FORBES LIFE: THE NEXT RIVIERA

by Joshua Levine, 07.05.04

Who needs France? Croatia's sun is warm, its seas azure, its hills scented with rosemary and its real estate cheap.

It wouldn't be quite fair to call the Dalmatian coast of Croatia undiscovered, even if most Americans have at best a hazy idea of where it is. The Greeks discovered it 400 years before Christ, sprinkling its 1,100-odd islands with colonies. Since then waves of imperial sun-seekers have washed across its rocky shores, from the Romans to the Byzantines to the Venetians, all leaving behind splendid buildings to mark their landlordship. The Roman Emperor Diocletian spent his twilight days in the Croatian city of Split at what may be the biggest retirement home ever built, its main bedroom wing protected by a portico 517 feet long.

Dubrovnik, a Renaissance jewel 110 miles to the south, was shelled briefly by the Serbs in 1991 during the breakup of the former Yugoslavia. War hasn't cast a shadow on the region for almost ten years now, and Dubrovnik has been completely restored.

Now Dalmatia's storied coast is being discovered all over again, this time as the Mediterranean's next Riviera--and as an investment opportunity in the second-home sector. The old Riviera, of course, hasn't gone away. Come summer, hordes will infest the beaches of Spain, France and Italy. Miles of once-lovely coast now have all the charm of Atlantic City, with water so murky you can barely see your toes.

Croatia, meanwhile, has been waiting patiently. Communism and ethnic strife have kept it isolated and underdeveloped. Over here the Med (technically the Adriatic) still sparkles. Beaches may be rocky, but the absence of sand leaves the waters preternaturally clear--underwater maven Jacques Cousteau singled them out for their transparency. Steep limestone hills thatched with rosemary, olive trees and lavender loom dramatically out of the sea. Port villages boast fortresses, churches and palazzi, all built from the same stone.

Robert Benmosche, chairman of the Metropolitan Life Insurance Co., visited Dubrovnik in 1987 and was struck by its unspoiled grandeur. A wine enthusiast, he returned in 1999 on the trail of a Dalmatian grape regarded as a forebear of zinfandel. When visiting a wine grower, he heard about a stone beach house being auctioned off by the state. Built in 1934 for the treasurer to the king of Yugoslavia, the property included a main house and three smaller buildings, with 8,000 square feet or so of combined living space and 150 feet of frontage on the water.

"It's breathtaking--you couldn't find anything like this anywhere else," says Benmosche, 60, who plans to retire here. "I'm an hour's flight to most places in Europe and a ferry ride across the Adriatic to Italy." He paid around $1 million and will probably end up spending at least that much again for renovations. Still, he thinks he got a tremendous bargain: "Homes that sold for a quarter of a million in 1998 are going for as much as a million today."

Dubrovnik's stone walls and graceful Venetian palazzi make it the hub of Croatia's growing real estate boom. Next--just a step or two behind--come the big islands off of Split and a region to the north known as Istria.

IberianSun, an English real estate agency that helped turn Spain's Costa del Sol into a London suburb, has understandably been looking for the next candidate for overdevelopment. "Croatia stood out head and shoulders above Bulgaria, Turkey, Cyprus, North Africa," says Paul Keppler, managing director of CroatianSun, the sister company that opened in Dubrovnik last September.

Keppler says prices have risen 20% to 30% in the past year, but off a very low base. Compared with Europe's A-list beaches, Croatia's are still cheap. Modest stone houses on the islands can be had for as little as $70,000, and $150,000 buys a very comfortable 1,100-square-foot vacation home. Foot for foot, new apartments go for half what they do on Spain's Costa del Sol.

Andrija Kojakovic, formerly Croatia's ambassador to the U.K. and now an adviser at the European Bank for Reconstruction & Development, boldly predicts that prices will rise fourfold by 2009, when Croatia is scheduled to enter the European Union. Some 30,000 foreigners bought homes on the coast last year, Kojakovic estimates, but he suspects that as many as three times that number gave up in frustration. It's only since 1998 that non-Croatians have been able to own real estate, and many impediments remain.

Sales to individuals must be approved by the foreign ministry, a process that can drag on for at least six months. Often it is simpler to establish a Croatian shell company and then, as a corporation, buy a home. More problematic still: A buyer, to claim clear title, must secure the agreement of all the owners of a property. Since many old stone houses for sale on the coast and the islands have been family property for generations, many owners with fractional shares disappeared or emigrated long ago. Unless they or their heirs can be found, ownership remains uncertain.

Attempting purchase isn't for the faint of heart, as I discovered on the beautiful island of Hvar. I toured the back alleys of Stari Grad (Old Town) with a tough guy named Scarpa--6 foot 3, with an earring and a scowl. Scarpa said he'd already sold 12 houses in the village, all to Norwegians. He showed me houses I'd already seen before, and for Ř30,000 ($37,000) less than what he was quoting. What other houses had I seen? he asked. I didn't trust him, so I didn't say.

Parting company with Scarpa, I offered to buy several houses, but their owners changed their minds about selling as soon as I met their price. Their reasoning goes like this: If someone is willing to meet the asking price, someone else will undoubtedly offer more. The asking price is just a trial balloon.

Finally I reached a deal with a red-nosed fellow named Matko for his small stone house in a little village several kilometers from Stari Grad. I agreed to pay $36,000. So what if the house needed a lot of work? It was a steal, with sweeping views of the surrounding hills, two terraces--one in front and one in back--and maybe 2,000 square feet of living space after renovations. That's when Matko told me of an uncle with a one-sixth share who disappeared in Argentina 30 years ago. I left with a handshake deal and Matko's promise to find the long-lost uncle's family. How do you say "escrow" in Croatian? No one seems to know.

Next thing I hear, an Austrian woman has bought Matko's house for $66,000--with or without the uncle is not disclosed. What's the lesson here? You're better off using a reputable real estate broker, even if that means paying a higher price. CroatianSun won't show properties that don't already have a clear title, which limits its portfolio to modern villas, mostly. As Croatia heads toward EU membership, many of the arcane regulations will be harmonized with existing EU law, making the process far more transparent.

By 2006 Croatia is required to open its airports to cheap flights by the likes of Ryanair and EasyJet. It will then be up to the Croatian government to protect its coastline from the type of depredations that have laid waste the coasts of France and Spain. Already there are encouraging signs that Croatia intends to safeguard its natural assets. New laws have been enacted that forbid development within 100 meters of the waterline. The country's development ministers may prove more resistant than their Spanish counterparts to what Paul Keppler sarcastically calls "envelopes of goodwill." If officials can resist temptation, today's buyers will be sitting pretty.

BROKER, real estate agency team.