New housing market crawls towards recovery

Demand for newly built homes is on the rise, but while banks are more open to financing buyers, the same cannot be said about developers. Nonetheless, Bucharest’s stock of new apartments is expected to surpass 30,000 units by the end of this year, and should market conditions further improve, several developers are waiting in the wings to start new projects.

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Simona Bazavan

For the moment there is “no chance at all” of securing the necessary financing for a residential development in Bucharest, said Hanno Soravia, one of the founders of Austrian developer Soravia Group, last week, summing up the general market feeling. “It is a vicious circle of pre-sale and financing. To get the financing, the developer needs to pre-sell. Given the conditions here, this is not really possible,” added Lorenz Tragatschnig, country manager of Soravia Romania.

While for office developments there are signs that banks are loosening their grip on lending to some degree, the residential sector has yet to return to favor. Back in 2007 the market’s upward trend seemed like a one-way street and in the frenzy anything sold despite sky-rocketing house prices. Come the crisis and subsequent market collapse, a new reality set in and residential developers started to go to the wall, contaminating the banking system.

Indeed, what little has been built in recent years has been funded almost entirely from developers’ private equity. Real estate developer Adama, which last year delivered 210 apartments in Bucharest and will deliver 50 more new homes in Iasi this autumn, has been expanding since 2012 solely using its own funds. The apartments, which are part of the Edenia Titan and Evocasa Optima residential projects in Bucharest and Copou Bellevue in Iasi, required a total investment of close to EUR 16 million, Alina Necula, head of marketing & sales at Adama Group, told BR.

“Regarding relations with the banks and their openness towards financing real estate developers, we can say that their appetite is not very high. Banks continue to be rather cautious. To finance the projects I mentioned before, we considered the option of getting a loan, but the terms weren’t that advantageous so we opted for an investment covered by the company,” she outlined.

Average prices of new units have dropped by more than half in the meantime, from a whopping EUR 2,576/sqm in March 2008 to EUR 1,192/sqm at present, according to Imobiliare.ro data. Nonetheless, the lion’s share of transactions continues to come through the Prima Casa (First Home) government-backed loan scheme, where new apartments are getting serious competition from old housing stock. This could change if the government goes ahead with a move to change Prima Casa so it applies only to the acquisition of new properties. However, no actual timetable for this change has been announced so far.

“There are two types of residential projects. First there are those built or designed during the boom period, which qualify to a lesser degree for the Prima Casa program and which are now more difficult to sell. Then there are those residential projects which were adapted to the market conditions, where one-bedroom and even two-bedroom apartments – which are the most sought after – fit the criteria for the Prima Casa loan. For this latter category Prima Casa has been an important financing source,” Daniel Crainic, head of marketing & communications at Imobiliare.ro, told BR.

At the other end of the spectrum, while financing conditions for developers remain tight, the situation has definitely improved when it comes to financing buyers, thinks Necula. In addition to the Prima Casa program, banks have launched attractive standard loan schemes. This has been one factor fueling the increase in demand for new apartments, along with the fact that there is a limited supply of residential projects that offer a good price-quality ratio and which are located within the city limits, she believes.

Last year demand went up by 50 percent, according to Annemarie Fabian, associate in the valuation & advisory services department of Colliers International. “This was mainly caused by the change to the Prima Casa program, but also because there was a growing preference for new apartments. There has always been supply in the years following 2008; the problem was the gap between developers’ expectations and buyers’ purchasing power,” she told BR. Last year, the Prima Casa program was changed to include only loans in the national currency.

Crainic too agrees that demand is on the rise. “This is something which is confirmed by the more than 800 real estate agencies we are working with. There are small residential compounds which have managed to perform well during this period. Taken one by one they are small developments (20-50 units) but there are enough of them to add up to a significant volume of new units,” he said.

Good intentions

Over 27,300 new flats located in 115 residential compounds of over 20 units have been built in Bucharest and Ilfov County since 2006, according to CBRE data. More than a third of this stock is in Ilfov County. In the capital, district three takes the lead with a 17 percent share of the total modern stock. Headline prices are below EUR 1,000/sqm (gross built) for 69 percent of the modern stock.

Around 4,000 flats located in 31 compounds were in various stages of development by mid-2013 and were expected to be delivered by 2015, according to the same source. However, the majority of these homes represent expansions of existing developments.

As for new developments, there are few concrete plans. Soravia Group, which owns the downtown office and retail scheme Metropolis Center, has no intention of expanding into residential in Romania for now and is instead planning to invest EUR 80 million in another office scheme. Back on its home market, Austria, the developer is building some 2,000 apartments in Vienna where “the residential market is booming” at average prices of between EUR 2,500/sqm and EUR 3,800/sqm and annual growth rates of about 6 percent.

Another large player, AFI Europe Romania, the developer of the AFI Palace Cotroceni and AFI Palace Ploiesti shopping malls, is looking at expanding into residential, the developer’s CEO, David Hay, told BR in an interview earlier this year. However, there are no firm plans for next year. “It is in the cards. Not next year, for sure, but the market will change. We see this and we are getting ready for when it does. It could take one, two or three years, but it will change. Right now the demand is, let’s say, only for apartments that qualify for the Prima Casa scheme. We’re hardly seeing any sales outside of this. The market will move past this when people feel more secure and are ready to take risks,” he predicted.

Adama has land in Bucharest to develop new residential compounds and is considering the Berceni and Razoare areas of the capital for its next two projects. Starting works depends on getting all the permits and the way the market evolves, said Necula. “These are two good projects but for now it is difficult to estimate a date for starting works or other details regarding the investment or the development phases,” added the head of marketing & sales. Based on how the 210 apartments delivered last year are selling, the developer is also considering expanding its existing projects. In 2013 Adama sold 25 percent more properties than the previous year and has set the target for this year to maintain monthly sales at at least 12-15 units. So far sales have been higher, with a 30 percent increase in the first quarter y-o-y, said Necula.

Fabian, on the other hand, is optimistic that some of these intentions could start materializing into action over the next year. “There are many developers/investors who are getting ready to start new projects. Rather than having a record number of deliveries this year, I would say that next year we will see the launch of more new projects,” she said. Moreover, in 2014, more than in the years before, there is greater interest in buying large plots of land for residential developments, she added.

Prices stabilize

The average asking price of new apartments in Bucharest is currently 1,192/sqm compared to EUR 1,011 /sqm for old apartments, according to Imobiliare.ro data. Over the past year the situation has been relatively stable, with asking prices dropping by 2.5 percent. Despite monthly fluctuations, prices are expected to remain stable over the next period should the economic and political context remain stable as well, said Crainic.

Necula also expects the market to post fluctuations of no more than 5 percent over the next 12 months. “These are normal fluctuations on a mature and stable market, which is something that the segment is heading towards. We will definitely not witness significant price hikes or drops like before and after the crisis, but more likely stabilization,” she concluded.

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