Building Land: A Good Investment or Dead Capital

The unpredictability of political, economic and social changes and uncertainty that marks various aspects of life is also reflected on the real estate market. The real estate market is sensitive and susceptible to changes caused by a number of factors. Compared to politically more stable and economically more advanced countries, people who participate in activities pertaining to buying and/or selling real estate in Croatia are faced with operational problems on the newly created market that is marked by insufficient development and lack of activities that favour a better goods exchange process.
While buyers in Croatia typically buy real estate to reside in it or rent it to tourists, investing in real estate in Great Britain is often considered an additional job that allows its citizens to earn additional incomes through the buying and selling processes. During the period prior to the latest global financial crisis, it was the citizens of Great Britain who purchased numerous real estates in Croatia since the real estate prices on the British market had peaked. The global financial crisis shocked the citizens of Croatia, especially those who had believed that the prices of their houses, land and apartments would continue to grow in accordance with the ongoing trend. However, the legalities of a free market during periods of crisis can cause real estate to be sold at prices lower than those that could be attained under regular conditions, even below the purchase price. Trading real estate does not necessarily imply making a profit as it can also create a loss due to changes of the market conditions or insufficient knowledge and experience of those who manage that process.
When it comes to real estate investments, it is imperative to become familiar with the legal regulations that impact the cost effectiveness of certain investments. This is why, for example, you should take into consideration real estate taxes that should become effective at the beginning of next year. As has been announced, communal fees will be replaced by real estate taxes. Those who own real estates of average age and quality will pay taxes equal to the communal fees. During the past several years, the communal fees have not increased or their increases have been insignificant. However, if the change of name, from communal fees to real estate taxes, is understood as the beginning of next steps of increasing the tax burden on citizens, it could seriously impact the home budget of many families.
Investors who are legal persons in the VAT system have had to pay VAT on building land for newly built apartments sold to end-users since 2015. Also, abolishing the tax relief for those who purchase their first real estate can diminish their interest in buying. However, it is believed that a positive impact on the real estate market would come from reducing the tax rate from five to four percent on real estate purchases made by buyers when purchasing previously owned real estates. Countries that are members of the European Union, such as Slovenia, can serve as an example and an indicator of what can be expected in Croatia in the near future in terms of tax reforms and legal regulations pertaining to real estate. The Slovenian parliament approved the first real estate tax law in 2013 and it should have been applied since 2014. The Constitutional Court annulled that law in the section pertaining to the establishment of the value of real estate. That law called for the annual tax of 0.15 percent of the value of apartments and houses used for owner residence if the value of that real estate did not exceed 500 thousand Euro, that is, 0.40 percent if the real estate was above the mentioned value. Furthermore, the law called for an annual tax of 0.75 percent of the value of the real estate if it was not used, from 0.45 to 0.75 percent of the value of the real estate for business and industrial facilities, 0.30 percent for agricultural facilities and 0.15 percent for agricultural land.
Accordingly, there is the possibility that a discussion will take place in Croatia regarding a similar tax and a possibility that a law will be passed dictating that owners of homes or building plots would have to pay high taxes to the state if the value of those real estates is assessed as equally high.
Since 2005, the company Libertas inženjering has been involved in construction works and real estate transaction brokerage. The company offers special arrangements to the owners of such attractive building plots or houses on locations where multi-unit buildings can be built where the owners provide their land as their investment. The company Libertas inženjering is obligated to attain construction permits, pay communal fees and construct multi-unit key-in-hand residential buildings. With this type of an arrangement, the owners place their unused real estate in function and gain value through the apartments. This value is a lot greater than the value of the land alone or the value of a house with a land. If apartments built this way are placed into function, then their owners pay lower real estate taxes while keeping higher values through apartments compared to the value of the land. In case of need, the owners may sell some of the apartments, while the land is primarily sold as a unit. As an independent real estate, it has a total lesser value than the cumulative value of the built apartments. Furthermore, the owner of the land avoids unfavourable changes that could occur due to frequent amendments of spatial plans on his/her plot that would significantly reduce the value of the land or if the land was removed from the building area. We offer a similar arrangement for plots with a view of the sea where villas with swimming pools could be built. The owner participates in the investment with the land and gets a built villa. All expenses – from geodetic surveys, project preparation, communal, water and other fees, to construction works – are exclusive investor expenses while the owner of the land, in exchange, gets a finished product.