The main sources of real estate law in the Republic of Slovenia are:
Over the last 12 months, real estate prices in Slovenia have remained stable compared to the previous period. Even the COVID-19 pandemic has not had a major impact on the real estate market (so far). The number of investments, especially in the area of warehousing and residential developments, remains comparable for the time being.
So far, disruptive technologies do not appear to have had any major impact on the real estate market in the real estate industry. Consequently, no major changes in this area are expected in the next 12 months.
There are currently no proposals that would significantly impact real estate investment, ownership or development. However, it must be noted that although the above-mentioned statutes (see 1.1 Main Sources of Law), which came into force in June 2018, were supposedly adopted with the intention of simplifying and expediting the adoption and obtainment of spatial acts, construction and fit-for-use permits (by introducing so-called integrated procedures), these procedures have not changed significantly in practice.
The Real Estate Tax Act – Adopted and Repealed
Furthermore, it must be noted that, in December 2013, the National Assembly of the Republic of Slovenia adopted the Real Estate Tax Act, which levied on the owners of real estate an annual tax calculated on the basis of the valuation assessed by the state administration pursuant to the Mass Valuation of Immovable Property Act. The adoption of said statute has been greeted with great disapproval by the general as well as the professional public, and soon thereafter, a procedure for the review of the constitutionality of said statute was initiated before the Constitutional Court, which repealed the statute in question, mainly due to it being insufficiently clear and precise, and due to it unreasonably applying different tax rates in similar taxable situations. In other words, the Constitutional Court did not repeal the statute because the imposition of a real estate tax would be unconstitutional, but mainly because the wording of the statutedid not meet the clarity and precision of tax-imposing provision requirements of the Constitution of the Republic of Slovenia, which means that such a tax could still be levied in future. In the aftermath of the repeal of the Real Estate Tax Act, the government of the Republic of Slovenia issued an official statement that the wording of the statute would be amended and that the real estate tax would be enacted sooner rather than later. It probably goes without saying that the imposition of such a tax would greatly limit the attractiveness of owning real estate in Slovenia.
The full list of property rights that can be acquired can be found in the Law of Property Code, which provides for the following categories of property rights: ownership right (the most common as an ownership of a plot of land and the pertaining buildings, if not divided into individually owned building units under a strata-title regime), lien, easement, building right (right to erect and own a building on or under a plot of land for a maximum of 99 years) and land charge (right to demand the performance of certain periodic acts or services from the real estate owner).
The transfer and acquisition of property, as well as formal contract-related requirements, are primarily regulated by the Law of Property Code, the Code of Obligations and the Land Registry Act. Some other restrictions, eg, pre-emption rights of municipalities or administrative approvals, can be found throughout the legislation if the property that is the subject of the transaction meets certain statutorily laid-down criteria. For example, if the intended use of a certain piece of land is agricultural, the pre-emptive right-related provisions of the Agricultural Land Act must be observed. Similarly, if a certain piece of land is located within an area deemed by the respective municipality to be of such importance that a statutory pre-emptive right is instituted in favour of such municipality, the approval or waiver of the pre-emptive right by such municipality must be obtained prior to the conclusion of the real estate transfer contract. Such rights of pre-emption are also laid down with respect to real estate representing forests, bodies of water, cultural heritage, nature conservation or state defence-related sites etc.
Ownership of real estate is transferred from the transferor to the transferee by way of registration in the electronically maintained Land Registry, with the Land Registry permission issued by the transferor being a prerequisite for such registration. In order for a permission to be registered with the Land Registry, the parties must first conclude an appropriate written contract and fulfil all the administrative and tax-related requirements. All transfers, as well as underlying contracts and Land Registry permissions, are recorded in the publicly accessible Land Registry.
Given the fact that the Land Registry is held electronically and is publicly accessible and that the person relying on the information contained in the Land Registry may not suffer negative consequences as a result of relying on such information, title insurance is not common. Any potential defects or problems relating to the ownership of real property are usually eliminated in the due diligence process and additionally contractually regulated between the contracting parties themselves.
A transferee typically commissions an expert legal adviser to conduct a thorough due diligence process regarding the property in question. Due diligence is done primarily by examining the electronically held and publicly accessible records (Land Registry, Land Cadastre, Building Cadastre, etc) and, if necessary, by co-operating with other government or local bodies (eg, to verify that the real estate in question is not the subject of any restitution or expropriation procedures).
