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Encouraging Real Estate Investment in Macedonia: Overcoming Challenges and Barriers Published in Magazin of the American Chamber of Commerce of Macedonia  

by Slobodan Hristovski, Senior Associate

Published: June, 2008

Submission: July, 2008

 



The real estate market in Macedonia has been in a state of transition for the last two decades. This period brought the country from a situation in which such investment was seen as a duty primarily fulfilled by State bodies, institutions and enterprises to one in which the sector was left virtually entirely to the private sector. While 20 years would seem to be sufficient time to smoothly execute such a transition, the period was marked by inadequate State reform and legislative adjustment to keep pace with demand in this field.

Notably, no major amendments were made to national legislation dealing with real estate during the first decade of independence. The first comprehensive modifications in this regard were embodied in the Law on Construction Land, adopted in 2001; for the first time in over 40 years, the Law allowed for private ownership of construction land and defined the state-to-private ownership transformation process. However, regulations implementing the law were also to be a long time coming; in 2002, these provisions were repealed by the country’s Constitutional Court. Then in 2005, the Law on Construction Land Privatization and Leasing was adopted, but again the enactment of the procedures outlined in the law began as late as in 2007 and is now expected to be completed in January of 2009.

In addition to the delayed modern legal framework that caused insecurity with local and international investors, the Macedonian real estate market was stunted by periodic and unfavorable political and security influences, chaotic management of land title and registration records, excessive and inefficient bureaucracy at both central and local government levels, as well as prohibition of land acquisition by foreign citizens. Several scandals were also exposed in the construction sector, further highlighting problems. The combination of these factors has resulted in only minor progress in land development in the country when compared to its neighbors.

On a positive note, substantial reforms have been introduced since 2000 with the aim of attracting local and international investment in the sector. Among these reforms were laws on ownership and other real rights, construction, spatial and urban development planning. Each aims to modernize national legislation and align it with current demands. The 2008 Law on the Real Estate Cadastre is the most recent piece of legislation in the corpus of legal reform in this area.

In legal terms, a mismanaged cadastre is undoubtedly the biggest hindrance to investment in the sector. While the Macedonian Real Estate Cadastre was introduced in 1994, it did not encompass most of the country’s territory until recently. While it is meant to be the final authority on both construction land and any structures built on it, in those parts of the country not covered by the Cadastre, the “old cadastre” (introduced in 1928) applies, which includes records of only land titles. The transition from a land cadastre to a real estate cadastre has been ongoing for several years and is expected to be completed by 2010. The reality is that today, the Cadastre procedures required to modify a land ownership title can take months, even years, to complete.

One of the weaknesses of even the new Cadastre is that it does not maintain any record whatsoever of structures under development. As a result, several scandals have been revealed in the country whereby a single apartment under construction was sold multiple times; this fact has shaken buyers’ feeling of legal security, severely impacting the market for such pre-selling in the country.

The new Law on the Real Estate Cadastre is expected to address most of the above-mentioned problems. The law prescribes concurrent record keeping of any real estate under construction or intended for sale, thereby preventing the potential of multiple sales. Anyone building a structure will have to register it in the Cadastre, enabling tracking of any ownership transfers of the property under construction. This should go a long way toward restoring legal certainty to the construction and real estate sectors.

Another major problem hindering real estate investment used to be the inability to privatize State-owned land. In 2005 (though in practice, 2007) it was finally possible to gain private ownership over construction land formerly owned by the State. This lifted legal insecurity caused by title uncertainty since it defined whether, when and under what conditions (e.g., price) a State property could be privatized, and the consequences of buyers not meeting privatization requirements (e.g., lack of required funding).

Despite the 2005 reforms, state and municipal administrations continue to function inefficiently in this field. This is particularly notable in the country’s municipalities that are more attractive for developers and thus targets of more requests for building permits. Further complicating matters in these same municipalities is the lack of detailed urban development plans that clearly regulate building types, dimensions, number of floors and so forth. Currently, the process of obtaining a building permit can take up to several months, though reforms were recently announced that should help reduce this span.

A final hindrance to real estate investment is the inability of foreign citizens to own land and a limitation on the right to purchase multiple pieces of real estate. In practice, this unnecessarily raises transaction costs by requiring foreign entities to establish and maintain a local company through which they can purchase property. Fortunately, reforms have also recently been announced that will enable foreign entities to freely acquire real estate in the country.

Thus, regulatory reforms already adopted have yet to yield expected efficiency gains in practice. The forthcoming reforms should first provide an appropriate legal framework which will be evaluated down the road.

 



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