This week, we bring you an overview of the Croatian construction sector – one of the key industries driving the Croatian economy, yet a source of frustration for many people striving to afford their own real estate.
Historically, the Croatian construction sector has always played a significant role as both a driver of GDP growth and an enabler of other economic activities, such as infrastructure projects, tourism, offices, and other facilities that rely on a robust construction industry. The sector reached its peak before the 2008 financial crisis and has been slowly recovering ever since. However, it has picked up pace significantly since the pandemic period.
Currently, the Croatian construction sector accounts for approximately 6.5% of the country’s GDP based on data from the first three quarters of 2024, placing it shoulder-to-shoulder with pre-2008 levels. This growth can be attributed to a strong investment cycle initiated by the Croatian government, bolstered by EU funding, reconstruction efforts following earthquakes, and Croatia’s flaming-hot real estate market, both residential and commercial.
Looking at the annual growth rates of the volume of construction works, there is a notable spike at the beginning of 2024. Total construction activity increased by almost 20% compared to the same period in the previous year.
Volume of construction works (2015 – 2024, YoY, %)
Source: DZS, InterCapital Research
This growth in the volume of construction works is primarily attributed to a strong increase in building construction, which grew by more than 20% during the first eleven months of 2024 compared to the same period in the previous year. Civil engineering projects also experienced a significant upturn, reversing the slowdown observed in 2022 and 2023.
Value of completed construction works (2015 – 2024, EURm)
Source: DZS, InterCapital Research
With the increasing volume of construction works, the value of completed construction projects also rose, albeit with a slight delay. Moderate growth was observed until 2022, when the completion of infrastructure projects initiated in previous years began to contribute significantly to the overall value. Notably, 2023 saw a remarkable 31% increase in the value of completed construction works compared to 2022, with a CAGR of 11.6% for the period between 2015 and 2023. For the first three quarters of 2024, the value of completed works increased slightly above the historical CAGR, at 12%, compared to the same period in 2023.
Several other indicators should also be considered. First of all, the number of issued building permits, which spiked at the end of 2022 and the beginning of 2023. In 2015, the total number of permits issued stood at 6,328, rising to 11,564 in 2023 and 10,865 in 2024, with one month left to report. This suggests that a significant amount of construction activity is expected in the coming period, at least in the short term. The expected value of these construction works has also increased proportionally, from EUR 2,769m in 2015 to EUR 7,015 in 2023. For the first 11 months of 2024, the expected value of works reached EUR 6,356m.
Building permits issued and the expected value of these works (2015 – 2024, EURm)
Source: DZS, InterCapital Research
With all this in mind, what are the key drivers of this growth?
First, looking at the supply side of the equation, the Croatian construction sector has long faced challenges related to a shortage of workers, primarily due to wage pressures from higher-paying countries like Austria and Germany, as well as a mismatch between education and labor market needs. However, at least in the short term, this issue has been alleviated by the import of foreign workers.
Secondly, since the pandemic, material costs have surged due to inflationary pressures fueled by elevated public expenditure, supply chain disruptions, geopolitical conflicts and other factors. To quantify this impact, construction costs per square meter rose by only 10% between Q1 2015 and Q1 2020. However, from Q1 2020 to Q3 2023, these costs increased by 58%.
Construction costs per m² (2015 – 2024, EUR)
Source: DZS, InterCapital Research
On the other hand, increasing demand has also played a significant role. This demand is driven by the need for reconstruction following the earthquakes, the construction and maintenance of infrastructure, new tourism-related real estate, commercial buildings, and, of course, new residential buildings.
What needs to be accounted for in the context of Croatian residential buildings is that they are not viewed solely for their basic purpose – living – but also as a form of investment. This trend is evident among both domestic and foreign investors.
Average prices of new dwellings sold per m² (2015 – 2024, EUR)
Source: DZS, InterCapital Research
As can be seen from the graph, this led to a 57% increase in the average price per square meter during the analyzed period, but this figure applies to the Republic of Croatia as a whole. For Zagreb alone, the increase exceeded 70%, with other tourist-attractive cities facing similar challenges.
To conclude, rising material and labor costs, and strong demand for real estate are expected to persist, although at a slower pace in the coming years. However, to address issues in the real estate market, particularly affordability for young people seeking to buy apartments, structural changes are required. These changes must focus on areas such as construction, urban planning, transportation, tax policy, and other related fields which are currently often neglected or approached with populist intentions.
