The Bull Thesis for Serbia's (Belgrade, Novi Sad) Real Estate (Up Only)
The prices can't keep going up forever...or can they?
Not a week goes by on /r/serbia that someone doesn’t mention the ever-rising cost of apartments in the capital city and Serbia’s second biggest city and de-facto IT hub of Novi Sad. The growth of the real estate sector in these two cities has eclipsed every single mode of (sensible and relatively passive) mode of investment, yielding nearly a double digit increase in the past 24 months, and has left many pondering - when will the market correct? However the real question that we should be asking ourselves is if, or, even more apt, why should it?
This article delves deeper into the key growth drivers and factors influencing it from both the supply and demand sides.
This article won’t bother you with numbers, excel spreadsheets and maths that serve only to confuse the layman reader and psy-op him into thinking that I’ve come to these conclusions using some sort of Excel witchcraft and trickery only available to quants/data freaks, and therefore, because it’s not obvious to many, and its explained in a lot of words, it must be true.
No, this article will be based on factors that are essentially obvious to many, but are often times not consciously considered, with their gravitas’ and nuances often times downplayed or straight up misinterpreted.
If you want a more academic, data-driven analysis, FREN is your fren, but these guys don’t really do what I’m trying to do here, nor do I personally think they go into as much detail due to the way these analyses are typically done (it’s academia, you say what you have to say using the tools you have at your disposal, in order to produce a body of work that you can stick in your CV), so there’s that.
“It’s hot, but it’s not overheated”
It might be because it’s a hot July day that I’m writing this on, in a room without any air conditioning and no semblance of a cold wind to be heard of, let alone felt, but I’m pretty sure it’s much hotter in here than on the real estate market in Serbia.
Throughout the entirety of this post, these two mantras should be continuously repeated and scrolled back to in case you’ve forgotten how they go:
The real estate market in Serbia, barring Novi Sad and Belgrade, is not that hot.
The real estate markets in Belgrade and Novi Sad are a bit hot, but not overheated.
Cultural hub thesis
Let’s face it, other places do exist, but Belgrade and Novi Sad are the ones with the most infrastructure, cultural events, historical sights, and, most important of all - people. While in theory it is possible to make Nis or Kragujevac (both relatively large cities, and essentially the last remaining of the ‘bigger’ cities that aren’t written off and left for dead by governmental policies) the next Novi Sad, it will never happen simply because of the capital flows present in BG and NS, which yield extra benefits from what Naval calls market networks/network effect businesses that hinge mostly on human capital, rather than raw $$$.
In simple terms, while you can, hypothetically, as a government, for whatever reason, decide to put in a LOT of money into Kragujevac/Nis and subsidize everything from income tax breaks to property sales tax breaks, firstborn subsidizes, what have you, you will only attract a meager amount of people who really depend on these subsidies, while the subsidies last, whilst the core ‘money-makers’ will remain in Belgrade and Novi Sad, because the reasons for why they opened up shop there in the first place.
Cultural hubs take on many forms, and are important for foreigners (which are coming to Serbia en masse, more on that down below in the “demand” section) and domestic citizens alike. At the end of the day, the definition of a cultural hub simply boils down to one thing, and one thing only, and that’s the sheer number of available options, and that’s precisely what is being priced into the price of real estate.
Belgrade has many options.
Want to fly somewhere? Airport is here, not Novi Sad, let alone Kragujevac, Cacak, Subotica.
Sure, Nis has an airport, but it mostly serves gastarbeiter LCC lines and you can’t really get that easily from Nis to New York or China, Japan, Australia.
Want to eat sushi for lunch? You can probably find it without much difficulty in Nis, but only a few places. Right now, there’s 8 places to choose from on Wolt (food delivery app), 4 of which are with free delivery to your location, and 2 of those offer a promo deal + free delivery. Krusevac, Nis, Smederevo cannot compete.
Want to find a job? Best odds are for you to try in a city that has 4 different food delivery apps, all of which need drivers, a lot of restaurants/coffee shops looking for staff, and the biggest # of currently active property development in desperate need of people to lug around concrete blocks, and are willing to pay the most. That’s manual labor, I’m not even gonna go into areas such as finance/banking, travel, fashion, etc.
