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REAL ESTATE & CONSTRUCTION - Where Space Turns Into Opportunity
Legalization of illegal buildings in the region - How will the new regulations affect the real estate market and investors?
Illustration (Photo: urfin/shutterstock.com)
In Serbia, the issue of legalization has been current for more than a decade and represents one of the most extensive administrative processes in the urban planning sector. According to the data of the Ministry of Construction, Transport and Infrastructure, more than one million requests for legalization have been recorded in the registers of local self-governments, while in recent years intensive work has been done on establishing clearer procedures and digitalizing data.
Law on special conditions for recording and registering rights to immovable property actualized the issue of legalization of illegally built buildings in Serbia. The new law was conceived as a continuation of earlier solutions, with the aim of enabling the registration of existing buildings and the registration of owners` rights, but experts warn that the way it was prepared could have numerous negative consequences for citizens and the real estate market.
Đorđe Vukotić, a lawyer and consultant in the field of planning, construction and legislation, indicates that the Draft Law did not pass the mandatory public discussion, which in practice means that experts and the general public did not have the opportunity to influence the final text.
- The proposal for a new law regulating legalization not only did not pass the mandatory public debate, but during the work on the law, the relevant ministry did not conduct an appropriate consultative process, nor an analysis of the effects in relation to key legal solutions - Vukotić points out.
According to him, circumventing the consultative process and control mechanisms leads to the adoption of unenforceable and potentially harmful laws, whereby citizens are left without adequate protection of their rights.
The expert further warns that the proposed law changes the rights of users of legalization compared to the current Law from 2015.
- The most harmful effect is the degradation of the quality of the rights that are acquired by registration in the cadastre, because an irremovable note is foreseen that publicly presents reservations regarding the object and the rights to it. The paradox is that citizens who have already submitted complete documentation under the previous laws must submit applications again - Vukotić explains.
In addition, the new law prescribes too short a preclusion period of 60 days for submitting applications and objections, which puts citizens at risk of permanently losing their right to legalization. Also, the announced "zero tolerance" for new illegal construction, in Vukotić`s opinion, will not stop illegal construction.
- The newly proposed law abandoned mass legalization and returns to the system of legalization upon application, which means that in practice we will have neither mass nor rapid legalization.
Vukotić recalls that he previously proposed a two-stage model of legalization - first recording of buildings and owners with notes on possible deficiencies, and then removing those notes when citizens obtain the necessary documentation. In his opinion, the proposed law does not recognize this double phase, but introduces a complex procedure in which two state bodies act - the Spatial Planning Agency and the Republic Geodetic Institute - which additionally slows down the process and increases the risk of legal uncertainty.
According to Vukotić, the paradox of the current proposal is that the citizens who were the most orderly, the buyers of apartments in buildings with a construction permit, are punished the most by the law. Increased fees, permanent notes and the obligation to re-obtain technical documentation create additional financial and administrative barriers.
- In practice, the legalization procedure will cost the citizens several times more than the promised 100 to 1,000 euros, because they will only be able to protect their right to registration in the cadastre through a lawyer, whose tariff for submitting just one urgent application to the RGZ for processing the application is a minimum of 50,000 dinars, considering the high value of the real estate - notes Vukotić
How to protect citizens and prevent future illegal construction?
When asked about the most effective way to protect the interests of citizens who bought in good faith, and at the same time prevent future illegal construction, Vukotić emphasizes the importance of mass and automated legalization.
- I believe that the most effective way to solve the problem of illegal construction would be to implement, in an automated procedure and in the shortest possible time, the most massive legalization of all buildings built by 2015, primarily in urban centers. It is precisely in these centers that professional investors have the greatest interest in continuing illegal construction - explains Vukotić.
He adds that the state had to set a higher tariff for the legalization of buildings built after 2015, in order to ensure the payment of the necessary contributions for the development of construction land, because the policy of zero tolerance proclaimed in this way seems frivolous
- With the Law on Legalization from 2015, the state determined the public interest in legalizing buildings illegally built from 1945 until then, aware that it was only with the amendments to the Law on Planning and Construction from 2014 that it relaxed the conditions and construction costs to an acceptable level.
Vukotić points out that the process of legalization of individual buildings in rural and suburban areas can take longer, because such illegal construction also happens in EU countries, where legalization is usually carried out when the owner wants to sell the building.
Number of illegal buildings - statistics or methodology?
When asked about the difference between NALED`s data, which records about 2.1 million illegal buildings in Serbia, and the publicly mentioned figure of 4.8 million, Vukotić points out that the key lies in the census methodology.
