When my partner and I decided to set up a real estate agency in Tirana in 2004, our initial goal was to provide expatriates with relevant information and transparency in the renting property market. Then after some months, notably because of the large local demands for residential properties, we expanded our offer in the buying property market. However if you look at the average salary in Albania and the property prices, you would probably say, like us, that there couldn’t be a real estate market in this country. A 100 square metre apartment in Tirana costs hundreds of times the average monthly salary... yet the market exists which only proves that official economic statistics in this part of the world are one thing and reality is something very different.

Market overview
The absence of financial markets and the irrelevance of financial variables in the workings of the real economy, especially the enterprise sector, have meant that the development of the real estate markets has taken place within the wider evolution of the real and financial economy. At present, real estate lending and real estate transactions in Albania are constrained by a number of factors, including a large concentration of unregistered properties, delays in enforcement of legal contracts, excessive permitting requirements, urban development activities stalled by an overly layered administrative framework and by the length of resolution of the restitution issue. The lack of information on the magnitude of the registration problem, on actual household income and the market value of real estate transactions further exacerbate the issues. It doesn’t sound too optimistic, but there are gradual improvements. To be more precise, the situation now looks better than some years ago. Albania is the fastest growing of all the Southeast European countries that are set to join the EU by 2014. A vibrant real estate sector is crucial for economic development. The specific weight of the construction in the Albanian economy increased to 47% in the fourth quarter of 2005 from 43% in the second quarter of 2005! Like other transition and emerging economies, the government stimulates economic activity through real estate development; a 200 million euro governmental project for the construction of 10.000 new apartments in the capital city is under reflection for instance.

Property market background
Offices
Office property is largely concentrated in Tirana – two-thirds of all space developed from the beginning of the 1990s has been in Tirana. Other cities have a very limited stock of modern and quality real estate. The office market in Albania is a relatively immature market in the initial stages of development. The office real estate sector is part of the wider economy which itself is in the process of transition. The office market has seen small growth and few buildings are built according to international standards. In 2005, approximately 20.000 square metres of Class A buildings have been completed whilst 45.000 square metres will be delivered in 2006 and some 55.000 square metres in 2007. Almost half of the modern space in Tirana is located in the Central Business Area; in the core centre rents range from €14 to €18/sqm a month. in the central area from €18 to €22 and outside the centre from €10 to €14/sqm a month. In addition to rental costs there are the cost of services amounting to €1-3/sqm a month. Parking is generally not included and can be astronomic - like in the Twin Towers office building at €250 per month. Due to the relatively small size of quality tenants, the investment possibilities are quite limited for international investors. Furthermore given the size of the city, it is difficult to believe that Tirana will ever develop as an important office investment market. That said, it is likely that the market will continue to expand by 1 to 3 investment grade buildings each year for the foreseeable future. In such an environment, office yields have been falling over the last few years, and are currently standing at around 9-10%. This has been driven by a combination of falling bond yields, shortage of suitable Class A Buildings, a perception of lower risk and improved investor confidence. Yields are expected to closely track those in Prague, Budapest and Vienna with many local constructors applying premiums of 25–50 basis points to account for the relative lack of liquidity in the market. In the mid-term we believe that the ongoing shortage of quality tenants is expected to continue to drive yields down. Over the long term a re-rating will have to take place, bringing yields higher than East European levels. Leases are mainly shorter than in western Europe and yields will therefore reflect the potential increased risk of letting voids. For overseas occupiers currency risks are mitigated by the fact that rents are denominated in euro. Overall, rental levels have been stable. However, it is unlikely that positive rental growth will resume in the near term.