Want to find a significant other, to play the dating game? Good luck getting a Tinder match in Zagubica or Prijepolje, it’ll take a while.
You found a date on Tinder, got married, got a kid, and now you want the best pre-school available for the kid? It’s not gonna be located in Kraljevo.
Cultural events, universities, concerts, parties, day-care, exotic restaurants, whatever it may be, the odds of your taste being met are greatest in these main hubs.
Like Naval says: “In a network effect, each new user adds value to the existing users” - thus, the decades, if not centuries, of migratory practices, cultural enlightenment, infrastructural focus, foreign capital (both human and financial), cannot be erased simply by telling people “go to Kragujevac we’ll pay for your stay there, your life will be 30% cheaper and you won’t need to pay taxes for 2 fiscal years”.
You’ll still end up going to Belgrade to take that cross-Atlantic flight, you’ll still end up going to Belgrade if you have a concert you want to see, a business meeting to discuss, or a serious medical issue that needs the attention of medical specialists.
While the advent of broadband internet and mobile tech has made living out in the sticks a lot easier than it would have been 15 years ago, the heart wants what the heart wants and the cultural hub premium is gladly paid by the vast majority.
This effect has been recognized by many, the last of which were Russian IT companies relocating their workers from Russia to Belgrade/Novi Sad, with almost all of them ignoring the rest of the country. Russians aren’t even the richest of expats to come to Serbia, and yet even they won’t even dream about settling for anything other than BG/NS. Think about why that is, is that the sign of an overheated market?
I promised I’d be gentle with the numbers, but I can’t help but shoutout our Eastern European pal, Mladen and his site Numbeo. We’ll be going through a few interesting numbers re: real estate in Serbia.
Coming up first, Mortage As A Percentage Of Income - barring the top 3 which are heavily involved in the Ukranian conflict, Montenegro and Serbia are #4 and #5 on this list.
To explain how these numbers can be above 100, we need to see the definition Numbeo uses.
”Mortgage as Percentage of Income is a ratio of the actual monthly cost of the mortgage to take-home family income (lower is better). Average monthly salary is used to estimate family income. It assumes 100% mortgage is taken on 20 years for the house(or apt) of 90 square meters which price per square meter is the average of price in the city center and outside of city center.”
The take-home family income of Serbian residents is pretty bad for European standards (the lists here are filtered for Europe only), and official numbers are heavily disputed by pretty much everyone in Serbia, offline and online, with most citing median income to be a much better representation. If the figures above were calculated using median income, and focused only on Belgrade/Novi Sad we’d most likely be looking at mortgage numbers well above 200% as a percentage of income.
Also 20 year mortgages, while they definitely do exist and are popular, are very difficult, if not impossible for the majority of Serbian couples who earn the most popular salaries of between 500 and 1000 euros and are contemplating a mortgage loan. Anecdotally (don’t have the official data available), most people tend to settle around for the 25-30 year mark. Yikes.
The story is even worse if we use the Price-To-Income ratio, which is the most basic of indicators.
“Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere).”
#2, yikes. This means that it’ll take you 16 years, on average, if you dedicate your entire salary, to pay off a 90m2 apartment, and eat nothing but dirt.
It’s not that apartments are expensive, it’s that Serbian people are generally very poor, on average, and cannot move the market prices that much on their own.
Europe: Current Property Prices Index by City
They shot Game of Thrones in Dubrovnik, and it’s a ~dream destination~ for pretty much everyone on TikTok, so that one isn’t really a fair comparison, Munich is Munich, Paris is Paris, Russia suffers from some pretty big income inequality, and a bunch of other factors I’d need an entire new article to cover, but basically, owning property in Belgrade is more of a daunting task for a person living and working in Belgrade, for a Belgradian salary, than it is for someone working in London, for a Londonian salary, living in London, to buy a London apartment.
Bear in mind that, I’ve looked at these numbers a few years back, and the story was similarly dire.
If you’re gonna wageslave and buy a 90m2 apartment somewhere in your lifetime, it might as well be Vienna, and not Novi Sad, for 15 years.
