Author: Josipa Glumpak, Property Manager, Novaston Asset Management

Josipa Glumpak

Last year in Croatia in the real estate segment, in particular the residential real estate, was rated as ˝one of the most successful years˝ in the past several decades, reflecting particularly on the golden era of the real estate boom just before the start of the 2009 financial crisis.

Prices per square foot exceeded every expectation and reached its maximum in mid-2019, thanks to a high demand that had not declined due to a number of factors - a stable economy, a record low unemployment rate, an increase of real-sector wages, affordable loans and government subsidies.

The situation was equally favourable in the commercial real estate sector, despite the fact that the market had long reached its saturation - investments were mainly directed to secondary and tertiary cities in the form of smaller shopping malls / retail parks, or were focused on revitalization, improvement and expansion of the existing projects.

Most of the investment in commercial real estate came from the tourism sector that, according to data released in January 2019, generated 16,9 percent of Croatia’s gross value added.

However, 2020 has come. Along with it came an unknown virus named SARS-CoV-2, which is the reason why the World Health Organization declared a global pandemic on March 11, 2020. Coping with the world’s health threat to the population, states were, one by one, declaring the state of emergency, introducing quarantine and stopping businesses, leaving us with the question ˝What’s next?˝

In Croatia, the tourism industry was the first to be hit. In an effort to minimize human fluctuation and prevent the spread of the virus, hotels in Istria were the first to respond and made an independent decision to shut down. This was followed by a decision by the Istrian headquarters, which banned operations of people renting out of private properties and of catering facilities.

On March 19, 2020, the Civil Protection Headquarters of the Republic of Croatia issued a Decision on Measures on Limitation of Social Gatherings, Work in Retail, Service Activities, and Sports and Cultural Events, prohibiting the work in retails except those necessary (food, pharmacies, gas stations, etc.). Overnight, the entire commercial sector was interrupted unexpectedly, and the purchase of essentials such as food and medicine was further exacerbated by measures of social distance, limiting the maximum number of people per square meter, and shorter working hours.

Just three days later, an earthquake of magnitude 5,5 struck Zagreb and Hrvatsko Zagorje, devastating over 26,000 buildings in Zagreb alone, of which 1,900 are absolutely unusable. The material damage is still being determined, however, the headquarters reacted in such a way to enable the work of shops selling construction materials, at the same time prohibiting all public transport and leaving the place of permanent residence.

Unlike the previous crisis, this one came abruptly, devastatingly and does not discriminate against anyone. Everyone is equally important and equally vulnerable. In this case, the money that is still in sufficient quantity does not help either. Money is at rest at present, both forcibly and voluntarily, as people, companies and countries of the world try to figure out which strategy will maximize effectiveness in minimizing the negative consequences of this emergency. Everyone is equal before this crisis, gender, skin colour, education level, financial situation, or intelligence quotient is not important. Interesting, isn't it?

By the decision of the headquarters, lessors and lessees are forced to minimize business operations, which completely eliminates retail as the main form of leaseholder income, thus hampering and to some extent interrupting the lessors’ income generating. Faced with an impossible situation, lessees rapidly turn to online sales, and those who do not have it in their operations are looking for ways to launch it as soon as possible. Aware of the severity of the moment, the lessors have little choice and empty room to manoeuvre. If they want to keep a lessee, compromising for the purpose of long-term cooperation is not an option, but a must-have. A proactive and individualized approach to each lessee is the only sustainable approach in the long term in order to maintain a comparative advantage in the market, while the compromise in terms of benefits that lessees have made during the crisis will be reflected in the future through a high occupancy rate of the center, and thus, increase the level of attraction to potential new business partners when the crisis is over.

It is understood that the real estate market is slower in responding to change, however, thanks to sound and stable foundations, investors and owners of commercial real estate have been better prepared to reacted in this new situation and prone to cooperate with all business partners. Having learned from previous experience, and given all of the above, the vast majority of major shopping centers in Croatia were among the first to take a proactive approach and propose a series of different measures to lessees to facilitate the current situation, given their joined survival in circumstances that impede the normal operation of both parties with a view to long-term future cooperation. The established lessees responded in the same way, perfectly aware of their own importance in the current situation while respecting the burden of the obligations and the role played by the lessors.

It is interesting that those who are tactful because of their unwillingness or ignorance to adapt to the current circumstances also enjoy understanding of all participants. Empathy is not a word in the business vocabulary, but obviously the time has come for substantial changes, which of course does not mean that deliberate procrastination will remain unnoticed.

The situation is difficult for everyone, and there is no proven recipe for success. All we can do is to wait and see where this health crisis will take us, both in business and in every other sense.

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