Due to measures resulting from the COVID-19 pandemic, the provision of real estate brokerage services was banned for a certain period in 2020. An even larger proportion of the real estate business has thus moved to the internet and means of distance communication.
The statute contains only framework representations and warranties, which is why appropriate representations and warranties are typically given in the sale and purchase contract, primarily with regard to the absence of any rights of third persons to the subject of the contract (the seller usually guarantees that the current legal state of the real estate, as evident from the Land Registry, is accurate). The seller also typically provides additional representations and warranties in connection with the factual state of the real estate, as well as taxes and other public duties payable with respect to the real estate. In the case of the seller’s misrepresentation, a buyer is entitled to demand:
The most important areas of law for an investor are construction law, property law, spatial planning and zoning law, real estate tax law and environment-protection law.
Under the Environmental Protection Act, the "polluter pays" principle applies. This means that the polluter is responsible for the elimination of any excessive pollutants and related consequences and is liable for all costs of measures taken in order to prevent or reduce pollution or environmental risk. Allocation of liability in respect of environmental clean-up is commonly regulated by the contract, as typically one of the representations and warranties of the seller is a declaration that the object of sale is free from any contaminants. Should such a declaration on the part of the seller prove to be false and it is established that the object of sale is encumbered with a factual defect (contamination), the buyer is entitled to demand that the seller remedies the breach at its own expense, or to demand a proportional reduction of the purchase price, or to withdraw from the contract.
The state and local authorities regulate the spatial planning, development and use of real estate, and determine the use of specific areas of land. A buyer can obtain information concerning the permitted uses of land from the competent local authorities. With regard to specific development agreements, it should be noted that, under the current legislation, such agreements are limited only to projects carried out in the public interest from June 2018 onwards.
The compulsory purchase of real estate or expropriation is only permitted if it is required for public benefit (with the term "public benefit" being defined by different statutes) and this benefit cannot be achieved without it. Generally, compulsory purchase procedure is allowed after a compulsory beneficiary has failed to negotiate a voluntary purchase from the owner of the property. Owners and tenants are eligible for compensation established by a certified appraiser. However, an agreement on compensation is also possible. Decisions on compulsory purchases can be challenged in court.
Asset deals concerning real estate are usually taxed by the 2% Real Property Transaction Act, payable by the seller, however, the parties may agree that such tax be borne by the buyer. If certain specific conditions are met, such transactions may also be taxed in accordance with the Value Added Tax Act (22%, however tax neutral if both parties are subject to value added tax). Obligations concerning taxation must be fulfilled prior to registration in the Land Registry. In the case of share deals, the buyer enters into the position of the owner of real estate, which is why such transaction is not viewed as a real estate transfer. However, share deals may be subject to the payment of Corporate Income Tax, currently amounting to 19%. The contracting parties are free to agree on who bears the liabilities for taxes and duties in relation to the real estate.
There are no legal restrictions for legal entities and natural persons from EU member states, while legal entities and natural persons from non-EU countries are allowed to acquire real estate only under the condition of reciprocity, ie, if Slovenian legal entities and natural persons are allowed to acquire real estate in that country of origin.
Acquisitions of commercial real estate are generally financed by both equity and debt. An investor usually has to provide sufficient equity in order to acquire debt financing from a bank or any other type of lending institution.
The most common security instrument available to lenders (usually from financing banks) is a mortgage. Other types of security instruments usually include liens on movable property or a company’s shares and other intangible assets (such as intellectual property rights), mother company guarantees, bills of exchange, sureties and other personal guarantees. Also, a security assignment of all receivables of the borrower stemming from its bank accounts, insurance policies or receivables held against tenants, is fairly commonly used.
The method of creating and perfecting a security interest in real estate differs, depending on the nature of the security instrument. For example, a mortgage and a lien on the company’s shares must be registered in the Land Registry and the Court Registry respectively, which is why such agreements are usually concluded in the form of a notarial deed. The agreements granting a non-possessory lien on movable property must also be concluded in the form of a notarial deed. Some forms of liens on movable property (which can be identified through an ID designation – such as motor vehicles, inventories and equipment) must also be registered in the registry of non-possessory liens. For other types of security instruments, the written form is generally sufficient.