However, these numbers only tell us a piece of the story, as it assumes no capital mobility - you work in Vienna, you spend in Vienna, you mortgage yourself in Vienna, for a Vienna property. The real world does not work like that.
What if someone with a Viennese or London salary was working remotely in Serbia, or simply had a lot of cash laying around, and doesn’t want to wait 15 years to buy something in London, when he can buy it in 3, or 4 years, without a mortgage, in Belgrade or Novi Sad?
We now arrive at the meat of the article, which is the drivers of growth, neatly packaged into two sections, demand and supply.
Capital preservation/Investment thesis
Serbia has a de-facto non-functioning equity market. I mean, check it out yourself, BELEX15, an index tracker that follows the 15 most liquid of stocks on the Belgrade Stock Exchange has the monthly volume equivalent to the daily (or in peak bull market sentiment, hourly) SHIBA INU or DOGECOIN volumes.
There’s no Robinhood equivalent, no ease of on-boarding and accessing these markets for investors from abroad, whether it’s out of regulations, negligence, or simply lack of interest, it doesn’t really matter, you won’t make a fortune on there, even if you jump through all of the hoops and find a ‘gem’ you think might have a future.
Serbian people, in general, do not trust banks to preserve the value of their capital (even though one must use them in the day-to-day), for a variety of reasons.
There’s, of course, those whose beliefs are grounded in paranoia and conspiracy theories, as well as PTSD from the 90s, a period of hyperinflation and state-sponsored rug-pulls, but even the most educated of people, with money to boot, wouldn’t expect the savings yield offered in these banks, even on timed deposits (which limits you heavily in case of an emergency, even though it’s more liquid than an apartment sale), to outpace inflation, or at least not by a wide margin. Below, you can see essentially what you’d be seeing in any other European country or the USA, in regards to interest rates on savings in euros (1Y time deposit). This accounts for the 15% CGT paid because you’re saving in a foreign currency, as per Serbian laws.
Basically, since 2012, you’re wasting your time and money, thinking you’d outpace inflation, let alone grow your capital.
Fun thought experiment: The picture above is from 2007 to 2018, before 2020’s COVID-induced QE, imagine what the yields were in 2020, 2021? Yep.
There’s also alternative savings methods, such as Raiffeisen’s investment options (one of the biggest banks in Serbia), where, I assume, you’d be paying some fund manager a performance fee for earning you 10% of a yield from 2015 until 2022, plus you’re locked into euros as the main currency.
In Serbia, having your own apartment, especially in NS/BG is (as is the case with many things in Serbia, from iPhones, polo shirts to cars) a status symbol, but also an asset that will generate rental income, come hell or high water, it’s regarded as a safe haven.
Students need a place to stay (although they’re, in my opinion, the smallest of all market forces governing the Belgrade/Novi Sad real estate markets, even though they’re numerous), working professionals need it, foreigners need it, and most won’t have the capital or the need to buy it outright. To reiterate the cultural hub thesis outlined above, it’s irreplaceable, and will retain value much better than anything else. Hell, even a parking space in the more central boroughs of Belgrade goes for like 25000 euros nowadays, the price of an entire apartment in Majdanpek or Cuprija.
COVID and lockdowns have made business owners more aware of the impact a governmental decision can have on their bottom line, and has caused them a lot of financial stress that they wouldn’t really like to repeat, unless they firmly believe they have a killer idea and execution (as is the case in most recessions).
Most people, size of capital permitting, would rather earn passively from rent, than risk being hit by a global or industry-specific black swan, as the wounds are still fresh and ease of doing business in Serbia is not as great as it is in other countries.
There’s no game other game in town quite as lucrative as RE in these two cities.
Price per m2 rises much faster in BG/NS than it does in rest of Serbia, and the R/R is simply best in these two cities, than trying to guess when, if ever, will there be a third one, and then waiting for the cultural tide.
Real estate is the only way for capital preservation for Serbs living and working in Serbia, and has been for the longest time. This won’t change any time soon.
Political, macro, monetary
Serbia is one of the few, if not the only country in the world that allows American, Chinese, Russian, Ukranian, Middle-Eastern, African, hell, everyone, to buy a house or apartment and claim residency (the law stipulates that there must be a bilateral agreement in place, for this condition to hold - e.g. Indian residents cannot buy property in Serbia and claim residency that way).