Retail
The retail property market is currently one of the most active sectors. The third quarter of 2005 was marked by rapid growth in the services and construction sectors. Specifically, the sales index of the services sector “Trade, hotels and restaurants” recorded an annual 15.1% growth during the July-September 2005 period.
The retail market does not exhibit the same degree of spatial concentration as the office property market. Space ranging from first generation (hyper- and supermarkets) to fourth generation (gallerias, which are arcades with several retail shops, with trading and amusement areas, offices and hotels) has been developed not only in Tirana, but also in other major locations. The most dominant player in the commercial retail space market is QTU: the unique supermarket opened in September 2005 along the Tirana-Durres highway. In the capital, two chains of mini-market exist with 4 to 6 outlets. In addition, thousands of small retails shops are flourishing in the capital. Tesco, Real, Hypernova, Auchan and Carrefour haven’t yet entered the market as they need first to solve logistical issues. Nevertheless according to our information, over five international food store companies, mostly from Italy and Greece, are looking to invest in Albania in 2006 and aim to target both small urban areas and large-sized shopping centres. The level of rents depends on location, as well as the lease period. In general rentals have broadly remained steady. For well located gallerias they have increased from €45/sqm a month at the end of 2003 to €60 in 2005, and for the best locations lessees were willing to pay as much as €80-90/sqm a month. As in western European cities, shoppers wish to shop in well-located gallerias that accommodate highly specialised retailers rather than on the high street. There are very few of such gallerias and the opening of the only supermarket within such galleria has been a success. The retail property market offers different products with long lease periods, which are attractive to investors. In this sector local investors prevail. In the retail market, as in the office market, leases have been shortened from 5 to 2-3 years.

Warehouse
The warehouse market has gone through a period of strong development. Large warehouses have been developed in and around Tirana as well as other locations within the country. Rents are standing at around €5-7/sqm a month within the Tirana limits and at €4-5 outside Tirana. Rents have stabilised in 2005. The vacancy rate in warehouse space in Tirana is non-existent. This sector is currently viewed as being at the bottom phase of the business cycle. The expansion of trading chains along the Tirana-Durres highway has captured developers’ interest in building more space, where projects of the built-to-suit type have prevailed. We anticipate that this sector is likely to become much more active. A fall in unoccupied space is forecast resulting in the expectation of small increase in rental growth. The impetus for this will be the growth of the domestic economy and a larger market due to demographics. Outside Tirana the growth of warehousing space will be dependent on the expansion and development of the road system. We see also some development of the warehouse market in the port of Durres and Vlora. The warehouse market is today mostly dominated by local investors.

Residential
Thanks to GDP growth, urbanisation, demographics and money remittances from Albanians abroad, Tirana is witnessing a housing boom. The residential property market is the most active sector in real estate. Casual observation certainly suggests that income levels in Albania are higher than official statistics suggest. Deals involving residential property account for approximately 2/3 of all market transactions.

Supply
Outside Tirana, new residential developments have dominated the market in 2006 as it has become difficult to obtain building permits inside the city. In addition to this, there is an increasing demand for green environment-friendly properties. Local investors usually buy suitable plots of land, demolish old buildings and construct large apartment buildings with underground garage parking. These buildings typically consist of up to eight floors In the last 3-4 years a number of international developers have been expanding their businesses in Albania. They have introduced new practices and buildings of a higher quality with better insulation and sound proofing, which were a rarity in the past.

Demand
First home ownership has been the incentive for most buyers, with off-plan apartments, sales based on the architect’s design before construction, forming the bulk of sales. First-time real estate buyers now demand quality apartments of approximately 100 square metres at €600. Demand for property of this size and price with a full mortgage has been high in the past 12 months due to a new middle class that is looking to access the property market creating a property boom. The banks which are currently facing falling local interest rates are also keen to increase their mortgage loan customers. There is now a demand for high quality properties in a very limited market segment. The demand is mainly driven by wealthy locals and Albanians from abroad looking for properties for inhabiting, as well as for investment purposes. A large share of them have been purchasing properties as an investment.

Price levels
Like in many other eastern European countries the prices in Albania are denominated in euro. New high-end residential developments maintain the highest asking prices of up to €1.500 per square metre. In the mid market the prices range from €500-700 per square metre. All projects have similar pricing no matter the size, quality and location, which is a sign that the market is still developing. In the second-hand market the sale prices for high-quality apartments average from €1.200-1.500 per square metre. However, many of them have remained on the market for long periods, representing a downward trend when compared to past years. The sale prices of good quality apartments have experienced a moderate increase due to flat demand, ranging from €500-800 per square metre. In the last years sellers of mass-market apartments purchased under €450 per square metre without property titles have had more and more difficulty in finding buyers. In general the lack of publicly available information on past transactions is one of the reasons why asking prices for second hand properties continue to remain high. A small number of foreigners, mostly from the Middle East and Asia, are presently investing in the Albanian residential real estate market.

