This content is from: Local Insights

Higher yields for property

The real estate market in Bosnia and Herzegovina (BiH) is increasingly buoyant. Foreign investors are rapidly becoming aware that they can buy relatively inexpensive property directly or through the use of a BiH company. At present, the price per square metre of an apartment in the capital city of Sarajevo is between €500 and €900 ($600-1,080), depending on the age of the building and whether renovation is required. It is not just residential property which is in demand.

The search for commercial property is also intensifying. Foreign investors are looking to buy real estate to develop commercially in class A or class B locations, either independently or in a joint venture with a local developer. The new C5 corridor, which will link BiH from southern Croatia to Budapest, is expected to boost sector growth.

A wide range of credit options is also available to foreigners in a domestic market dominated by Austrian banks. There is increasing competition to provide cheaper loans to domestic buyers. Better terms for BiH consumers and small businesses alike are also driving the markets forward.

Better buys

When looking for real estate to buy and exploit, the potential buyer should bear in mind three things.

First, consider your time-line. If you are working on a tight schedule, you are better off buying real estate that already has a full complement of licences and permits for building. The regime for licences and permits can be fraught. It can take up to a year to wait for all the necessary land use and construction licences and approvals to be granted. BiH is composed of two main territories (known as entities): the Federation of BiH and Republika Srpska. Licences are required from municipal governments as well as entity governments.

A foreigner also needs approval from the State of BiH. If he buys real estate as a physical or legal person, he needs prior approval from the BiH Ministry of Foreign Affairs and the BiH Ministry of Justice. Approval is granted on the basis that the foreigner's country of origin does not prohibit or restrict Bosnian citizens or legal entities from owning real estate (termed the reciprocity principle). Approval can take several months. If a foreigner buys real estate by establishing a company, however, the reciprocity principle does not apply. Although the BiH Ministry of Foreign Trade and Economic Relations must still approve the company's establishment, it normally takes a maximum of 10 days.

Second, always conduct a thorough due diligence with a reputable practice. There are many snares which could catch the careless buyer. Real estate in BiH may be subject to a restitution order or a forthcoming restitution law (a legacy of the war of 1992–95 and also the Second World War). Property documents may be forged or unlawfully obtained and should always be verified from different sources. A due diligence would cover a review of the ownership documents, registration documents and other relevant documents for the buildings (construction permits, permits for use, etc).

There may also be competing claims on the property which are not noted on the land register. A transfer of property only becomes effective when the buyer's ownership is registered at the land registry. Depending on where you buy property, there can be a delay of some months to complete registration. The last thing a buyer wants is to pay over the purchase price for the property and then discover that he cannot be entered in the land register. It is therefore advisable to make staggered payment arrangements via a transfer agreement with the features of a financial leasing arrangement, combining a long-term lease and eventual sale.

Third, if you are planning to build on or develop the property, be aware that delays are common in the construction sector and enforcement of contracts in courts is not easy, given the current backlog. Arranging arbitration or a court hearing outside of BiH is not always a solution, since issues relating directly to use or ownership of land must be regulated in a BiH court in accordance with BiH law. Therefore it is essential to look for developers with a reputation and proven track record of meeting deadlines and delivering products to detailed specifications. Imports of necessary materials can also be delayed, and embassies or domestic political connections might be useful in avoiding red tape.

Conclusion

Following trends in neighboring Croatia and Serbia, the BiH property market is showing marked growth. Real estate is still inexpensive and foreign investors can make tidy profits. However, they must be aware of the potential pitfalls and always review the documents in detail before they close a deal.

Renuka Kukanesen, Sead Miljkovic* and Naida Custovic

*Sead Miljkovic is an independent advokat working in cooperation with Wolf Theiss in accordance with BiH law and Federation of BiH Bar Association rules

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