There’s also no stipulation in regards to the value of the property in order to be eligible for residency - you can buy a 15000 dilapidated house (as long as it’s registered in the katastar as liveable and isn’t a hazard to live in) in a village near Smederevska Palanka and claim residency same as someone buying a Zlatibor apartment or a West 65 condominium that cost upwards of 200k euros. The law does not discriminate, there’s no ‘golden visa’ minimum that other countries stipulate.
If you thought Chinese people buying up Vancouver property was bad, this is way worse (or much better, depending on who the reader of this article is).
Serbia is not in a *real* feud or war with anyone. They’re good with Americans, good with the EU, best buds with China, love Japan and the SEA (lots of visa-free agreements), and African students still populate the Belgrade and Novi Sad universities just as they did 50 years ago when the contracts between Non-Aligned Movement countries were signed.
Serbia is a top destination for people looking to park their cash for the reasons above, but also for the cultural hub reasons above, and also the fact it’s a remarkably safe country compared to London, Paris, etc, while being adequately positioned, in terms of geography. The people are not xenophobic in the slightest, often times they prefer foreigners to domestic citizens, especially when it comes to money/business.
Furthermore, I’m highly convinced that there won’t be any bans/embargos enacted from the side of the Serbian government, to any foreigners here, let alone those who have already purchased property. The Turkish scenario in Serbia is unlikely.
In terms of monetary/fx risk (case in point: Turkey TRY depreciation, again), while inflation is an issue, and will continue to be for some time, the RSD to EUR peg is essentially at 117-118 dinars for 1 euro, and has been for the better part of the past decade. Prices are what reflects the majority of the inflation, the FX rate will remain the same.
There’s a lot I could write regarding this, but for the sake of brevity, let’s just say I’m highly convinced this won’t change as long as there’s an influx of FDI into Serbia and existing agreements made by the Serbian government and foreign partners are being honored.
While a smaller factor in terms of size and impact, it’s one that has been of import for the past half century, if not more, a trend exacerbated in the past two decades.
If you just turned 19, born and raised in rural (read: not BG/NS) Serbia, and haven’t decided on going to a foreign country ,chances are you’re either staying in your provincial town, or going to Belgrade or Novi Sad to study or find work.
Dormitories are affordable for students (25 euros a month, plus 80-90 euros for a month’s worth of food in the cafeteria), but this doesn’t last forever and neither does your tolerance of below adequate lodgings. While I believe fewer and fewer people choose Belgrade and Novi Sad for finding work (and why should they, when the Schengen area exists and there’s plenty of jobs Swedes, Germans and Swiss people don’t want to do), than they have in the past, due to general globalization and ease of accessing information via the internet, it’s still a factor.
Hotels have become extremely expensive the last few months, and many parents accompanying their children to their university entrance exams are facing prices well into thirds of their monthly salaries for just a 2-3 night stay in the capital. I see no reason why this shouldn’t be the case going forward, as a general trend.
I only have anecdotal evidence for this, but expats in Serbia are definitely on the rise. Lots of people with remote jobs that pay out in USD/EUR/GBP have realized that the QOL is simply unmatched here, if the job allows them, they’ll move, and often times move their families as well, due to the safety and availability of iB curriculum schools in Belgrade. All of this, plus standard globalization story. HNWIs, or High Net Worth Individuals are, to my knowledge, still not buying property en masse for speculative reasons (intent to resell), neither are companies (say no to Zillow!), and it’s anyone’s guess when they’ll come, I don’t think it’s a matter of if, as long as the foreign policy remains the same as it is now.
Again, family people love it, tourists fall in love with it, party people love it, regular joes love it, LGBTQ+ people love it, it’s good.
In case we’re (which is almost a given, but for the sake of the article, still not official) in a global recession, the question that begs to be asked is - will this be the time for curbing real estate investment, and delegating capital elsewhere.
I am of the opinion that a recession will not reverse the trend of rising real estate prices, only slow it down (if that, and even then with a time delay), with the situation will be much less severe than in other developed countries.