Rental
Following an already established pattern, the high-end rental market has continued to be driven by corporate expatriates and diplomats living and working in Tirana. Demand for quality accommodation has stagnated, compared to 2004. One of the reasons for this decrease is the slowed influx of new expatriates. Demand is high for high quality, brand new, fully furnished apartments of 100 square metres that offer the amenities of a contemporary home, including facilities such as 24 hour electricity, air-conditioning and a garage. The supply of such apartments is limited and, therefore, demand is being redirected to smaller good quality apartments around 100 square metres. The rental price of high-quality apartments remained stable around €10/sqm a month. Due to relatively high supply, the rents of good quality apartments displayed a downward trend with achieved rents between €5-8/sqm a month. Again the yield is identical to some other central European countries which seems insufficient to attract international investors with a buy to let strategy.

Tourism and Leisure
Traditionally France, Spain and Italy have long been among the preferred destinations for European real estate investors who are looking for a weekend or retirement home. But many now are looking further afield at more exotic and less developed markets such as eastern Europe where the potential for appreciation is much greater. Albania is a country of great natural beauty which includes sandy white Mediterranean beaches, rocky mountains, fertile plains, big and small lakes, natural monuments, and remote virgin areas. Emerging markets real estate investors, many of whom are from Great Britain, have already invested in Bulgaria thanks to the proliferation of low-cost carriers such as Ryanair, Wizzair and easyJet flying to the country. They are expecting valuable increases in rents and capital appreciation beyond its holiday and retirement value as the anticipated entry of Bulgaria into the EU will surely drive up prices. If we compare this to Albania (where no low cost airlines fly to yet) which recently signed the Stabilisation and Association Agreement paving the way for EU membership, its seems logical that this agreement and the political change that it will generate will further contribute to the development of infrastructure and a control of the development of this country. The government has already approved a partial Coast Development Bill in an attempt to counter excessive construction along the coast that is jeopardising tourism. An example of this can be seen in Durres. The bill envisages the introduction of two construction zones – let say Zone A and Zone B - along the coast. Zone A will be an area of special protection regarding permissible construction. It includes the beaches, dense forests, sand dunes, coastal lakes, lagoons, firths and wetlands as well as part of the agricultural land and forest areas bordering the beaches. In these areas construction density cannot exceed 20 per cent. The height of constructions cannot be over 7.5 metres. Zone B will include agricultural land and forest areas two kilometres inland from the border with Zone A. Building waste dumps and waste treatment facilities will be forbidden, as well as discharging effluence, use of agricultural chemicals such as fertilisers and the development of new products that may emit harmful substances. The height of constructions in Zone B can not exceed 15 metres and construction density should not be higher than 30 per cent. Unfortunately, a lack of concisely defined law and non-enforcement of the law has allowed the construction of buildings even on the prohibited zones, such as directly on the beach. Developers show documents claiming they have in fact built on agricultural land. Pollution from illegal construction is ruining some of the most popular areas. This has certainly triggered serious criticism as it appears to show the state’s unwillingness and even inability to deal with illegal developers and their buildings that in some instances have been built upon illegally seized public property.
In spite of its picturesque nature, Albania hasn’t been able to attract significant number of foreign tourists and the massive exodus of young and qualified people has reduced the market demand, making all the goods and services very cheap for those foreigners who dare to visit the country. Despite the above problems, Albania is making progress. Foreign tourists are not unknown. International hotel chains are established in Tirana. Club Med has proposed a development between Vlore and Saranda, but this lacks local support as it takes little care of villagers’ rights. Greek and Italian businesses account for nearly 85% of total foreign investments in the Albanian economy for the time being. The real estate tourist entrepreneurs are starting to invest. For example, a first small marina in Vlora is under development. We believe that this is just a start - as there is 350 kilometres of virgin coast line.