There are no restrictions on granting security over real estate to foreign lenders. However, if such a lender wishes to obtain the types of security instruments that must be entered into the appropriate public registries, it must first obtain a tax ID number and an identification number for registration purposes. Liens are commonly instituted on the basis of agreements entered into in the form of a notarial deed. Assignment of security instruments is only possible, however, together with the underlying loan or claim.
No tax would have to be paid on the granting and enforcement of security over real estate, with the exception that the lender is obliged to pay the notarisation and registration fees in order to achieve Land Registry registration of the security.
There are no legal rules or requirements to be complied with before an entity can establish a valid security instrument over its real estate (apart from being a lawful owner), per se. Restrictions could potentially be contained in the entity's memorandum of association or in the event of the entity's insolvency (in which case, legal transactions establishing security interests might be challengeable).
If a borrower is in default, a lender must generally file a lawsuit and obtain an enforceable judgment in a litigation proceeding in order to initiate an enforcement proceeding against a debtor and foreclose on the debtor’s assets. In order to avoid costly and time-consuming litigation proceedings, loan agreements are usually entered into in the form of a directly enforceable notarial deed that grants the lender the right to file for immediate enforcement and foreclosure. The parties can agree that the lender is entitled to assert this right in respect of any kind of obligation defined in such a notarial deed, but the most common type of obligation that is the catalyst for foreclosure is default in the payment of monetary obligations. Slovenian law also allows the parties to agree that the creditor itself is entitled to sell the pledged movable property extrajudicially without having to obtain a writ of enforcement against the debtor. There are no restrictions as to which type of legal remedy may be brought by the lender in the case of default by the borrower.
As regards priority among various interests in the estate, a ranking order is established and published in the Land Registry in accordance with the prior in tempore potior in iure principle. The right that was entered into the Land Registry first has priority over all subsequently entered rights; however, the holders of such rights may agree otherwise, provided that such an agreement is also entered and published in the Land Registry.
Slovenian law enforces the "polluter pays" principle, which means that the lender is only liable for pollution it has caused.
Should the borrower become insolvent, any security interests created by the borrower could be void if the provisions of the Financial Operations, Insolvency Proceedings and Compulsory Winding-up Act are met. The security interest could be void if such security interest was created 12 or 36 months (depending on whether the legal transaction was onerous or gratuitous) prior to the beginning of the bankruptcy proceeding against the borrower, in the so-called contestability period, and under the condition that such security interest caused a decrease in the value of the insolvent debtor's assets (causing the other creditors to obtain a smaller repayment portion in the insolvency procedure) or more favourable payment conditions than the other creditors received, and if the lender knew or ought to have known, at the moment of conclusion of the transaction, that the debtor was insolvent.
Based on the fact that the LIBOR index is not frequently used as a benchmark rate offered to borrowers in Slovenia, no significant consequences are expected for the general position of borrowers in current and future real estate projects. In addition to this, no legal source providing legal consequences of the expiry of the LIBOR index was adopted.
Spatial planning, development, construction and use of real estate are regulated by the state and local authorities through spatial development plans which determine the general use of specific areas of land. Control is exercised in the procedures to obtain a construction permit, as the competent authorities are obliged to reject a request for the issue of a construction permit if the intended construction contravenes the provisions of the applicable spatial plan.
The design, appearance and method of construction of new buildings, or refurbishment of an existing building, are governed by the Construction Act and the Spatial Management Act, which, in conjunction with each other, set forth that construction is generally only allowed after acquiring a construction permit. After the issuing of a construction permit, the building inspectors are competent to conduct supervision in order to ensure that the actual construction does not derogate from the construction permit.
The regulation and development of the intended use of real property is done hierarchically, which means that, at state level, the government of the Republic of Slovenia is the competent authority that decides on the general land use strategy. At the regional and municipal level, the local self-government communities (eg, municipalities) are competent to adopt detailed spatial plans which must not, however, contravene hierarchically higher legal acts.
An investor has to obtain a construction permit before starting construction. A construction permit is issued in an administrative procedure by the competent administrative unit at the investor's request and after examining the submitted documentation and whether the intended construction is in line with the applicable spatial regulations. In such administrative procedure, any third party with appropriate legal interest (eg, parties whose rights or benefits could be affected by the intended construction) has the right to participate and potentially file objections against the intended construction.
