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How foreign investors fueled a Montenegro property boom

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Dateline: Kotor, Montenegro

Almost eight years ago to the day, the semi-autononymous region of Montenegro – the smaller half of the last vestiges of communist Yugoslavia, Serbia and Montenegro – declared its independence and went on to become one of the world’s youngest sovereign states.

For years, Montenegro had been distancing itself from Serbia. This despite sharing a language and a culture, something that has shaped the breakup of Yugoslavia over the years as each religion and each ethnic group goes its own way.

However, it was the madness of dictator Slobodan Milošević that pushed Montenegro further from its Serbian counterparts.

Eight years later, business is booming here on the gorgeous coast of Montenegro. The Old Town in Budva, a stone’s throw from here, is one of the most charming (if not slightly plastic) tourists attractions in the region in my opinion.

Meanwhile, here in Kotor, tourists are flocking in from around Europe and even, according to the New York Times, from the United States.

The fact that Montenegro was featured prominently in the James Bond movie Casino Royale just as it declared its independence couldn’t have hurt. The real Casino Royale is, in fact, just a few miles from here.

On Friday, I reported from Budva, the tourist enclave made up of posh rock beaches and filled with Russian tourists… and their yachts. Buildings are going up all over the city to keep up with demand from wealthy Russians. One of the most luxurious buildings in Europe is under construction right along the beach, while other apartments and hotels are being constructed all over town.

To be honest, the building boom in Budva is a bit much for my taste.

Considering Italy is a short swim across the Adriatic Sea, it’s no surprise that the beaches of Montenegro are a similarly gorgeous place to vacation. However, the city has quite a lot of available land and I suspect building will continue at current levels for several years at developers and buyers bet that Montenegro will become part of the European Union, causing prices to rise.

(Note: It’s hard to compare the potential rise of Montenegro real estate values to other case studies in Europe, as the country already uses the euro as its currency.)

Here in the less trendy Kotor, mountains prevent any such building boom, and I suspect real estate here in this somewhat more buttoned-down, more western friendly port of call is a better investment. In fact, they’re building one of Europe’s largest marinas just down the street.

On a personal note, I have to say Montenegro is one of the most gorgeous spots in Europe. While not on the radar of many Americans, it would make a perfect spot for a honeymoon or romantic getaway.

And if you’re looking to own foreign real estate that you can actually use yourself for part of the summer, prices here aren’t totally unreasonable. I saw a decent one-bedroom condo just outside of the Old Town here in Kotor for $80,000. The problem is that yields are, by nature of Montenegro’s appeal as a beach destination, seasonal.

However, it is worth noting who is purchasing so much of the real estate here in Montenegro: the Russians.

It’s equally noting what many of them are doing with it: next to nothing.

Standing on the balcony of a tourist rental for sale in Budva, I quizzed the Belarusian real estate agent about several “for sale” banners I saw draped over the balconies of condos around the city.

While several of her responses did not satisfy me – including her claims that the real estate market here is rather opaque – she knew exactly what she was talking about when it came to which properties here are for sale, and which aren’t.

Some of the banners, she claims, were hung by wealthy Russians who purchased condos here shortly after Montenegrin independence, just after the global recession.

These wealthy investors figured parking money on a sunny beach far away from Mother Russia would be a good way to get some cash out of the country.

While I tend to fall in line more with Chinese culture than Russian culture, you have to hand it to the Russians: they, too, realize their government is out to get them and their money.

After all, it was a short plane ride away in Cyprus that countless Russians lost millions in the Cyprus bank debacle. Long before that actually happened, I was in Turkey meeting with several bankers who laughed about what an open secret it was that Cyprus was a big safe haven for Russian money laundering.

In addition to bank deposits throughout Europe (including now Latvia), Russians have been snapping up properties in places that, according to my Belarusian real estate agent, they “feel welcome.” In addition to southern Spain and Latvia, Montenegro is high on that list.

But here’s the kicker: those Russians hanging “for sale” signs don’t really want to sell their properties. The real estate agent pointed out one more run-down condo that has had such a sign flapping in the breeze for four years.

The guy who owns the place threw up a sign before returning to Moscow several years ago, she said, suggesting that the largely cliquish real estate scene here is filled with such properties.

For those investors, Montenegro hasn’t been the worst bet. Property prices for investment-grade real estate have largely been flat for the last six years. Property taxes are as low as 100 euros per year in many cases since the Montenegrin government assesses a 3% stamp tax upon transfer of the property.

An “investor” who merely wants to park cash in foreign real estate wouldn’t fare too poorly here, considering he could always use the apartment as a perk for business associates who want to party with supermodels and the ultra-rich.

Personally, I prefer my real estate investments to throw off some yield, which is why I have suggested buying tourist-friendly foreign real estate to rent out for high gross yields.

However, the lesson I takeaway from the real estate situation here in Montenegro is that there are plenty of people in the world who just need a safe place to park money far away from the greedy fingers of their home country’s government.

Foreign real estate is a great way to move cash offshore and avoid capital controls, since real estate is among the hardest assets to seize. With an offshore bank account, there is always the risk that your government could convince another government and your bank to rule in their favor and hand over your money.

Granted, that is a lot harder to do than it would be if your money was in domestic banks, and it would likely be further down the government’s hit list than, say, retirement accounts.

Foreign real estate, however, can not only be a store of value but a way to lock up money in a way that really keeps your government’s palms off of it. US persons do not have to report their foreign real estate holdings, although they do have to report any income.

Montenegro offers some decent opportunities if you are looking to make a lifestyle investment with the potential for a significant appreciation if and when the country enters the European Union (the two experts I sought out here suggested appreciation would be minimal until then as supply keeps up with demand).

My one word of caution would be, as always, to avoid the much-ballyhooed new build projects that the big money is flocking to. The wealthiest Russian investors have a reputation throughout Europe as throwing money around for show, and I’d avoid the flashy baubles the big oligarchs are throwing their money at.

That said, the lesson here is that parking your cash in a relatively stable market with minimal government (corporate taxes are 9% here) can be an excellent legal strategy for keeping your money safe from the coming collapse at home.


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