Land
There is a rush from developers for large land parcels of land for housing projects just outside the city as it is extremely difficult to get building permits within the city limits. There is also significant interest in land parcels suitable for industrial development near the international airport and along the Durres highway outside of Tirana. The price of freehold land for sale in Albania has increased significantly in recent years. Rural land prices in certain area rose by 30% in 2005 and residential land prices have increased a staggering 10-fold over the past years. With these statistics it is hardly surprising that plots of coastal land are seen as a viable alternative to more traditional investments. Since summer 2005 more and more international investors are interested in land as an investment vehicle, and are snapping up much of the land that is available. Investors from the Middle East and Asia were early comers, though they are now being surpassed by European investors. Plots near the coast are priced at €50-150/square metre with, in the south, some parcels of land already reaching more than €200/square metre.
Investing in land has the advantage that there is currently no VAT but only a 3% stamp duty to pay on your investment. In addition, there are no rates to pay whilst the land remains undeveloped. There are solid benefits to buying land for sale. Land is a tangible asset - it’s real and its supply is limited. The demand for coastal land for sale, particularly in the south, is soaring because of the chronic shortage. Profits can be made from buying land, which then needs planning permission to be obtained separately. Planning permission, however, cannot be guaranteed on land. Plot sizes vary from 4 to 100 hectares. We forecast prices on the coast to rise significantly in the next few years as more local and foreign investors are attracted to the coastline. From Kavajes to Vlora, thanks to a better infrastructure, we will see more and more future developments.

Factors encouraging the development of the real estate market
A number of factors have combined and contributed towards the development of the Albanian real estate market. These are discussed next.

Economic transition
In almost every guidebook, Albania is described as the least developed country in Europe. This may be true, but this is only a part of the story. The expansion of GDP was accompanied by a falling inflation rate. Consumer demand is expected to increase and will result in renewed interest from foreign investors. Low wages are also anticipated and act as an incentive to foreign investors. The improving GDP and inflation situation have significantly reduced unemployment. The recalculated Albania’s gross domestic product (GDP) rose no less than 6.7% in 2004. These are positive factors for the development of the real estate market.

Amendments to legislation
Private property rights have been extended. The impact of the amendments to legislation became particularly obvious in the first transition years. It allows local government and municipal ownership to reinstate privatisation of property rights. The legal achievement has been substantial in the past years:

• 1995 legislation (further streamlined in 1998) legalised buying, selling, renting and mortgaging real estate properties. The Immovable Property Registration System is the foundation for establishing guaranteeing rights in land transactions and is now being implemented.
• The Immovable Property Registration Act of 1994 is the blueprint for the informational and administrative operation of the system. Cadastral mapping of each individual property and the first registration of these properties is ongoing in 35 of Albania’s 36 districts. As of March 31, 1999, 1.6 million of the country’s 3 million properties had begun the registration process.
• World Bank, FAO, USAID and others are assisting the government in making recommendations for new legislation in mortgages, restitution of lands, restrictions of land use and transactions registration. They also assist government efforts to legislate the management and distribution of land information.

Changes in the financial environment
Bank restructuring and significantly the entry of foreign banking capital and expertise has created a vibrant and competitive retail banking sector. Reforms in the banking sector have help to facilitate the emergence of competition amongst the commercial banks. These measures have facilitated the role of external sources for financing funding and investment. Banking environment comprised 17 commercial banks at the end of last year with all of them offering mortgage loans. The combined assets of commercial banks in Albania rose 16.4% year-on-year in the fourth quarter of 2005, to €4.0 billion! The mortgage market is under 10% of this total which is extremely low and will offer new opportunity.
Real estate lending is primarily hindered by the registration and enforcement problems. However, (the lack of?) experience in developing mortgage finance systems in transition and emerging markets indicates that banks remain very risk-averse. We believe that this trend will reverse after the components of the legal and administrative infrastructure start to fall into place. Today banks in Albania have generally adopted a collateral approach to lending, and focus their marketing on the upper income groups and favoured corporate customers.
Despite the banks’ very conservative approach to mortgage lending greatly limits its effectiveness, most of the problems are external to the banks. Foreign banks bring a high level of international expertise and also longer-term funds from the mother banks. The newly developing competition in retail lending will improve the appeal of the sector. However, the fundamental legal and registration problems must be solved before real estate lending can truly move forward.

Changes in Albanian’ mentality
Albanians’ have gradually started to perceive real estate as not only a physical asset (a place of residence or somewhere to run a business from), but also as an investment asset. The reluctance to invest in real estate stemmed from the disregard of property rights and mortgage title. The emerging of a market economy began to draw attention towards investment categories other than the traditional ones, including real estate; the introduction of regulations secured ‘respect’ for property rights. As a result, the real estate market has now become an acceptable investment area. The flow of capital into the real estate market occurred across all sectors, but particularly into the retail and the residential markets.

