidated, communist-era hotels and “had a vision” of building a modern resort. Now, with the former Yugoslav republic set to join the EU on July 1, Wiesmeyer has remade the site and is preparing to offer 52 seaside apartments designed for foreign vacationers, with swimming pools, spas, a concierge and a mortgage that offers a better rate than local banks’ from Austria’s Allgemeine Sparkasse Oberoesterreich Bank AG.
“For many investors, Croatia used to be a beautiful place but not a market for investment because they worried about the security of ownership or legal problems,” Wiesmeyer, the owner of Istra-Fortuna d.o.o., said by phone from his home in the Austrian city of Linz. “That will now change.”
Croatia, whose beaches, vineyards and national parks have made summer tourism a 6.8 billion-euro ($9.1 billion) business, is counting on EU entry to lure visitors to come for more than a week a year and spend their money there. Property sales could give a boost to the economy after total lending fell 2.7 percent last year. By linking with other European economies, the government hopes to end four years of recession or economic stagnation two decades after the Balkan civil wars destroyed Yugoslavia.
Residential-property sales in tourist regions like Istria and Dubrovnik along the Adriatic coast rose by an average of 10.8 percent last year even as the sluggish economy caused overall home sales to plunge 20 percent. That gave banks including Vienna-based Erste Group Bank AG the chance to win more business, despite a drop in lending across Croatia.
“For buyers, it’s psychologically very important that their holiday home is also in the EU,” Patrick Franolic, head of the Croatian unit of Zagreb-based brokerage Spiller Farmer s.r.o., said in an interview. “As foreign interest in second homes in Croatia grows, banks will compete to attract these buyers.”
Following Yugoslavia’s bloody breakup in the 1990s, Croatia began marketing its 5,800-kilometer (3,600-mile) coastline, including the chain of more than 1,000 islands, beyond the traditional eastern European tourists to Austrians, Germans, Britons and the French. Tourism typically makes up about 20 percent of the country’s economy.
As Croatia has moved closer to joining the EU, it gradually eased the rules on foreign ownership of homes and other properties. Since 2009, there have been no restrictions on EU citizens.
Foreigners own about 40,000 mostly-residential properties in Croatia, according to Ivan Stojevic, head of the real estate arm of Intesa Sanpaolo SpA’s Privredna Banka Zagreb d.d. Croatians own about 200,000 second homes, the local unit of research company GfK estimated earlier this year.
The EU’s debt crisis has prevented Croatia’s economy from growing since 2008. That contributed to a plunge in the total value of home sales to about 7.5 billion kuna ($1.4 billion) in 2012 from 25 billion kuna in 2008, central bank Vice Governor Damir Odak said in May.
While total home sales fell by about 50 percent to 32,000 in 2012 from a peak of 66,000 in 2007, sales on the coast declined less and are now showing signs of a recovery, Dubravko Ranilovic, head of the Association of Realtors at the Croatian Chamber of Commerce, said by phone.
In the two main tourist regions, the Istrian peninsula in the northern Adriatic and Dubrovnik and its surroundings in the south, home sales increased by 13 percent and 8.6 percent, respectively, in 2012, according to a study by Ranilovic’s Kastel Zagreb d.o.o. published last month.
Home sales in Zagreb, the capital, dropped 21 percent in the same period. In eastern Croatia, where the country has a border with Hungary and Serbia, sales dipped 44 percent. The estimates are based on the Finance Ministry’s data and its preliminary figures for last year.
“We estimate that foreigners accounted for more than 50 percent of home purchases in tourist areas, outside major population centers, over the past six years,” Ranilovic said. The Istrian peninsula, home to tourist centers such as Porec, Rovinj and Pula, “in particular is rebounding” he said.
The Tax Office assessed the number of foreign purchases at about 15 percent of total home transactions in 2011.
Michael Grimm, a broker at Engel & Voelkers’ satellite office on the Adriatic island of Rab off the northern coast of Croatia, said inquiries from Germany, where the brokerage is based, rose about 30 percent in recent months, he said.
“The demand for second homes in western and northern Europe is very big,” Grimm said by phone. “Why Croatia? It’s much cheaper than Italy or Spain, it is still unspoiled, and you can reach it by car from Austria, Italy and southern Germany.”
A recovery in the property market will bring in more foreign capital and help revive construction, transportation and service industries, among those hurt most by the weakness of Croatia’s economy. Foreign direct investment in 2012 plummeted to almost a fifth of the $4.2 billion in 2008, according to the central bank.
Steve Fagg was on vacation in Croatia almost a decade ago when he saw a derelict beach house on Korcula, one of Croatia’s large islands near Dubrovnik.
“It was love at first sight, but I bought it with the knowledge that Croatia will be entering the European Union at some point down the road,” Fagg said by phone from his London home.
By mortgaging his property in England, Fagg bought the house in 2005, the year Croatia started EU membership talks, and turned it into Villa Jade, a luxury rental property.
“It was a brave act, but it paid off,” said Fagg, who last year bought a development plot on the same island. “EU entry will be valuable across all industries, and property prices will rise once the crisis is over.”
For now, the Croatian unit of Erste Group is the only major bank operating in the country to offer mortgages to foreigners interested in Croatian properties, with a program that started in 2010.
The loan has an interest rate of 5.6 percentage points over 12-month Euribor and limits mortgages to 250,000 euros, said Ilijana Jelec, head of the bank’s real estate arm in Zagreb.
Alan White of Barclays Plc said his bank isn’t considering loans with Croatian collateral because it doesn’t have any outlets in the country. Tim Oliver Ambrosius, a spokesman of Deutsche Bank AG, declined to comment on the bank’s plans when reached by phone in Berlin.
“There will be certain changes here, as the EU membership will increase competitive pressures and foreign banks will approach the Croatian market differently,” Jelec said by phone from her office in Zagreb. “For such changes to happen, we need clear regulations and we need people and institutions to have absolute trust in deed books.”
Austrian investor Wiesmeyer said after years of red tape, he’s in the final phases of construction at his Rabac resort, after tearing down the two abandoned hotels and starting anew. The complex will include swimming pools, spas and a concierge. He has more than a dozen reservations for his high-end units and the first residents are expected to move toward the end of 2014.
By then, the country will be in the EU and concerns about the country’s violent past and sometimes slow trek to a free market will have eased even more in the minds of prospective buyers, Wiesmeyer said.
While struggling with the construction, Wiesmeyer lined up Allgemeine Sparkasse to offer foreign buyers an interest rate of around 3.6 percent, below comparable Croatian mortgages.
“Compared to the paperwork, getting an arrangement with the bank was much easier,” Wiesmeyer said. “The project is very good, and I’m an old customer.”
To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at email@example.com