There’s many reasons why I believe this to be the case, with effects of a recession abroad perhaps being positive for the growth of the real estate market:
Negative GDP growth occurred with a slight time lag in Eastern Europe in the last recession (global financial crisis), and did not affect developing economies as much (as a %). How much exposure to global supply chain inefficiencies and cheap money does Serbia have?
It takes much less capital to move the real estate market in Serbia than it would in a first world country capital or tier 1 city - meaning that, if, there was to be a rotation of capital from first world countries into Belgrade/Novi Sad, whether institutional or retail, in search of better capital efficiency, there would be seller exhaustion, rather than buyer exhaustion, based on momentum, which might actually be even more of a bull-case for Serbian real estate. Again, do not underestimate the Zillow effect, if institutional money from abroad were to rotate into Eastern Europe in search of yield, BG/NS would be its first casualties. Do you trust the Serbian government to not allow entry? Perhaps, they didn’t let Uber operate, but Yandex Taxi exists and works just fine. Whether it is Zillow or its Russian competitor or a domestic enterprise deciding to diversify their portfolio (Delta, perhaps?), the threat exists.
I’m of the opinion that seller exhaustion is much more likely of a scenario than buyer exhaustion - barring another black swan event that really grinds everything to a screeching halt (Monkeypox, subsequent lockdowns, etc). People who are selling their Belgrade property now are either permanently relocating to another country/countryside (less common), diversifying capital into stocks, cryptocurrencies, or simply cash, if it’s their second or third property. No one I know is selling their first and only property, unless its for upsizing (moving from a 1bd to 2-3 bd apt); again, anecdotal, but no one is calling Belgrade quits.
The housing market is not overleveraged (this time around), people buying property are mostly non-residents (foreigners), or Serbian people with sidelined capital, waiting for a market correction and biting when it doesn’t correct, statistics exist, 16% are mortgages, rest are full payments or other types of bank loans (shorter in maturity). Loans are indexed in euros, with most being fixed-rate or with a fixed-rate component clause. They’re not indexed in USD, RMB (lack of liquidity in the markets/not popular) or CHF (bad experiences from 10 years or so, as much as they were popular before, people learned their lessons)
The comments such as "‘haha wait until ECB raises rates and then you won’t be able to pay for your loan installments + you will pay for three times more expensive electricity than you do now and a hamburger will cost 450 dinars for a small one in a fast food restaurant, you’re dead” are not applicable. If this were the case, you’d already be seeing grandmas with pensions less than 300 euros p/m moving from Belgrade and selling their “salon-type” apartments just to survive, but it’s not happening. If they haven’t sold thus far, they won’t be selling any time soon. Property ownership is not as fluid here, and people have emotional (sentimental, often) attachments to it.
New property development is going full steam ahead, as is the 'upgrading’ of existing, over 80 year old buildings, because there’s always demand for a flat or two more, even to comical lengths (great thread on this here, with 🖼 of some insane shenanigans being attempted and actually developers getting away with). If you’ve been in a few AirBnB’s the past couple years in Belgrade (I’ve been), you’d realize that a lot of them are, in fact, top floor+1, and while the legal status of these apartments is dubious, they serve their purpose, giving rental income to those who built them, simply because there’s not enough apartments being rented out.
Land suitable for building on is scarce in the most desirable boroughs, Vracar, Stari Grad/Savski Venac, Dorcol, and these accidents (video below)are a testament to how hot the property development situation is right now - deadlines have to be met, capital is sidelined and waiting to be deployed, especially for new flats in the aforementioned areas. Why would someone prefer these, instead of Zvezdara, Zemun, and others, I can attempt to understand, even though I would personally choose the latter, but I can infer that it’s because of the social hub thesis - for decades they’ve been deemed ‘prestigious’ areas, and the ‘happenings’ of Belgrade, much like Shoreditch in London and Williamsburg in New York.
Everyone’s trying their best to build as much and as big as they can, which is a verifiable fact, but these things take time. I do not believe that supply of central Belgrade/Novi Sad (especially BG) apartments can go up as much as the non-domestic demand can.