The investor and/or the third parties with appropriate legal interest have a right to appeal against any decision of the competent authority issued in a construction permit-related procedure.
Under the current legislation, specific agreements with local or government authorities or agencies or utility suppliers are possible, but are limited to the construction of public utility infrastructure. Since June 2018, these have also been limited to projects carried out in the public interest.
Restrictions on development and designated use are enforced by a separate state authority, ie, the Inspectorate for the Environment and Spatial Planning, which has the power to initiate an inspection procedure and demand that the owner/investor rectify any established breaches, including demolition of illegal structures. Should the owner/investor not comply with the decrees issued by the inspectorate, the inspectorate has the option to enforce such decrees by force and at the expense of the owner/investor.
Investment entities can take several different legal forms. Those forms are:
The best shield for ultimate owners is the limited liability company (d.o.o.) as a vehicle for real estate ownership. All entities are required to pay taxes and fees when acquiring real estate. The most common form of entity used by foreign investors is the limited liability company (d.o.o.).
Of the entities used to invest in real estate, the main difference lies between limited liability companies and unlimited liability companies.
Limited Liability Company
A limited liability company can be formed by only one shareholder, individual or legal entity, has a simple organisational structure that can be modified according to the investor’s needs and generally shields the shareholders from liability for the actions of the company or its debts. The organisational formalities for creating a limited liability company are provided in the Companies Act. A company can be established by one or more shareholders by adopting the articles of association, wherein the company name, seat, objectives, duration of the company (if established for a fixed period of time), and the amount of share capital are set forth. The minimum required share capital is EUR7,500, which can be paid in cash or by in-kind contribution. The profit of the company is generally subject to taxation in Slovenia, unless the provisions of the Corporate Income Tax Act determine otherwise.
Unlimited Liability Company
A limited partnership can be formed by at least two partners, and at least one of the partners has to be liable without limitation, and with all of its property. In other aspects, the provisions regulating limited liability companies generally apply.
The minimum share capital for a limited liability company is EUR7,500. There are no minimum capital requirements for unlimited liability companies and limited partnerships, while in the case of a public limited company, the minimum share capital is EUR25,000, the same as for a partnership limited by shares.
There are no special governance requirements, apart from the general requirement to act as a prudent businessperson.
It is impossible to provide even an approximate cost of maintenance and accounting for a specific legal entity. However, it could be stated that a single-shareholder limited liability company is, in general, the cheapest to maintain.
A person may occupy and use real estate for a limited period of time without buying it on a number of legal bases, such as a building right (which is, however, treated very similarly to ownership) or some forms of personal easements, however, the legal transaction most commonly used to this effect is the lease agreement.
Slovenian law differentiates between ordinary leases, residential leases, leases of commercial premises and leases of agricultural land.
Ordinary lease agreements are generally governed by the framework provisions of the Code of Obligations; however, in the case of residential, commercial and agricultural leases, mandatory provisions of the Housing Act, Commercial Buildings and Commercial Premises Act, and Agricultural Land Act must be observed respectively. The most notable restrictions of the above-mentioned statutes include the prohibition of subletting without the consent of the lessor, the fact that the lease agreement for commercial premises may only be terminated in a time-consuming court proceeding, and that the lease agreement for agricultural land may only be concluded for a minimum of 10 years and must be registered in the Land Registry.
Rents or lease terms are, in principle, freely negotiable, with the exception of the limits mentioned in 6.2 Types of Commercial Leases and some specific and untypical mandatory provisions that must be followed.
As a measure in the context of the COVID-19 pandemic, the government has stipulated that tenants of commercial premises who are prevented or significantly restricted from carrying out economic activities due to the pandemic and therefore cannot use the commercial premises in full or in part for an agreed purpose may:
In the event of a deferral, the lessee must pay deferred rental to the lessor no later than six months after the expiry of the measure, whereby the lessor is not entitled to default interest for deferred rents, but may request appropriate insurance for deferred rents. The lessor may not terminate or withdraw from the lease agreement because the lessee has requested a deferral of the rent or an extension of the lease agreement.
The law governing the said measure came into force on 31 December 2020, but it explicitly stipulates that the lessee may request a deferral of payment or renewal of the contract also for the period before the Act came into force. The measures are valid until 30 June 2021.