- As a rule, our politicians and the public are fascinated by statistics, and statistics can add and subtract anything. I assume that in these figures, in addition to multi-storey residential buildings and large production plants, there are also adapted attics, garages, sheds and other auxiliary rooms that our citizens built with their own hands - he explains.
Vukotić adds that he is not sure that the total number of illegal buildings has doubled in the last few years, and that it is more likely that the difference refers to different criteria for determining the status of buildings.
- What I am quite sure of is that the most valuable illegally built residential and commercial spaces in urban centers have doubled. It would be particularly interesting to see how many such buildings have been erected in the protection zones of natural and cultural assets. Only then would we be able to assess how much the new legal solution affects our cities, as well as natural and cultural resources - says Vukotić.
Impact on prices and the real estate market
Commenting on the possible impact of the new law on the market, lawyer Đorđe Vukotić estimates that the very act of legalization could increase the value of illegally built buildings, but with certain reservations.
- I believe that objects that go through the legalization process will certainly gain in price, because the sale of such real estate will become legally indisputable and enforceable in the cadastre. However, their value will still be slightly below the market value, due to the entry in the cadastre indicating that the object is from legalization - Vukotić explains.
According to him, the price difference will depend primarily on the available technical documentation on the basis of which the building was built, as well as on the visible quality of the construction. An additional factor that could affect the market value is the announced practice of entering in the cadastre a record of unpaid fees in the amount of the contribution for the development of construction land.
- If such a note is applied, it can further reduce the value of the apartments in those buildings, because the legal consequences of such a note are not precisely prescribed - he points out.
Speaking about the potential impact of the new registration regime on the market of new construction, Vukotić estimates that the effects could be different depending on the location and type of construction.
- When we talk about new construction, we are primarily talking about apartments in urban centers, where prices are already extremely high - even in the suburbs of Belgrade, Novi Sad or Niš. It would not be a surprise if some buyers decide to wait, expecting that the legalization in those locations will temporarily lower the prices of apartments - says Vukotić.
However, he adds that no significant changes should be expected in the central city zones, where large investors who build legally dominate.
- In the center of Belgrade, illegal buildings are not a competition for serious investors. Therefore, in that segment of the market, we should not expect legalization to affect prices, even in the short term - Vukotić concludes.
MONTENEGRO - THE GOAL TO ENABLE THE LEGALIZATION OF THE GREATEST NUMBER OF FACILITIES
In August, Montenegro received a new Law on the Legalization of Illegal Buildings, and as previously ordered by the Ministry of Spatial Planning, Urbanism and State Property, the goal is to bring as many illegal buildings into the legal channels as possible, as well as to provide citizens with a fairer and more efficient legal solution than before. The new law, as explained, introduces clear procedures and stricter rules, and for the first time, aerial photogrammetry images are introduced as the basis for the procedure.
It is estimated that there are around 120,000 illegal buildings in Montenegro, and when explaining this legal solution, the Ministry pointed out the inefficiency of the previous law, where only 5.5% of the buildings for which requests were submitted were legalized as of 2017. More precisely, out of 61,647 requests, 3,397 decisions on legalization were made.
The new law is expected to establish order in the field of spatial planning, because the state, with the help of satellite images and digital procedures, will receive an effective tool for monitoring new construction and preventing illegal construction. Local self-governments are obliged to register all illegal objects on their territory within five months, thus establishing a comprehensive database on the situation on the ground for the first time.
According to the new law, owners have until February 14 to register their buildings in the cadastre and submit a request for legalization. If they don`t, they risk demolition (where the cost is borne by themselves) and loss of ownership. An important item of this law is that it will enable the legalization of all buildings, except those located on land planned for infrastructure (roads, schools, hospitals), then if they cross the plot boundaries, or if they are temporary and unstable structures. In some cases, legalization will also be allowed in zones without a planning document, but not in protected parks and areas of special importance.
The facility must be visible on a satellite or aerial photogrammetric image of the territory of Montenegro - those that are not visible cannot be legalized, nor can they be included in traffic. The cadastre will ex officio cancel the registration of such objects. Also, the owner must prove the ownership right to the building and the land or initiate court proceedings. For facilities on state or municipal land, local governments publish a call for redemption within 30 days; if the contract is not concluded, the facility becomes state property. All owners of illegal buildings must pay a fee for urban rehabilitation, with 80% going to the municipality and 20% to the state.
Although the Ministry stated that one of the goals of this law is to ensure an orderly, safe and transparent real estate market, experts warn that precisely one of its provisions can block this market, which is among the fastest growing in Montenegro.