Flow of foreign capital
The World Bank has committed some 808 million dollars for 58 projects in Albania since 1991, when the country joined the global lender. We believe the flow of foreign investments made in Albania will continue thanks to the recently signed Stabilisation and Association Agreement with EU.
International capital started flowing into to the Albanian real estate market as early as the first half of the 1990’s, mostly from the Middle Eastern countries. Now that institutional investors have started to look outside their traditional real estate investment markets, they consider central and eastern European markets as offering potential for their real estate investment portfolios.
The remittances also play a definitive role in the flow of capital. The Bank of Albania estimates that the total workers’ remittances have reached around 1.028 million (one billion) dollars, or 13.5 percent of GDP in 2005. This is twice as high as revenues from export of goods, which makes “work force” Albania’s main country export.
Furthermore, remittances are estimated to be three times higher than foreign direct investments (FDI) inflow and its value far exceeds the official aid from abroad. Mr Ardian Fullani, Governor of the Bank of Albania, at the Conference on Remittances in Bari on March 2006 stated that: “Remittances represent the most direct and immediate benefit to emigrants’ families and to the economy” adding that “Remittances are mostly used for imported consumer goods, services, and for the purchase or construction of properties”.

Market underpinnings
Despite being relatively immature, the real estate market in Albania has already some foundations. They comprise of the following elements:

• Establishment of a legislative base supporting the functioning of the real estate market. For example free trade in property, the rules for restitution of land, as well as the amended rules for disposition and apportionment;
• A mortgage banking system has been created and is working;
• Higher learning institutions like USAID have launched courses and research into the real estate market and educate professionals to service the market.

Professional brokers
Estimates of the number of legitimate brokerage companies in Tirana ranges from 7 to 10, with each company consisting of 1-5 individual agents or staff members. Today only approximately 20 percent of the real estate transactions are broker-assisted. We estimate that the number of real estate practitioners range from 150 to 300 persons practising full or part time real estate brokerage; the legal community participates in approximately 20 percent of the cases.
These figures include not only the legitimate registered businesses but also the “black brokers”. Nationwide, there are probably 50 to 75 “higher quality” practitioners. Thus, it would appear that there are many illegitimate brokers, throughout the country. Legitimate brokers complain that they are tainted by the activities of “black brokers” and that the entire profession is therefore not viewed in a very professional manner.
Also, because of these illegitimate brokers, commissions are low, in the range of 1-3 percent and are paid by the seller. The fee for rental commission is one month’s rent on an annual lease (pro-rated if less than one year) and a half month’s rent on subsequent renewals. We believe that the market will become more and more professional making it more difficult for non-registered brokers to work.

Outlook
Real estate development
There is a development community that is alive and well in Albania. All developers are private sector companies. There are 5 to 6 larger companies that have development capacity in the marketplace. Most of these are organised as civil engineering and construction companies that also build for their own account and ultimately re-sell the property. Until recently, none were purely development companies, though they all have this capacity.
Municipalities require a multitude of licenses and permits to develop real estate, all of which entail fees of varying amounts. Developers estimate that this adds 15% to the cost of real estate development – enough to eliminate profits for most developers and to discourage all but the most highly motivated and deeply capitalised firms from undertaking development projects. What is helping the developers is that construction costs are extremely stable and this helps increase their margin. During the fourth quarter of 2005, the Construction Cost Index ended at 122.3%, thus marking a growth of 0.2% against the previous quarter and an increase of 0.7% as compared with the same period of the previous year.
At present there are currently about 350 units under development by the major developers. Most of the development is for the native population. Generally the developments are of medium quality and do not meet international standards in term of insulation and sound proofing.