Serbia’s workforce is a smart one - why break your back, locally, for 5 euros an hour in Belgrade, when you can do it for anywhere from three up to five times (depending on your luck and proficiency) the amount in Germany or Austria? Builders are in short supply, workers from (mostly) Turkey, Nepal, are employed currently, with other countries to most likely to follow soon. Deadlines have to be met, the quality of their work is questionable, but time will tell.
Much love and respect to the one and only GCR, whose full thesis (beyond Singapore 2.0/Lite and lack of land) for Kuala Lumpur I’ve yet to dig into (once I’ve gotten access to the elusive Discord), but I think Belgrade is undergoing something similar, just from a different angle - everything around it tends to suck for a variety of reasons (Sarajevo/Zagreb pale in comparison to Belgrade as places of interest, plus EU laws make it difficult for capital from non-EU countries to migrate), Vienna/Budapest are too expensive in terms of CoL, and also too prohibitive with various clauses and investment minimums (good luck to Chinese people making those cities their base, when they can only enter Morocco, Turkey, Bosnia and Serbia without a visa, as far as Europe/near Europe is concerned).
While I do feel that the supply of rentable apartments via AirBnB can be more streamlined and regulated in a way that benefits both landlords and tenants, the odds of that happening in the near future (2-3 years) are slim, if laws such as the freelance tax law is anything to go by - the government does want to take money, but the dynamics of it being enforced are a bit difficult.
Again, AirBnB is not the best indicator, but just do this experiment - take a 30 day period in the upcoming few months, 2 guests, search for property prices (and amenities/size/aesthetic and looks) in Kuala Lumpur and Belgrade.
I’m not personally a fan of buildings with top floor pools, cleaning lady once a week and gyms included in the price, but I am a fan of getting a 2 bedroom apartment (60m2+) in Kuala Lumpur for the price of a meager 30-35m2 studio in Belgrade, and this is using the easiest method possible - an airbnb booked long stay, rather than using a specialized long-term website or negotiating with a landlord in person.
Again, I’m aware most people won’t use AirBnB for more than a month’s stay (if that) in Belgrade, but boy will they get ripped off if they do. Most rental agreements in Serbia are verbal, or under false pretenses for the purposes of the tenant getting a white card (temporary registration, needed for a residency permit) and the landlord avoiding rental tax (at around 15% or so) being paid to the government (which, truth be told, does very little in protecting the rights of both the tenant and the the landlord, in case issues arise, due to a slow judicial system and a small claims court not existing in Serbia).
The kicker is - unless the space of via-app rentals is regulated in a way benefiting both tenants and landlords in Serbia, AirBnbs in Serbia will probably end up being more expensive than they are now, simply because foreigners use it more to book accommodation, than Serbian landlords use it to advertise, as it is still somewhat of a grey area, in practice (even though the law is defined in that regard, and the e-turist online registration of tourists portal works since last year).
Bonus: Money laundering (?)
Many people (exaggeratingly) claim that money laundering is the biggest determinant of Serbia’s real estate prices going up. There’s an old reddit post that explained how the process works, or seems to work (again, hardly an expert), but, in my opinion, this ‘house of cards’ can only work if there’s sufficient demand for Belgrade/Novi Sad apartments in the end. Are shady dealings and money laundering a component included in the final price of the apartment being sold? Sure, to a smaller extent, but so is the 2.5% transfer tax on buying an apartment from individuals, or 10% VAT you pay to the government on new property purchases from real estate developers.
The key driver is domestic and (recently, much more of) foreign demand, and that’s not stopping any time soon. Serbia (BG/NS especially) outshines its neighbors, the lax laws on buying property make it a wet dream for foreigners from both the East and the West.
The inelastic supply of apartments people would actually want to live in (without an extreme makeover that’s both costly and time-consuming, in an environment of low skilled labor availability) make Belgrade and Novi Sad a top contender, especially when bundled with the cultural hub thesis. People from the USA would rather live in a low-crime area with everything being affordable [compared to USA prices] on a median US salary, where people speak good english, are not [overly] xenophobic, and would gladly overlook lack of good public transportation, shortage of adequate parking spaces and other things that make “native Belgradians” seethe at the very mention of.
The conquistadors are coming [back].
will add as comments/good points are made once this makes rounds