When buying property in Croatia, it is very important to consider and understand the currency exchange rate difference that results from property prices that are quoted in Euro but must be paid for in Kuna. Croatian real estate buyers need to be aware that currency exchange rate differences are a ‘cost of purchase’ and should be budgeted for beforehand. This is especially true on Croatian properties with higher transaction value where the currency exchange rate difference can result in €1000’s difference.
To consider how this came about, we have to step back into recent history when Croatia was a part of former Yugoslavia. Dinar, the official currency of that era, was very unstable and subject to numerous devaluations and inflationary tendencies. Deutsch Mark, seen as a reliable currency, took premacy in denomination of highly valued assets (primarily properties). In 1994, several years after Croatian independency, the Croatian Kuna became the national currency and the officially legal means of payment (Article 21, Law of Croatian National Bank). In 1999 the Deutsch Mark was replaced by the Euro, at approximately the same time the Kuna became a relatively stable currency. Kuna does have minimal seasonal fluctuations, i.e. when foreign currency inflow in the summer season drive Kuna rates up and the Croatian Central Bank then intervenes by buying-out Euros from commercial banks to stabilise it. The stability of Kuna in relation to Euro was set as a priority of the Croatian National Bank and the Kuna has therefore been pegged to the Euro ever since. This is very important when considering a large proportion of domestic savings are in Euro’s and housing & commercial loans are also denominated in Euros.
However, the prices of valuable assets in Croatia, such as properties, are still denominated in Euros and therefore there are regulations regarding transaction of such assets must take place considering the Croatian national currency is in Kuna. According to Article 22 of Croatian Obligatory Relations Act, contracted value in Kuna may be calculated based on the price of gold or exchange rate of Kuna in relation to the foreign currency. Simply said – the sellers will state their prices inEuros (and in most cases would prefer to actually get them), but sale-purchase contracts will state that the prices in Eurosare payable in Kuna, which brings us to the main question – as per which exchange rate?
It should be noted that the National Bank (www.hnb.hr) gives daily exchange rates for 13 convertible currencies (incl. Euro, US dollar, Australian and Canadian dollars, Swiss Franc and UK pound sterling). However, commercial banks are allowed to create their own daily exchange rates independently from the National Bank. For reference, the three biggest Croatian commercial banks – Zagrebacka banka (www.zaba.hr, part of UniCredit), Privredna banka Zagreb (www.pbz.hr, part of Intesa Sanpaolo), Erste & Steiermärkische Bank (www.erstebank.hr) – tend to keep middle rates at the same level as the National Bank. However, their buying (“lower”) and selling (“higher”) exchange rates are different and may affect the money needed to fulfil the contracted obligation when buying real estate in Croatia.
The spread between buying and selling exchange rates can be anything between 1% and 1.3%, meaning that on every one thousand euros needed for the purchase you could be loosing thirteen euros if you do not use the available means to reduce the exchange rate difference. In the next article we will give some advice and working examples to illustrate how Croatian real estate buyers are affected and what they can do about it.