Dubravko Ranilović LLB : Construction activity – consequence of weights on the real estate market

The main reason for the current high prices on the real estate market is that we are still in a cycle of low interest rates on loans that began in 2015, which is being stopped by increasing the price of money to slow down the demand, says Dubravko Ranilović, President of Real Estate Association with HGK, for Diplomacy&Commerce. Prices of square meters are highest in the most famous tourist places such as Rovinj, Opatija and Dubrovnik, but also in Zagreb, and this primarily refers to the newly-built high-quality real estate in the best locations in the city, Ranilović reminds.

 

  1. Total construction activity has been slowing down lately, with the increase in August being the lowest since a 2.2 percent year-on-year decline in May 2020 (largely affected by the lockdown period a month earlier). Along with the decline in the level of building permits issued (-5.5 percent year-on-year in August), this signals that the general trend in the construction sector is reversing into a negative trend by the end of 2022. If so, how long do you think it will last?

 There are many peculiarities that affect the activity of the construction sector. One of them is the need for reconstruction after the earthquake in Zagreb and Banovina, which has not yet warmed up, and then there’s the seasonality of the market. Slowdowns are more noticeable in some parts due to the global issue of labor shortage and rising prices of materials and construction costs that occurred during the Pandemic. However, while demand is high, it also stimulates the construction activity.

 

  1. Will this slowdown lower the prices of square meters for the retail sector and by how much? Also, what affects the formation of the price?

Causes of eventual decline on the real estate market, which would indicate there is a slowdown in demand, and then a secondary drop in prices will occur due to other, primarily economic causes. Construction activity is a consequence of weights in the real estate market. Therefore, it will primarily be affected by the decrease in demand. The main reason for the current high prices on the real estate market is that we are still in a cycle of low interest rates on loans that began in 2015, which is being stopped by increasing the price of money to slow down the demand. During the pandemic, cheap money was used to incite consumption which leads to high inflation, which chases away the investors in real estate in order to preserve the value of money through price rise, and to mitigate the consequences of this same inflation as much as possible.  We expect changes in trends next year, which will reduce the market volume and the number of transactions at first, , and then, after some time, it will influence real estate owners to adjust their asking prices to the new circumstances on the market.

 

  1. To what extent will Croatia’s entrance in the eurozone affect the retail and commercial real estate market, if we take into consideration the coastline and foreigners’ interest in purchasing real estate on the coast?

We should bear in mind that in more than 1/3 of acquisitions of residential real estate in the Republic of Croatia, the buyers are foreigners – primarily EU citizens. Foreigners (foreign natural and legal persons) acquired exactly 12,518 properties in the period from July 1, 2021 to June 30, 2022, which represents 35.8% of the total volume of 34,927 residential (apartments and houses) transactions in the same period.  As a rule, the vast majority of acquisitions take place in coastal destinations, so we can say that in this sense Croatia has 2 markets; the continental one and the coastal one. Therefore, changes in trends will not be reflected equally on all properties and on all parts of Croatia. The introduction of Euro and Croatia’s joining the Schengen zone will certainly have a positive effect on the real estate market, it will additionally bring foreigners closer to Croatia in a way that they can buy real estate in their own currency and they will be closer to their vacation homes, because without borders, travel will be shortened in terms of time and even more psychologically. However, we need to emphasize that these two facts, which are certain to be realized at the beginning of next year, will not have a decisive effect on the market, because the economic situation of Croatia and the world is more important for the market. If the trends are downward due to economic reasons, they will remain so until the moment those reasons disappear. Croatia has some market specificities, but all crises as well as market upswings were of global origin, and this will continue in the future as well.

 

  1. What do the statistics say by region, where is the least construction, where the most, and which region has the highest and the lowest prices?

Most properties are sold and built in the capital city of Zagreb, and these are primarily residential and commercial properties. Construction activity is also high on the coast, primarily due to the construction of apartments, the construction of which is encouraged primarily by the low tax on tourist rent, which in the long term is not encouraging because it empties the cities, artificially increases settlements and reduces the green zone, and prices are getting higher, so due to this it is increasingly difficult for the locals to afford housing.  Rural parts of continental Croatia are the least active. Prices are highest in the most famous tourist places such as Rovinj, Opatija and Dubrovnik, but also in Zagreb, and this primarily refers to the newly-built high-quality real estate in the best locations in the city.

 

  1. What is HGK doing to encourage the development of real estate trade?

 The Real Estate Association that operates within HGK is made of entrepreneurs who joined forces to make the Real Estate Market more transparent and to encourage it to move in the right direction in the interest of all the participants. It is not important to encourage trade every moment on the market, but it is important to push the market in the direction in which it will be stable in the long term and feed many participants. A market that leaps too far after a change in trend will have a very hard fall, which then ultimately leads to the collapse of many business entities. We who live from the market strive to be the voice of reason in extreme situations. Right now we are in one of these situations. We learned a great deal from the crisis that started in 2008 and it would be stupid of us not to remember the lesson. All of us who have real estate companies barely survived those crisis years, primarily because of the long-term consequences of the aforementioned crisis, but also because of the too big of a bubble that we did not deflate in time, when it was necessary. The construction sector, which lost the most workers and business entities, suffered even more. All the participants in the real estate market have to be responsible, as well as those who report about it. It is very important not to encourage unrealistic rise or excessive pessimism when the numbers go down. And they will, because it is logically for the market to have cycle changes which creates a desirable economic dynamics. Nothing lasts forever, including the growth of the real estate market.