The length of lease terms for commercial premises is freely negotiable, with the parties often opting for a one to ten-year fixed term. As in the case of a lease with an indefinite term, the termination of the lease contract and vacation of the premises is somewhat time-consuming and costly due to the antiquated legislation regulating the leasing of commercial premises.
Maintenance and Repair
Contractual parties can voluntarily regulate their rights and obligations, however, it is common for the tenant to be responsible for minor maintenance-related tasks and the payment of operating costs, while the landlord is usually responsible for investment maintenance and major repairs.
Frequency of Payment
Rent payments are usually made monthly, but this can be agreed differently by the parties.
Many leasing contracts concluded in the future can be expected to contain a force majeure provision in which the parties will determine the possibility of cancelling the lease, deferring the payment of rent, or the possibility of extending the fixed-term contracts.
The amount of rent will remain the same for the duration of the lease, unless the parties change it by an annex to the lease contract or by including the so-called indexation clause, causing the amount of rent to be harmonised with the relevant index.
Given the fact that the rent is determined in the lease agreement, which must be in written form, any changes in rent generally require a written annex to the lease agreement.
VAT is generally not payable on rent. However, the parties involved may opt into the VAT system by issuing appropriate statements to the tax authority.
At the conclusion of the lease agreement, it is common for the landlord to demand that the tenant pay a security deposit or procure a bank guarantee as security for the fulfilment of its obligations under the lease contract.
The cost of maintenance and repair of the common areas used by several tenants is usually divided between the tenants, taking into account their proportional shares.
The cost of utilities and telecommunications which serve a property occupied by several tenants is usually divided between the tenants, taking into account their proportional shares, unless the property enables individual procurement and payment of these services.
The obligation to insure the subject of a lease is usually transferred onto the tenant. Most commonly required is property insurance and civil liability insurance which cover the insurance events stated in the insurance contract, usually damage caused by fire, windstorm, flood, hail, lightning etc.
It is common for the landlord to impose rules on how the real estate is to be used. There are no specific statutory regulations concerning this matter, which is why it is commonly regulated in the contract between the landlord and the tenant.
During the lease, the tenant is not permitted to alter or improve the real estate without the prior consent of the landlord, unless otherwise agreed in the contract.
There are specific provisions in the Housing Act, Commercial Buildings and Commercial Premises Act, and Agricultural Land Act that, in general, provide for increased protection of tenants, minimum duration of the lease, restrictions on the use of rented property, etc.
In the case of a tenant’s insolvency, the landlord is entitled to terminate the contract if such entitlement is provided in the lease contract or according to the provisions of the Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act. If the contract is not terminated, the lender can collect rent during the bankruptcy proceedings.
It is common in Slovenia to agree on security deposits or other instruments of collateral when concluding a lease agreement. Security instruments include bank guarantees, letters of credit, surety, a parent company guarantee, bills of exchange and, most commonly, a security cash deposit given to the landlord at the beginning of the lease.
In general, the tenant does not have a right to occupy the relevant real estate after the expiration or termination of a lease, however, this does not mean that the tenant will voluntarily vacate the premises as agreed. If after the expiry of a lease, the tenant continues to use the premises and the landlord does not object to this, it shall be deemed that the lease has been tacitly prolonged for an indefinite period. If the landlord wants the premises to be vacated and the tenant resists, the landlord must obtain a judgment in a litigious procedure instructing the tenant to vacate the premises and, if the tenant still resists, enforce the judgment in an enforcement procedure. The litigious procedure step may be avoided and the vacation of the premises expedited if the lease agreement is entered into in the form of a directly enforceable notarial deed representing the enforcement title for the vacation of the premises.
Unless otherwise agreed, the tenant may lease the leased property to another (sublease) or otherwise put it to use, but only if this does not cause damage to the landlord. However, in the lease agreement, the landlord may prohibit the subletting of the property, or may stipulate that the tenant must obtain the landlord's consent before subletting.
Typical causes of termination of a contract fixed for an indefinite period are insolvency of the parties, delay in rent payments, failure to provide the contractually agreed guarantees or pay security deposits, or failure to take over the subject of the lease, etc.
Leases are in principle not required to comply with registration requirements or particular execution formalities. Also, leases do not have to be recorded in the Land Record, although the Land Register Act provides the legal basis for registering a lease in the Land Register. Thus, the owner of the property can, at their own request, record the existence of the lease in the Land Register.
