Slovenia is not known as a hot spot for foreign real estate investment, but it is starting to make a name for itself. According to the CIA World Factbook, Slovenia has the highest per-capita GDP in central Europe, an excellent infrastructure and a well-educated workforce. After rapid real estate appreciation from 2004-2007, Slovenia’s real estate market has become a causality of the global economic environment. To learn more about real estate in Slovenia, see the following article from Global Property Guide.
House price increases in Slovenia began to slow in 2007, and started to decrease in 2008.
In the first quarter of 2009, the price of second-hand dwelling houses declined by 7% (-8.7% in real terms) from a year earlier, according to the Statistical Office of the Republic of Slovenia (SORS) – the biggest annual price fall since the series was established in 2003. From 2004-2007, house prices increased at an average rate of 13%.
House price falls in Ljubljana, the capital, at 8% (9.6% real in terms), were greater than in the rest of the country at 6.8% (8.5% in real terms), over the same period.
Slovenia’s economy entered recession in 2009 with a contraction of 6.4% q-o-q in Q1, after a 4.1% contraction in Q4 2008. GDP is expected to shrink by as much as 4% during 2009. With credit conditions tight, house prices are expected to fall further within the next two years.
Transactions of used houses were 56% down in Q1 2009, at 662, compared to the same period the previous year. Ljubljana saw a sharper drop, 64% down to 141 transactions in Q1 2009, from 393 in Q1 2008.
The average advertised prices of apartments in Ljubljana fell in Q1 2009, from a year earlier according to SLONEP, the most comprehensive real estate portal in Slovenia. The average price of 1-room apartments registered the biggest drop, at -8.4% y-o-y. It was followed by 4-rm apartments (-5.2%), studio units (-4.8%) and 2-rm apartments (-4.7%). On the other hand, the average price of apartments with 5 rooms rose 6.3% from a year earlier, while prices of 3-rm units was relatively unchanged (0.75%).
Property prices in Slovenia had risen rapidly from 2004 to 2007, due to strong economic growth, low interest rates, and the rapid expansion of the mortgage market. The average price of second-hand dwellings rose 16.7% annually during the period on average, according to SORS.
Strong growth in the past
Slovenia, a small country, with only about 2 million people, experienced strong economic growth from 2000-2007, with an impressive average GDP growth rate of 9%.
In 2004, it made the transition from being a World Bank borrower, to being a donor-partner. During the following three years, Slovenia’s GDP grew to €36 billion in 2007, from €27 billion in 2004.
Slovenia’s economy is driven by exports, which account for 70% of GDP. After its accession to the European Union in 2004, it became even more open to trade with other EU member countries, and exports grew at an average rate of 14.5% during 2004-2007. Most exports are to Germany, Italy, Croatia, Austria, France and Russia. The manufacturing sector accounts for most employment. In the last few years, there has also been a huge increase in tourist visits to Slovenia.
Wages rose 3.6% in 2005, and 4.1% in 2007. Inflation stayed below 4% from 2004 to the third quarter 2007. Unemployment fell to 6.43% in Q3 2008, down from 13% in 1999.
Cautious mortgage market
Slovenia’s mortgage market is still relatively small, at 9% of GDP in 2008, but has been growing rapidly, and is up from 3% in 2004.
There are no special mortgage banks in Slovenia, though 19 commercial banks and 3 savings banks offer mortgages. Nonetheless, 233 banks from European Economic Areas (EEA states) are authorized to perform mortgage services directly in Slovenia or through a branch. The average loan-to-value ratio is 50%, i.e., households have to cough up a 50% down payment to qualify for a mortgage.
Slovenia’s mortgage market, though improving, plays a weak role in housing finance, according to Matej More of the Finance Ministry. The reason is the underdevelopment of land registration system, the foreclosure procedure, and other problems in the legal environment.
Mortgages are secured on property bought in Slovenia, not on property outside the country. Normally, a 10% deposit is required to secure a property. According to Slovenian law, if the seller backs out, he is liable to pay twice the deposit.
Housing loans with interest rates fixed for 5 to 10 years or more are now available, but almost 82% of loans in 2008 were variable rate, according to the Bank of Slovenia.
Interest rate movement
After Slovenia’s accession to the European Union in 2004, interest rates fell to an average of 5% in 2006, from 10% in 2003. However, in 2007 they started to rise again to 6%, and then to 7% in 2008, almost the same as the 10 years fixed-rate mortgage rate.
Lukewarm foreign demand
Slovenia’s real estate market has been completely open to EU nationals since it joined the EU in 2004. This was expected to usher in thousands of EU citizens eager to buy properties in Slovenia, but only a handful came, due to higher real estate prices in Slovenia compared to other EU countries, according to Sonja Gracanic of Dodoma Real Estate.
“When you explain to them (potential buyers) the realities, when they look at the prices… which are not that cheap… and mostly they’re thinking about renting it out and getting some money. And when they work out what they get in rent, it doesn’t actually add up,” said Diana Evans, a Briton who was among the first wave of foreign land buyers in Slovenia. Slovenia’s very short coastline is another negative.
During the first year after liberalization, only about 500 properties were sold to EU citizens. And from January 2006 to April 2009, foreigners bought only 2,026 properties according to the Slovenia Tax Administration (DURS). Most buyers were from United Kingdom (39%), Italy (29%), Austria (8%) and Germany (6%). Only two banks offer mortgages to foreign investors. One is the Volksbank of Austria, which offers 70% mortgages. The other is SKB Banka, which offers up to 50% mortgage credit.
Even before the recent house price boom, rental yields in Slovenia were relatively low.
In July 2008, rental yields for properties in central Ljubljana ranged from 4.3% to 5.5%, according to the Global Property Guide. Property prices were around €2,926 to €3,737 per sq. m. while rents are around €491 per month for a small (40 sq. m.) unit. Larger units have much higher rents that can reach up to €2,175 per month (for a 150 sq. m. flat).
Most Slovenes own their houses; the owner-occupancy rate was 82% in 2005.
More than 7,500 dwellings were completed in Slovenia in 2005 and 2006, and more than 8,000 dwellings in 2007, according to the Statistical Office. However in the first quarter of 2009, planned dwellings construction was 41% down on in 2008.
The rapid rise of house price during 2007 seems to have been due to strong housing demand. But the shock of the global financial crisis then brought property prices down. Consumers are now pessimistic about buying new houses, according to a Statistical Office consumer survey.
Germany, which has been adversely affected by the crisis, constitutes 18.7% of Slovenia’s exports. The first quarter of 2009 showed a 24% decrease in exports, over the same period of last year.
Since exports are the main engine of the country’s economic growth, unemployment rose during the first quarter of 2009 to 8%, from 6.77% in Q4 2008.
Inflation reached 5.68% in 2008, but then stabilized. In the first quarter of 2009, the rate of inflation for the period was 1.8%.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.