Research Report

Croatia and Bosnia Herzegovina

 Table of Content

I. Macroeconomic Overview

I.1 Introduction
I.2 Inflation
I.3 Exports
I.4 Debt/GDP
I.5 Interest rates
I.6 FDI flows
I.7 Effects on economy by recent global slowdown

II. Real Estate Sector

II.1 Overview
II.2 Operations of Real Estate Sector
II.3 Property taxes
II.4 Conclusion

III. Recent Outlook on Real Estate Sector

2|Page
 Bosnia & Herzegovina (BiH)

I. Macroeconomic Overview1:
1.1 Introduction:
It has maintained respectable annual GDP growth rates of 5-6 percent since 2004, and
experienced rapid export growth and strong inflows of foreign investment. Benefiting from the
currency board and the effects of past reforms in key sectors and the financial system, Bosnia &
Herzegovina (BiH) has seen strong growth in recent years. However, with capital inflows driving
a domestic demand boom, economic tensions have built up. The current account deficit has
widened and inflation is rising.

1.2 Inflation:
It accelerated sharply in the second half of 2007, rising from near zero in June to 4.9 percent in
December. By May 2008 it reached 8.2 percent. The reasons for recent high inflation growth are
attributed to following factors:

1. The prolonged period of BiH’s low inflation coincided with years of healthy growth,
strong domestic demand and double-digit wage increases. This raises the possibility that
domestic demand pressures are beginning to be finally reflected in consumer prices.
2. Rapid credit growth and widening current account deficits

1.3 Exports:
Export growth has been strong, and both real export growth and market share gain over 2003-07
are above the average regional performance. However, exports continue to have a narrow base,
and, over the years, have become more concentrated in resource-intensive products (40% of
exports are from base metals & minerals) that are exposed to large swings in global prices

1.4 Debt/GDP ratio:

At about 50 percent of GDP, external debt is not low. However less than 10% of it is short term
in nature and that is sufficiently covered by foreign exchange reserves contributing to low
repayment risk.

1.5 Interest rates:

Lending interest rates have so far remained flat, but commercial banks mentioned early
indications that global financial tensions are affecting foreign funding. While bank soundness
indicators are favorable, bank profitability declined in Q1 of 2008

1.6 FDI Flows:

FDI flows (in US$ million)

1
IMF Report

3|Page
 Year 2004 2005 2006 2007
FDI 704 595 708 2,022
Growth   -15% 19% 186%

1.7 Effects on economy by recent global slowdown:2

 To no surprise, recent macroeconomic indicators confirm the spread of the global financial
and economic crisis onto the BiH economy. The financial sector stability has been
maintained, but credit growth has been reversed from an average monthly rate of 2.1% to a
-0.4% in December.
 In addition to the lack of credit, the export sector is suffering from weak prices and foreign
demand. Trade figures for December, were just released showing a gloomy picture: exports
shrank 4.1% (yoy), and imports 3.4%.
 Like the rest of transition economies, BiH is almost certain to experience a drastic reduction
in the rate of growth. In 2009, real GDP growth is likely to drop by seventy percent, or even
more, and the recovery is expected to be slow even after 2009. The export and construction
sectors are likely to be hit more than others, at least initially.
 Since some companies may shed workers, and the income from remittances may drop to
some households, poverty may increase. In spite of the drop in exports, the downturn in
economic activity and falling commodity prices will reduce BiH’s current account deficit
(CAD) and inflation prospects, but financing CAD will become more challenging. Hence, a
part of the CAD may have to be financed by drawing foreign currency reserves.

II. Real Estate Sector in Bosnia (BiH)3

2.1 Overview:

In the last several years, BiH has made clear progress in a number of areas necessary to the
operations of real estate finance and real estate transactions. The lending environment is greatly
improved. Bank restructuring and the significant entry of foreign banking capital and expertise
has created a vibrant and competitive retail banking sector. BiH is pursuing best practice
regulatory and supervisory practices. Although limited by numerous factors discussed below,
mortgage lending is underway, as well as “consumer” lending for housing purposes. Realtors,
developers, and appraisers are engaged in the market. Overall, there is need to push reforms to
solidify and improve its legal and administrative framework.

