There are many opportunities for controlled development of the real estate business in tourism

Branding of residences and apartments, activation of neglected state properties in prime locations, and a uniform tax policy are some of the ways to address the uncontrolled growth of the real estate business in tourism, says hotel consultant Marina Franolić for Hina ahead of the real estate development conference.

This international conference on the real estate industry in Croatia and the region, titled “RE:D/Real Estate: Development/” will take place on February 28 and 29 in Zagreb, organized by HESA Group, of which Franolić is the director. Among other topics, it will discuss the real estate business in tourism as a significant part of the real estate market in Croatia, as well as the comparison of short-term and long-term rentals, where to invest further, financing real estate, infrastructure development in support of project development, and more.

– The new Tourism Act has provided new tools and a legal framework for tourism development, and has given local government a more important role in managing destinations: they will determine what, how much, and where will be built for tourism needs. Since tourism in Croatia today is mostly a real estate business that is growing uncontrollably and congesting space without being actively used year-round, this also leads to an increase in square meter prices and an imbalance in the supply and demand for residential properties – says Franolić.

About 500,000 Croatian citizens own a property they rent out

She particularly draws attention to the challenges of uncontrolled growth of private accommodation, such as the burden on local infrastructure and overtourism in a short season, the discomfort of residents in certain apartment buildings where short-term rentals are conducted due to “new neighbors,” as well as rising prices which lead to an increasing exodus from city centers and the inability for young people and others to purchase property.

Franolić confirms this with data: from July 2021 to June 2022, about 80 percent of properties on the Adriatic (where about 90 percent of total annual tourist traffic occurs) were purchased by foreigners, who mostly spend a smaller part of the year in these properties.

Prices of residential properties have increased by 8.2 percent by the sea, and by 12.1 percent in Zagreb from April 2022 to March 2023, while from 2016 to 2021, the capacities of private accommodation in tourism increased by 136 percent, from about 250,000 to over 586,600 beds.

At the same time, hotel capacities increased by a modest five percent, from about 171,000 to 179,200 beds, so in 2022, 60 percent of accommodation for tourists in Croatia was in private capacities, and only 15 percent in hotels.

Franolić also reminds that the VAT rate in hotel accommodation is 13 percent, while owners of private accommodation are usually not VAT payers and pay a flat annual income tax per bed (up to a maximum of 200 euros, depending on the decision of the local government), as well as a flat tourist fee and membership fees to tourist boards. They do not have income tax on property (12 percent of income) or profit tax, as in the case of long-term rentals.

– Of course, private accommodation also has its positive sides. The local population that has such capacities earns a substantial income which they later spend largely through the local or national economy. About 500,000 Croatian citizens own a property they rent out – states Franolić.

The practice of limiting rentals in cities already exists in Europe and the world

Due to the introduction of order in destinations, some mayors and local leaders have already opted for new measures, with Franolić mentioning the mayor of Dubrovnik who announced the cancellation of further permits for private renters in the old town core, and such practices are not new in Europe and the world.

Vienna will introduce restrictions for property owners from July 2024, limiting them to a maximum of 90 rental days per year, Paris has extended this to 120 days, but everything must be registered with the city administration, while in Amsterdam it is 30 days per year, and for more than that, special permits are required.

Italy is considering the adoption of a national law on short-term rentals, in Portugal, due to high property prices, they have stopped issuing permits for short-term rentals of private accommodation, except in rural areas, and in Palma de Mallorca, apartments in residential buildings can no longer be rented short-term, only exclusively standalone properties.

New York passed a law in 2023 allowing short-term rentals only while someone is living in the property, causing 90 percent of apartments in that city to disappear overnight from the AirBnb platform.

Combining quality offerings and opportunities for individual investment

In recent years, a successful trend has emerged that combines elements of quality offerings and opportunities for individuals to invest in tourist properties through branding of residences/apartments (houses, villas, etc.), most often alongside hotel properties, in so-called mixed-use resorts.

The advantages of this type of investment are significant, as it reduces the investment risk for investors who are often also investors in hotel properties and allows smaller investors to purchase one or more units, thereby investing in real estate.

The brand provides security of return, as the property is rented through the hotel system and achieves a higher market price than classic unbranded apartments, and guests can also use hotel services.

These complexes are often built outside the strict city center and have a significantly lesser impact on residential property prices in the center.

– Mixed-use resorts in Croatia are no longer a novelty; they have been discussed for many years, some have been successfully built, but they are still nowhere near as developed as in tourist-competitive countries. There is also no law regulating the relationships between owners of such real estate units and the management (hotel) company, which is a common practice in countries like Spain and Greece. It would be great if this could be elaborated through the new Tourism Act – believes Franolić.

Such a segment is also offered by top global hotel brands like Marriott, Four Seasons, Hilton, and Hyatt, as well as some that are not hotel-related, such as Armani, Versace, Bulgari, and others.

Activating neglected and unused state-owned properties in prime locations, which have been deteriorating for years due to property-legal relations, is considered by Franolić as one of the ways to better develop the real estate business in tourism. Here, the Tourism Act brings special conditions for granting state aid for activating inactive property owned by the Republic of Croatia, but it does not specify which property is involved.

Additionally, for better destination development, she considers it important to equalize the tax treatment of private renters in tourism with property owners for long-term rentals (profit tax or income tax on property).

Perhaps one of the most significant potentials for development and investment in real estate in tourism and related sectors, as well as destinations, Franolić sees in the announced development of railways in Croatia, which has been used in Europe for decades as one of the most important models for transporting residents by fast trains in intercity transport, for weekends and excursions, thereby enabling faster and better development of smaller destinations.