Namely, the Law on Legalization prohibits the sale and lease of illegal buildings, as well as the performance of economic activities in them. The ban applies to buildings without a building permit or those that have been built with the building permit exceeded. The law gives the possibility that in an unlegalized facility intended for economic activity, it can be carried out for a maximum of three years, and that the owners are obliged to legalize such facilities during that period. If they do not do so, economic activity will be prohibited in them.
Due to this item, the real estate market could slow down, because notaries are not allowed to deal with illegal objects. Many transactions have already been suspended, which affects buyers and sellers, as well as real estate agencies, which warn of the constitutionality of the traffic ban.
The Association of Real Estate Agencies welcomes any initiative aimed at regulating the market and solving the long-standing problem of illegal buildings. According to them, the Law on Legalization is a necessary step towards a more transparent and stable market.
- It is important to emphasize that Montenegro started the process of legalization in 2018 through the Law on Spatial Planning and Construction of Facilities. The legal solution at the time did not allow the legalization of buildings that did not meet urban planning parameters, so a very small number of buildings were legalized. Over the years, we have witnessed various attempts to solve this problem, and as an association that actively participated in the creation of the legal framework for our activity, we understand the complexity of this issue - Nataša Grdinić, executive director of CMM Investment Consulting Group, president of the Real Estate Trade Group at the Chamber of Commerce (PKCG) and member of the Association of Real Estate Agencies, said in an interview for eKapija.
- However, we must be honest - the success of this law will not depend only on its provisions, but also on the way it is interpreted and implemented - Grdinić added.
As she clarified, recent interpretations of certain provisions caused concern and showed that there is a need for additional clarifications and alignment with the real needs of the market.
Positive aspects of the law
Grdinić points to the positive aspects of this law and welcomes the legislator`s clear intention to regulate the market and ensure confidence in investing in Montenegro.
- The aim of the law is to finally solve the problem that has burdened the market for years and creates legal uncertainty. Legalized facilities allow the owners to dispose of their assets without hindrance. Increasing the value of real estate is an inevitable effect that this law will bring. Facilities with proper documentation have a higher market value - she explains.
Also, access to financing has been facilitated. Banks more easily approve loans for legalized buildings with complete documentation. In the end, the organized market attracts serious domestic and foreign investors, so this is a great incentive for investing in our country, the eKapija interlocutor notes.
A possible blockage of the real estate market
- What worries us is the way in which the law is interpreted and applied in practice, as well as the set deadlines in which legalization should be implemented. The provision of Article 33, paragraph 1 of the Traffic Prohibition Law was not sufficiently precise, which led to different interpretations. According to the opinion of the Ministry of Spatial Planning, the ban on traffic includes all illegally built buildings - both before and after the entry into force of the Act. This kind of restrictive measure practically blocks the real estate market - Grdinić points out.
According to her, the seriousness of the situation is illustrated by the data of the Chamber of Notaries - in Montenegro, there are between 100 and 150 thousand objects for which a request for legalization has been submitted, but nothing has been done with them. Also, for a large number of objects, the request was not even submitted.
- There is a justified concern that the state apparatus is not ready to process such a large number of requests, the cadastre as well as other state bodies in charge of legalizing buildings do not have the capacity to resolve such a large number of cases within the deadlines defined by the law. All illegal facilities as well as facilities without a use permit are currently out of circulation. This means that owners of illegal buildings cannot dispose of their property until they receive a legalization decision, which can take years. Disposition means that these properties cannot be sold, given away, gifted, inherited, pledged, etc. When we talk about publishing, a large space opens up for the creation of a new segment of the gray market - our interlocutor explains.
She adds that there are serious doubts that this interpretation of the law is unconstitutional because it restricts the owners` right to dispose of their property.
- The legalization process must be more efficient and transparent so that owners can adjust the status of their facilities as soon as possible. The drastic decrease in real estate turnover has a negative impact on the entire economy - from notaries and real estate agencies to the construction sector and local budgets. This is not only a problem of the real estate sector, but an economic problem that affects the entire society - Grdinić points out.
She also reminds that the ban on the sale of illegal real estate was in force in the Republic of Serbia for about 7 years and it is more than evident that it did not bring the desired results, so the simplification of the procedures was started.
- A few days ago, the Law on special conditions for recording and registering rights to immovable property was adopted, which will enable the majority of owners of illegal buildings to legalize their property. I hope that our decision makers will learn from this example - she states.
Impact of the law on investors
When asked what the Law on Legalization means for the investors themselves, Grdinić answers that it has a double meaning for them. On the one hand, it brings long-term benefits, but the current interpretation creates short-term challenges.