Land disputes and illegal construction
The collapse of the communist regime in the 1990s led to the massive privatisation of cooperative and state held farm assets. Distribution of land did not take into consideration former ownership of private property that had been nationalised by the communist regime. Ultimately, this ambiguity has created social, political and economic conflicts due to the lack of clear title to the properties. Disputes over ownership and other legal rights to property arising from restitution claims make it difficult to attract the necessary foreign investment in Albania.
Nevertheless, today efforts have been made to assist the Government of Albania in conducting the registration of immovable property and implementing the Law on the Recognition, Restitution and Compensation of Property in an appropriate manner that would minimise social conflicts. In the past, lack of enforcement to inhibit illegal construction of buildings have been widespread. But this is also changing; Municipal authorities are now under scrutiny for issuing illegal construction permits that clearly violate the zoning laws.
This year in Sarande, in a rare example, the construction police verified all constructions in the informal zones and inside town’s quarters. Many irregularities in constructions were pointed out from the exercised controls. The violations start from issuance of construction permits, to lack of controls during the construction process. There are numerous violations in the number of floors, construction surface, occupation of roads, parks and other public spaces. Also some of the constructions have occupied empty spaces and blocked the view to the sea.
An other type of illegal construction found in Sarande is the extension of walls between apartment buildings. It has become difficult, even as a pedestrian, to penetrate into this labyrinth. Old gates and corridors between apartments buildings are occupied with newly constructed extensions and fencing walls. Also paths have been blocked. From the last control intending to combat this urban chaos, Sarande’s construction police has pointed out that there are no less than 122 illegal multi-storey constructions. In addition they have also pointed out 74 illegal constructions in tourist areas at Kanali, Cukes and Ksamil. These constructions are going to be demolished.

An attractive investment?
There are other factors that make buying attractive here. Capital gains taxes have been steadily low; the rate presently stands at 10 per cent. Also, if a foreigner purchases property as a corporation, which is the recommended and most popular way, other tax benefits accrue to the buyer. Investment markets have become global and integrated, including real estate markets. However, southeast European (SEE) countries are still in a transition phase and therefore offer opportunities.
Evidence that the SEE markets are not fully synchronised with western European markets can be gleaned by looking at the correlation structures for rental growth, capital growth and total rates of return. As investors increasingly enter the SEE markets, these markets will become more liquid and mature. Among the purchasers of property in Albania are Middle Eastern and Asian investors who just want to invest their money. Investing in Albania is not a recent phenomenon for them as they have been buying property there for the past few years and have undoubtedly been rewarded in terms of property appreciation within that period.
Albania today is like Croatia 10 years ago. The strong growth in property development and the attractive prices are an incentive for foreign investment. If Albania does indeed follow in Croatia’s example in terms of a sustained property boom, investors who are currently getting their hands on remarkable deals will be set to make significant returns in the years to come.

Demand from investors for land plots
We can interoperate the increase in the number of direct flights from Europe (i.e. the new direct flight from London to Tirana operated by British Airways) as a testimony to the growing interest of western Europeans in Albania. Without doubt this will help future real estate development. Since 2005, more European individuals as well as Albanians fro abroad are chasing deals to land plots along the coast. But at this stage most of the plots available with clear title of property are of 5 hectares or more and, for the most part, fit institutional investment capacity only.
Investors are aware of the huge growth in land value in Croatia, Montenegro and Bulgaria over the past 5-10 years as this has been widely reported. Land is now an attractive investment in Albania and one that is no longer solely the domain of property developers. Today coastal lands parcels under 5 hectares with planning permission and infrastructures are in demand as well industrial land along the Tirana-Durres Highway.

Conclusion
In the last few years, Albania has made clear progress in a number of areas necessary to allow the smooth running of real estate finance and real estate transactions. The lending environment is greatly improved. Although limited by numerous factors discussed above, mortgage lending is under way, as well as “consumer” lending for housing purposes. Constructors and developers are engaged in the market. Overall, there is a growing awareness among the government of the importance of the real estate sector and the need to push reforms to solidify and improve its legal and administrative framework.
An encouraging factor in favour of rising standards in the Albanian markets over the next five years is the anticipation of continuing GDP and consumer expenditure growth compared with the EU average. The economic knock-on effect will benefit real estate growth, investment opportunities and development prospects.
The growth of the economy (the country ended 2005 with a budget surplus of €65 million!), the increase in urbanisation, the demographics and the Albanians abroad are determinant factors that are likely to deliver a different profile of performance to that in western markets. Bright prospects for EU membership (not later than 2014), a better political climate, the developing economy and moving real estate prices, Albania has it all.
The real estate market in Albania, currently offers significant capital appreciation, and looks set to do so for the foreseeable future.

© SEEBusinessguides 2006/2007