Property in Croatia

British investors have lagged behind other Europeans, such as the Germans and the Italians, in recognising the potential of Croatia, once part of Yugoslavia. Some areas such as Dubrovnik and Hvar Island have already experienced strong capital growth and this is expected to spread along the largely unexploited Dalmatian coastline, stretching from Slovenia in the north down to Montenegro, which includes more than a thousand islands.

Croatia property prices are rising fast, having more than doubled in the past three years. But, they are lower than the South of France and if you buy now in the right location, any profit you make will be tax-free after three years. When competitive mortgage deals become available after EU admission in 2008/9, property values are likely to rocket.

After decades in the doldrums, the property market in Zagreb, the beautiful and often forgotten Croatian capital, is moving up after the arrival of Oracle, Siemens, Te-Com and Coca-Cola. Demand exceeds supply for accommodation in the centre and prices are rising, although they are still lower than in Prague or Budapest. About E120,000 to E130,000 buys a new two to three-bedroom flat in Maksimir, a leafy residential area in the north east of the city with a large park, a short tram ride from the centre. Rental yield would be around 7-7.5%.

Now the big European tour operators are moving along the coast. With a shortage of tourist accommodation in many areas, buy-to-let investors from Britain are snapping up low-cost holiday homes along one of the most dramatic shorelines in Europe, often before a brick has been laid. Prices in Dubrovnik – a medieval gem with its sun-baked city walls, lapped by an azure blue sea – have gained up to 20% in the past year. A new one-bedroom flat overlooking the city’s yacht marina will to set you back from E174,000 (£120,000) for two bedrooms.

This growth rate looks set to continue, as demand for tourist beds is forecast to increase by an average of 6-9% a year. Access is a key factor, with more new flights to Croatia’s airports at Zagreb, Split, Dubrovnik, Pula, Zadar and Brac from a growing number of European destinations. A new coastal motorway from Zagreb to Split will reach Dubrovnik by 2008.

There are no plans to introduce budget airlines routes into Croatia. But Ryanair flies to Trieste, a 45-minute drive from Istria in the north of Croatia, close to the border with Italy and Slovenia. The region – dubbed the new Tuscany – has an undulating green hinterland and an unspoiled coastline, ripe for development, which is being explored by a growing band of foreign property buyers.

The Istrian Peninsula, jutting out into the Adriatic, enjoys an Italian influence with Venetian ports, including Rivinj and Porec, and a Roman amphitheatre in Pula. But prices are much lower than on the Italian Riviera. You can pick up a new three-bedroom det-ached house, with its own pool and garden, on a small private estate, a short distance inland from the sea, for 220,000 Euros. Air-conditioned flats on the coast start at E65,000 Euros.