The due date for vacating the subject of the lease is usually mutually agreed in the lease. In a case of a tenant's default, the landlord is entitled to rescind the contract and file a request with the court that the tenant vacate the premises. The length of such process may vary, depending on the activities of the tenant in the procedure, making it impossible to estimate the duration. COVID-19 legislation has not provided for a different eviction regime.
A lease can be terminated by state authorities, for instance, in the case of expropriation for public interest or defence purposes etc. In such situations, the expropriating authority has to pay the appropriate compensation.
The most common structures used to price construction projects are fixed price and price per unit. The most commonly used clause is the so-called "turnkey price clause" which excludes any potential additional costs which could not be foreseen at the time of concluding the contract.
The builder and the designer are statutorily liable for mistakes made during the planning and construction of a project, and for the solidity of the structure and any land defects which might arise within ten years of the construction being finished and handed over. Such liability, which applies also to any other person who obtains the relevant construction project, cannot be limited or excluded.
Construction risk is usually managed/mitigated by engaging the services of a construction supervisor, who supervises the construction process on the investor's behalf, and by demanding that the contractor take out appropriate insurance and provide appropriate bank or other guarantees for the provision of services and rectification of defects during the warranty period.
In the event that the completion dates are not achieved, the parties usually agree that the investor is entitled to a contractual penalty, the amount of which depends on the period of delay and the value of the investment.
It is common for the investor to seek additional forms of security to guarantee the contractor's performance. Such forms of security include, inter alia, bank guarantees, contractual penalties, sureties, bills of exchange, parent company guarantees, retention of payments, etc.
It is possible, although uncommon, for contractors to lien a property in the event of the investor's non-payment. Should the parties agree on such an encumbrance, it must be entered into at the Land Registry to take effect. The investor may achieve the deletion of the encumbrance from the Land Registry on the basis of the appropriate document, ie, a Land Registry permission issued by the contractor or, if the obligations have been fulfilled and the contractor fails to issue such permission, on an appropriate judgment of the court.
In cases where the investor has to obtain a construction permit for a project, it also has to obtain a fit-for-use permit issued by the competent administrative unit. Such fit-for-use permit is issued if the construction is conducted in accordance with the relevant construction permit and in accordance with the relevant technical regulations.
The principal tax applicable to transfer of real estate is the real estate transfer tax. Should the transfer involve legal entities that are subject to VAT, the transaction may be taxed by mandatory or voluntary VAT (22%), depending on the type of real estate involved and whether the parties opt to tax the transaction by VAT. VAT is generally tax neutral, which means that it must formally be paid by the buyer, however, if the buyer is subject to VAT, the buyer may deduct such amount as input VAT and demand reimbursement from the state, making the transaction tax neutral. Should the parties choose to opt-in and tax the transaction under voluntary VAT, the reverse charge system shall apply, meaning that the amount of VAT is shown on the invoice of the seller, but not paid, also making the transaction tax neutral.
No methods can be used to mitigate tax liabilities concerning acquisitions of large real estate portfolios.
The occupants of business premises are obliged to pay the fee for the use of construction land, unless the parties contractually agree otherwise.
Foreign investors are obliged to pay corporate income tax (legal entities – 19%) or personal income tax (natural persons – 25%) for rental income in Slovenia. Taxation on rental income applies only to natural persons. In the case of disposition of real property, natural persons are obliged to pay capital gains tax (25%, decreasing gradually proportional to the length of ownership), unless the conditions for exemption are met. Legal entities are subject to corporate income tax payable every fiscal year, which means there is no income tax at the moment of disposition.
There are no tax benefits from owning real estate.
General Real Estate Trends in Slovenia
Current market status and impact of COVID-19
Slovenia recently stepped into the second year of the declared state of emergency due to the COVID-19 pandemic. In the spring of 2020, the country faced a total lockdown, which ended in June 2020. At the beginning of autumn, a second lockdown followed, which is still ongoing. From February 2021 onwards, the state slowly started to lift some restrictions. Specific industries (tourism, accommodation, and the leisure sector, including the food service activity sector) are still not operating since the government has prohibited them from performing their business activities.