- When we talk about long-term benefits, investors first of all value an organized market, transparency and clear legal frameworks. Legalization contributes to the creation of a stable investment environment and investment security. The purchase of legalized buildings eliminates the risk of future legal problems and enables unhindered use and disposal of real estate. Legalized real estate is easier to sell and has a higher market value, which is crucial for investors planning to resell. Also, banks are more willing to finance the purchase or renovation of legalized buildings, which opens up additional opportunities for investors - our interviewee explains.
However, she adds, the current challenges are considerable.
- According to the current interpretation of the law, a huge number of buildings are out of business until they are legalized. This drastically reduces the supply on the market and can instantly increase the prices of legal facilities. Investors who are interested in objects in the process of legalization must wait for solutions, which slows down transactions and investment plans until all ambiguities in the interpretation of the law are clarified and until an efficient legalization process is ensured - she says.
She points out that the Association for Real Estate Trade strongly supports the implementation of the law and regulation of the market.
- We are the ones who actively participated in the creation of the legal framework for our activity and we understand the importance of regulation. However, the method of interpretation and application of the law must be in accordance with the Constitution and the protection of the rights of owners, aimed at solving problems, not at deepening them, followed by an efficient process of legalization so that owners do not have to wait for years for solutions, and balanced between the need for order and the real possibilities of the market - says Grdinić.
She adds that a constructive dialogue between state institutions, professional associations and market players is needed.
- The law must be enforceable and efficient. The Ministry and the Legalization Directorate must ensure clear and unambiguous guidelines for the application of the law, an efficient and transparent process of legalization, realistic deadlines and adequate support for owners, as well as interpretations that will not block the market and the economy - she said.
Message to investors
Grdinić states that it is very important to send a message to investors that Montenegro remains an attractive destination for real estate investments. It indicates that the combination of a favorable tax system, a stable currency (euro), membership in NATO and expected accession to the EU makes our country attractive for long-term investments.
- Current challenges in the application of the Law on Legalization are temporary. As an association that represents the leading companies in the sector, we will try to work on improving the application of the legal framework and its proper application. Our goal is a market that is regulated, transparent and functional - a market that protects both owners and investors. We invite all interested parties to work together on solutions that will enable the Law on Legalization to fulfill its purpose - to regulate the market - Nataša Grdinić concludes in an interview for eKapija.
Legalization of illegal buildings in Republika Srpska: state and challenges
The Ministry of Spatial Planning, Construction and Ecology of the RS points out that it does not have precise data on the number of illegally built buildings, because construction control is carried out by inspection authorities.
- One year after the passing of the Law on the Legalization of Illegally Built Buildings, we asked local communities for information on the number of illegal buildings. Out of 64 units, only 45 submitted data, of which 26 had no data, while the remaining 19 reported 23,801 illegal facilities. We believe that the actual number is significantly higher, bearing in mind previous estimates that indicated more than 80,000 facilities in the field - the Ministry states.
Since the entry into force of the Law on Legalization from 2022, 20,927 requests for legalization have been submitted in 38 local communities, and 10,430 requests have been resolved. According to data from 2023, 7,340 decisions on the legality of buildings were made. The Ministry notes that, due to the lack of legally binding records, it is not possible to accurately assess how many buildings have not yet entered the legalization process.
- Free legalization, introduced by the Law from 2022, and a simplified procedure for certain types of facilities contributed to a greater number of submitted requests. The most common reasons for the non-legalization of buildings are incomplete documentation, unresolved property-legal relations, the need to divide plots or the absence of buildings on digital orthophoto plans - the Ministry points out.
The legalization procedure, as they explain to us, is based on two principles: the standard procedure for buildings built before July 18, 2018, which includes obtaining documentation and paying prescribed fees, and a simplified "ex lege" procedure for buildings built by the end of 1992 or individual residential buildings up to 400 m² built by the end of 2013, where legality is determined based on evidence of the existence of the building.
Remediation of the consequences of illegal construction is not an easy or simple job at all, but rather a challenging and complex process that has been going on for many years. When defining the legal solutions, the legislator, in order to protect the public interest, tried to offer legal solutions that would be sufficiently acceptable and stimulating for investors and owners to massively submit requests for the legalization of their illegally built buildings, and that such objects are introduced into legal flows as soon as possible and that investors dispose of their assets, but at the same time to prevent further illegal construction and that such situations do not become a mass phenomenon in the future - the Ministry of Spatial Planning, Construction and Ecology of the RS states.
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"REAL ESTATE & CONSTRUCTION - Where Space Turns Into Opportunity"
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