Which roads will lead to profit in 2012?

Newsroom 06/02/2012 | 11:39

Tourism, agriculture, retail, energy and IT&C seem to be the hot areas for investment this year. Business Review takes a deeper look at the fields likely to catch the interest of those looking to build or expand their portfolio in 2012.

Individual options
John Templeton, founder of Templeton Mutual Funds, says that the four most dangerous words in investing are “this time it’s different”. With the local market connected to the international scene, the majority of investment instruments depend on how things progress abroad. But individual investors must set the prospective gains against their appetite for risk. Business Review surveyed the potential of the main investment vehicles for 2012.

Gold
Gold can be considered a profitable option for the prudent investor. Many people see gold as a luxury issue rather than a good investment for “hard times”. According to PwC’s new annual Gold Price Report, 80 percent of mining companies expect the price of gold to continue to increase this year, with the majority of respondents predicting it to peak at USD 2,000 per ounce in 2012. Last year the price of gold rose by some 10 percent, says the same study.

Moreover, central banks’ demand for gold has escalated to 148.8 tonnes since 2010. The Bank of Korea is one example. In 2011, it made two major gold purchases – 25 metric tonnes in June and another 15 in November – the first such moves since the 1997-1998 Asian financial crisis.
“This is a trend we are seeing not only in developed economies, but also in emerging markets which have shown interest in boosting their gold holdings. We believe countries are now entering into a long-term period of gold accumulation,” says Alexandru Lupea, partner, assurance services, energy, utilities and mining industry service leader at PwC Romania.

Bank deposits
Radu Ghetea, president of the Romanian Banking Association, said at the end of last year that he expected the interest rates for RON bank deposits to decrease in 2012. “We are faced now with a slightly different situation for savings than we have been used to so far. At present, while some lenders have cut their interest rates, others have preferred to maintain their higher levels and even negotiate, if we can say so, higher interest,” says Ghetea. According to Mihail Ion, president and CEO at Raiffeisen Asset Management (RAM), interest rates for RON are decreasing at the moment. But a customer who wants to obtain better yields on banking deposits has to lock up his or her money for at least two years. According to www.conso.ro, the average interest rates for RON deposits varied last week  from 5.81 percent (for one month), to 6.03 percent (for three months), about 6 percent (for six months) and 6.15 percent (for 12 months), while for EUR deposits the rates are 2.76 percent (for one month), 3.05 percent (for three months),
3.14 percent (for six months) to 3.23 (for 12 months).

Investment programs
The yields of investment programs offered by Aviva Asigurari de Viata were in line with the investments made and risk taken.
“The RON investment programs performed best, especially the guaranteed ones. Their exposure is on fixed income financial instruments on the local market, and they exceeded the 2011 inflation rate and ensured positive yields for their investors,” says Mihai Popescu, general manager at Aviva Asigurari de Viata, of the company’s investment products. According to National Bank of Romania data, the inflation rate was 3 percent last year. As for the investment programs in foreign currencies offered by Aviva, Popescu says they were temporarily affected by the evolution of the international stock and bond markets.

Mutual funds
According to Ion of RAM, the yields of funds with interest-bearing financial instruments exceeded those offered by deposits, while other types of funds posted negative yields as a result of the drop in stock exchange quotations in 2011. As for the future, “these financial instruments will exceed the average interest rates for banking deposits although there will be fierce competition to attract Romanians’ savings this year,” says Ion. He adds that diversified and stock funds will be influenced by the performance of the stock markets. “If the Euro zone sovereign debt crisis improves gradually, without having a significant impact on economic growth, then the stock market will offer good yields this year. This will directly affect the results of stock and diversified funds,” predicts Ion.

According to him, open investment funds on the local market have products for all types of investors. Both more conservatives and those with an appetite for risk will prefer interest-bearing financial instruments for sums available on the short term. For moderate investors that choose to invest their money, diversified funds are the most suitable investments. Elsewhere, dynamic investors that have financial resources available for the long term can invest their money in stock funds.

According to data from the Romanian Association of Asset Managers (AAF), from the end of December 2011, Undertaking for Collective Investment in Transferable Securities funds posted different yields depending on the type of funds. Over December 2010-December 2011 monetary funds posted a yield from 4.4-7.4 percent, bonds and instruments with fixed income funds from 0.5-14.14 percent (including foreign funds, with assets and subscriptions in RON and the yield calculated in the currency of the fund EUR or USD) while diversified ones had yields from 1.9-4.5
percent.

Romania’s investment hotspots
Moving beyond tourism potential

Romania boasts some of the most extensive and varied natural landscapes in Europe, a fact acknowledged even by the UK’s Prince Charles, who has made real estate acquisitions here, but significant investment can be made in the infrastructure, where Romania is lagging behind other countries in the region.