When the pandemic paralysed the world, the Slovenian real property market was flourishing, with new investment and construction cycles. The country was experiencing the rapid and stable growth of sales and prices, since supply could no longer meet the increased demand. Hand in hand with general economic growth, online booking activity (Airbnb, booking.com) has spread through the country and to major cities (Ljubljana, Maribor), severely impacting the rental housing market, especially long-term rental relationships.
Sales and rentals
The COVID-19 pandemic stopped the conclusion of deals on the Slovenian real estate market for only a short period of time. However, with the gradual cooling of the economy due to the ongoing health crisis and government restrictions and prohibitions, consumers have become less optimistic about the economic prospects in Slovenia and its financial position. Nevertheless, in the third quarter of 2020 the total value of housing transactions for all types of dwellings in Slovenia was EUR356 million, which is EUR126 million more than in the previous quarter.
For the second half of the year, 2020 statistics data shows dwelling prices on average 3.3% higher than in the same quarter of 2019. In the third quarter of 2020, dwelling prices were, on average, 3.3% higher than in 2019. The price of newly built dwellings went up by 5.4%, and the price of existing dwellings by 2.9%.
Slightly different data applies to the commercial real estate market. Due to sales of a larger number of shopping centres in 2019, the share of retail real estate turnover (offices, commercial, service, restaurants, bars, and other tourist facilities) was unusually high, but this decreased significantly (by more than 10%) in 2020. As a result of the change of ownership in lease agreement relationships, commercial real estate rental has increased.
Construction is one of the few industries that has been relatively successful in meeting the new challenges, with only a slight decline in operating. There are several large real estate projects in progress for residential and commercial buildings, especially in the capital city Ljubljana. According to the recent report of the Slovenian Institute of Macroeconomic Analysis and Development (IMAD), construction activity at the beginning of 2021 strengthened enormously, mainly because of increased residential construction. There has also been an increase in the number of hotel construction projects, with the number of hotel rooms anticipated to increase by as much as 45% in the next three years.
In its winter forecast, IMAD projected a 6.6% decline in GDP in 2020. After a deep fall in the second quarter of 2020, the economy recovered even more than expected in the third quarter of 2020. IMAD estimates that the economic impact of the second wave of the epidemic will be concentrated mainly on the service sector and less on activities integrated into international trade. However, due to the deteriorated epidemiological conditions, it is anticipated that a more pronounced economic recovery will be delayed until the second half of next year. Economic growth in 2021 is consequently expected to be at 4.3%.
Government Intervention Due to COVID-19
Commercial lease agreements
The majority of companies and entrepreneurs who temporarily had to shut down their businesses face a drastic decline in turnover. Many of those entities rent under commercial lease agreements, representing a high cost. The government therefore intervened in the commercial lease agreements market by accepting current measures, under which a tenant (who fulfils certain conditions) has the right:
The listed interim government measures are valid until the end of June 2021 and may then be prolonged for an additional six months.
List of important investments
Based on the Intervention Act on Removing Barriers for Implementing Important Investments to Restart the Economy after the COVID-19 Epidemic ("Intervention Act"), the government has determined the list of important investments, which list could be subject to further expansion.
The purpose of determining important investments is to co-ordinate and thus speed up individual procedures related to investment, which the government believes will mitigate the economic damage caused by the pandemic. The launch of investments will increase economic growth in all state sectors, including the construction industry and other industries such as sales, the furnishing of premises, trade, etc. Based on the Intervention Act, the government has formed the co-ordination group responsible for the accelerated and co-ordinated implementation of important investments, thereby ensuring their effective performance. This measure aims to speed up and stream the procedures for obtaining all the necessary permits and approvals for the construction and usage of buildings and infrastructure.
The Intervention Act provides a solid base for the faster realisation of those investments, which were evaluated as crucial for restarting the economy after the epidemic. The list includes all investment proposals with an estimated value of over EUR5 million, which are expected to begin in 2020 or 2021, as well as all proposed investments above EUR25 million, which are expected to begin in the summer of 2021. The list currently consists of 314 projects.
The important investments have been categorised by statistical regions and content relating to the environment, energy, transport, and regional development. Projects in the field of regional development mainly relate to the construction of (i) residential neighbourhoods, (ii) healthcare centres, (iii) educational institutions, and similar.
Other Legal Changes and Developments
Besides interim measures, the government has also adopted or is planning to adopt in 2021, some other legislative changes affecting the RE market. The aim of these legislative changes is to remove administrative barriers and boost the country's economy and foreign investments.