2.2 Operations of the Real estate market:

2
World bank newsletter, Feb’2009
3
Source: report on real estate market prepared for USAID by THE URBAN INSTITUTE, Washington June 2004

4|Page
Approximately 20 percent of the real estate transactions are broker assisted. As discussed, the
legal and regulatory structures in BiH are incomplete and overly restrictive. Because of the
complex nature of concluding transactions, including court approval of the offers to purchase and
an onerous registration/transfer fee mechanism, the market is unduly limited. Estimates suggest
that annual transactions represent approximately 1 percent of the total housing stock

1. Residential Sector: 81% of all residential properties are privately owned dwellings, the
rest being socially owned dwellings. Real estate agents and housing officials state there is
strong demand for additional housing for refugees and returnees and better housing for
individuals having above average income levels. Commercial development of housing
are viable if assumptions about demand are correct.

2. Industrial and commercial Sector: Land is available on the outskirts of the city in both
entities for industrial and commercial developments. However, there is high cost of
connection to public utilities. Commercial development within the cities is impeded by
one time positional tax usually equivalent to purchase price and in some cases difficulty
in aggregating small parcels from different owners. Demand for land in industrial sector
is difficult to quantify. At present, the commercial property market remains week.

3. Real Estate Lending: Collateralized mortgage lending is now underway, for residential
purchases and for use of real estate as collateral in SME loans. Real estate lending is
dominated by the large foreign banks, bringing international underwriting and servicing
skills to BiH. Lenders are competing for consumer (as well as corporate) lending, which
ultimately is of great assistance in decreasing spreads. The growth of real estate lending
is limited by the legal and administrative problems, especially those plaguing foreclosure
and registration. There are fears concerning foreclosure and lack of documentation
adequate for a mortgage loan in the banking industry.

2.3 Property taxes:

Sub-entity levels of government in BiH have few options for generating revenue, and rely
heavily on sales taxes. Real property is taxed through an acquisition fee at the time of transfer
but not on a regular basis after that.

2.4 Conclusion:

Real estate lending and real estate transactions in BiH are severely constrained by a number of
factors, including a large concentration of unregistered properties, delays and other problems in
enforcement of legal contracts; excessive taxes, fees, and permitting requirements; and urban
development activities stalled by an overly-layered administrative framework and by the lack of
resolution of the restitution issue. Lack of information on the magnitude of the registration
problem, and on actual household income and the market value of real estate transactions, further
exacerbates the issues.

5|Page
III. Recent outlook on real Estate sector4
 Bosnia was hit with recession alongside the rest of Central and Eastern Europe and the
economy is expected to have contracted by 3.0% in 2009

 Growth of the real-estate sector and house prices came to a screeching halt all over Bosnia
and Herzegovina, on the heels of the worsening economic situation abroad and in the
country.

 Many real estate projects were shelved due to crisis. Supply of commercial real-estate from
projects whose construction ended in 2009 and hose which are due in early 2010 means that
pressure on rents will be downwards in Sarajevo and most other centres

 It is expected that yields in all sub sectors will fall in Sarajevo through 2010-2011. This is
because rentals will fall further in an environment where there are few property transactions

 New commercial loans are already harder and harder to get, payments for old loans are
increasing and many of those who had taken out mortgages to buy new houses or apartments
will face great difficulties in servicing their debt.

 Prices in Sarajevo went down by about 20 percent in the six months after the crisis while
prices in other towns such as Tuzla, Mostar or Banja Luka have plummeted, in some cases
fell by 40 percent.

 To make matters worse, restrictive laws obstruct foreign nationals from acquiring property in
the country

4
http://balkaninsight.com/en/main/news/16321/ and http://www.prlog.org/10722579-recently-released-market-
study-bosnia-herzegovina-real-estate-report-q3-2010.html

6|Page