The main tourist attractions are the local seaside, which stretches for 245 km along the Black Sea coast, the unique Danube Delta and the Carpathians, with ski resorts such as Poiana Brasov, Sinaia and Predeal. Modern accommodation facilities and services can be found in the spa resorts of the Carpathian valleys and plateaus such as Baile Herculane, Covasna and Vatra Dornei.  
Romania had 5,222 tourist accommodation establishments in 2010, according to the National Statistics Institute (INS). There are 1,246 hotels, 1,354 rural tourist boarding houses and 768 villas, but bungalows and chalets are also available. The INS says the existing accommodation capacity totaled 311,698 beds.

In the seaside there are 1,014 tourist accommodation units, out of which 318 are hotels, while the mountain resorts have 1,038 facilities, including 121 hotels. The Danube Delta has 127 tourist establishments, but only 15 hotels.  
The accommodation facilities are unsufficient though for the influx of tourists coming to Romania in recent years. Around 1.3 million foreign tourists arrived in Romania in 2010, with another 4.7 million Romanians. There were over 86,000 foreigners in mountain resorts and 31,000 at the seaside, but Bucharest and the main cities hosted around 1 million foreigners.    

 Romania registered an FDI inflow in tourism of EUR 186 million between 2006 and 2010, according to a report on tourism by BCR. During the same period, neighboring Bulgaria was able to attract EUR 450 million. Romania also posted a negative aggregate income in the balance of tourism between 2006 and 2010.

Steady profits in energy
Energy is the lifeblood of any society and pundits say it could be profitable in Romania. The national energy and transport sectors have been modernized by private investors, such as E.on, Gdf Suez and Enel, but around EUR 10 billion will be needed in the years to come for improvements in this sector according to Mark Gitenstein, US Ambassador in Romania. Chevron and Exxon Mobil, two American energy giants, are interested in shale gas and traditional oil and gas, but General Electric is also considering investment in the electricity grid.

The renewable sector has gained traction in recent years, mainly in wind installments, but the other clean energy sources represent good investments as well. The government recently amended renewable energy law no. 220/2008, allowing energy producers to be granted up to six green certificates for every 1 MW produced and delivered to consumers from clean sources.

The price limits for green certificate trading are a minimum EUR 27 and maximum of EUR 55 per certificate, but they are currently being traded almost at the maximum.
“I believe investment can be made in the renewable segment. It is in a very good stage supported by the new law, and the number of green certificates has risen. In the wind segment we have many players, and I would go for solar and co-generation systems,” Corneliu Bodea, vice-president of Adrem Invest, told BR. Adrem will build a EUR 70 million co-generation plant in Suceava County and two solar parks of 10 MW each.  At present, Romania has 826 MW of wind capacities, 380 MW in micro-hydro plants, 1 MW in solar and 25 MW for biomass.

Planting for future growth in agriculture
Soaring food prices worldwide and an ever increasing global population make agriculture and farmland acquisition two very lucrative business options, and Romania offers plenty of opportunities in both fields.

Be it traditional crop cultivation, zootechnics, organic farming or agribusiness, there are many options to choose from. “Agriculture can certainly be a very rewarding industry for those with a solid, well thought out and well implemented business plan,” Gabriel Ionescu, the advisory coordinator of the AgroManager program of AgroAdvice, told BR. He added that after the good results last year, the local agriculture industry has been getting a lot of attention from potential investors and entrepreneurs. Several local businesspeople who have established themselves in other industries have announced plans to diversify their operations by investing in agriculture, the most recent of whom is Ion Alexandru Tiriac, the son of local billionaire Ion Tiriac. Foreign investors also have set up businesses here and bought land in recent years.

Romanian farmland is valued on average at less than 20 percent of its Western European equivalent, making it a fertile investment opportunity. The good quality of the soil here, large surfaces of available land and, most of all, cheap prices have made many foreign companies and investment funds buy land and many more state their interest.

The 2010-2011 national agriculture census reveals that there are about 8.2 million hectares of arable land in Romania, placing it in fifth position in the EU, after France, Spain, Poland and Germany. About 8.5 percent of the country’s total farmland is owned by foreigners according to data from the Ministry of Agriculture.

When it comes to farmland and forests, the market has been less affected than the general real estate sector, and looking both at global trends and the local offer, things should take a turn for the better in the years to come. Demand is on the rise and prices are set to follow suit.

Romanian farmland comes with a low price tag when compared both with Western Europe and also in a regional context. According to DTZ Echinox, farmland prices have returned last year to the levels registered in 2002 and 2003, averaging between EUR 1,000 and EUR 3,000 per hectare depending on the plot size, soil quality and region. In a few years’ time prices could be back to where they were in 2007 and 2008. “On the medium and long run, the price of local farmland could come close to the Central and Eastern European average. However, we think that it is very unlikely it will reach the prices seen in countries like Holland or Denmark where a hectare of agricultural land often surpasses EUR 20,000,” Marius Grigorica, senior business analyst with DTZ Echinox, told BR on a previous occasion.