Law of Property Code (Stvarnopravni zakonik, SPZ)
The reform of the Law of Property Code has brought several changes, the most significant of which affect condominium property and the building right.
In the field of the condominium property, some new legal positions are regulated. The reform provides a new legal status for individual parts of a building, which also serve other buildings in condominium ownership or other real estate (common garages, etc); for individual parcels that serve other condominium buildings or real estate (parking lots, etc); and for connected parcels. The amended provisions regarding condominiums will apply from 1 July 2021 onwards.
The changes also affect the building right. The reform removes the current compulsory limitation that the duration of a building right cannot exceed 99 years, and provides the possibility for the landowner and the holder of the building right to set the amount of compensation according to what the holder of the building right is entitled to.
Another meaningful change is the possibility to establish false real easements (neprava stvarna služnost) in favour of persons who have an economic enterprise. An owner can establish such easement for a period exceeding 30 years, or for an indefinite period.
Reform of the Housing Act (Stanovanjski zakon, SZ-1) – proposal
Currently, the legislative branch is considering a proposal to amend the Housing Act. If accepted, the reform will affect several areas of the real estate market, with the highest impact expected to be on the housing rental market.
The proposal envisages the establishment of a public rental service, which would rent apartments on the market and sublet them. The new regulation would allow municipalities and public housing funds to have higher borrowing rates, which would ensure sufficient funds for initial investments related to acquiring new rental public housing. In addition, the reform would grant the housing fund of the Republic of Slovenia a pre-emption right in the case of the sale of municipal land intended for housing construction.
The proposal foresees some other changes that affect rental relations, non-profit housing rentals, rent subsidies, inspections, and multi-apartment buildings management.
In general, the proposed reform, if adopted, could have a significant long-term effect on the rental housing market.
Reform of the Building Act (Gradbeni zakon, GZ-1) – proposal
The proposal specifies the tasks of the investor, contractor, and civil project manager and establishes equal conditions for access to construction works for foreign investors and construction companies.
Probably the most important novelty of the proposed Building Act is an option to start construction work on the construction site based on the building permit becoming final on the first instance (no appeal is possible). According to the current Building Act, an investor has to wait for the building permit to become final on the second instance, which is only possible when the court proceeding ends.
The proposed novelty of the Act significantly changes the definition of a temporary object. As a temporary object, it is also considered a facility, erected for the duration of some temporary, exceptional needs that require a quick and effective solution.
Moreover, the proposal introduces some new concepts, such as a minor reconstruction, which should serve to bridge the gap between maintenance work and real reconstruction. Works that are carried out as part of a minor reconstruction will be allowed, based on a notification of the start of construction.
The proposal foresees some other changes, such as:
Apartment Buildings for Short-Term Accommodation
As internet platforms for (short-term) accommodation in apartments or rooms, such as Airbnb and Booking, became hugely attractive and a competition to hotels before the COVID-19 pandemic, the concept of leasing apartments in the whole building through these platforms gave birth to an investment in Ljubljana. Owners of land at an excellent location in the centre of the City of Ljubljana started construction of a new apartment building with innovative architecture, programming and an impressive interior. The project enables owners of the apartments to rent their apartments through the operator (building management company) with an excellent return on investment. For realisation of the project besides a sale-purchase agreement, the investor offered to deliver the equipment for all the apartments under prearranged interior design. Most importantly, a special agreement was developed that serves as a basis for arrangement between each owner of an apartment and the operator (manager) of the apartments, including participation in income from renting the apartments, management of the building, marketing, cost coverage, future investments in the building, insurance and other important matters. Construction is expected to be finished by the end of 2021.
Slovenia is an attractive real estate market with huge potential in apartment rentals. Traditionally, people buy and own the apartments they live in, and this behaviour is supported by the banks enabling consumers to finance the purchase. As prices are rising and the economy is not really keeping up with the market, the rental market is expected to develop in line with other, foreign rental markets. The proposal for changes to the Housing Act confirms this. Construction is keeping the economy fairly buoyant for now and the government sees construction as a crucial element of the national economy. The list of important investments will enable investors to speed up the individual procedures of each investment. The economic damage caused by the pandemic is to be tamed, at least to some extent.