Although pundits agree that the market is heading for consistent future growth, there are discrepancies between supply and demand. Investors, especially large foreign companies and investment funds, are looking for big, consolidated plots – investors are mainly looking for over 1,000 hectares – whereas about 25 percent of the country’s agricultural land is estimated to be divided into plots of under one hectare. The lack of cadastral documentation and the high costs of obtaining it also add to the challenges the local market faces.

Retail: success of the fittest

Retail remains on investors’ radar despite the fact that Romanians spent less last year and 2012 has not yet produced any good news, with consumption expected to continue to decline.
But while the market is dominated by large retailers who will continue investing in expansion throughout 2012, this doesn’t mean that there isn’t room for newcomers. Kids’ retail and online stores are just two of the options to consider and, probably more than in any other industry, innovative niche business ideas can go a long way.
“In the current market environment we don’t see retail greenfields as an attractive investment compared to other industries, if not driven by a very specific niche or game change of the retail formats,” Michael Weiss, partner with A.T. Kearney’s Bucharest office, told BR.

The Romanian toy and game market is one of the most dynamic in Central and Eastern Europe and could grow annually by 14 percent until 2015, estimates Euromonitor.
As for online stores, market analysts say that e-commerce is still in its infancy in Romania and will grow considerably in the years to come. Romanians have got used to buying electronics and IT products online and other consumer goods will follow suit. Large food retailers are also expected to enter this segment despite the fact that the possibility of doing the weekly grocery shop online remains some way off. Metro Cash&Carry Romania was the first to break the ice after launching in January 2012 an online store that sells about 4,500 office stationery products and various electronic appliances.

Research segment gets EU backing
If you are looking for reasons to place your money in research projects, the EU launched last week the biggest ever call for proposals to fund European research and innovation, totaling around EUR 7 billion.

When they adopted the Europe 2020 strategy and, later, the flagship Innovation Union program in February 2011, EU member states, including Romania, committed to make research and innovation a priority in the foundation of their investment plans in jobs and sustainable growth.
There is no shortage of financing. Potential beneficiaries in all EU member states, which include Romania, can tap into this EUR 7 billion to finance their research projects. In total, it is estimated that the program will generate around 174,000 jobs in the near future.

There will be 16,000 beneficiaries of the financing – universities, research organizations and companies. Special attention will be given to small and medium sized enterprises, which will benefit from a financing package of nearly EUR 1 billion.     

Meanwhile, in Romania, several large research projects have already been announced, in domains such as nuclear physics, health, pharma, nanotechnology, smart cities and IT.  Doina Banciu, general manager of the National Institute of R&D in Informatics, tells BR that the most important projects are in the fields such as eLearning, eContent, eHealth and eGovernment.  “The development of digital content for cross-border online information, the development of inter-operability among cross-border administrative procedures as well as ambient intelligence and humanoid robots are the IT projects that deserve the investors’ attention ” says Banciu.   

At the moment, the largest-scale research project being developed in Romania is the Extreme Light Infrastructure-Nuclear Physics (ELI-NP) project, which will mark a premiere in physics: the intersection of a high-power laser beam and a brilliant high-energy gamma beam. The project is expected to make Romania an important scientific hub for talent and know-how, creating 214 new high-qualified jobs in research and tech support. “There is expertise in Magurele, both in the domain of lasers and nuclear physics. After Germany, France and Great Britain, the best expertise in nuclear physics can be found in Romania,” said Nicolae Victor Zamfir, project-manager of ELI-NP.

IT poised for growth
The IT market in Romania is set to grow by 12.7 percent in 2012, according to a report by Erste Group on the Central and Eastern European region.
“After a drop over the last three years, the Romanian IT market is on a positive trend. In the private sector, SMEs are increasingly interested in IT products and services. The Software-as-a-Service recipe is beginning to work on this market,” George Stan, president of the administration board of TeamNet, tells BR.  

Growth driver number one will be cloud computing, which will be particularly attractive to SMEs and start-ups in Central Europe, found the Erste report.
A second growth driver is mobile communication networks, which goes hand-in-hand with the dynamic growth of smart phones, tablets and internet-based applications like cloud computing, machine-to-machine communication, video streaming, or data and voice communication. Thirdly comes the increase in efficiency, operational and strategic excellence. Last but not least, one should not forget the EU funds which fuel public IT projects.
“The weight of equipment sales is starting to dwindle in the IT industry and this favors investments attracted by specialized software companies and system integrators. Since this is a sector where the quality and training of people has an essential contribution, Romania attracts due to the good quality-cost ratio,” says Stan. “As this is a demanding sector from the point of view of the labor force, investors are checking the level of involvement of the technical and management teams as well as personnel retention.”

There are two main reasons to invest in IT, Andrei Pitis, vice-president of the Association of the Software and Services Industry (ANIS), tells BR: the growth of the IT local market which is at a relative low compared to other countries in the region, and the number of technological start-ups that are successful outside the country.
“One of the most important investment domains is software of the type ERP (enterprise-resource-planning) or CRM (customer-relationship management) for the local market. Also another smart thing to do would be to place your money into a start-up that could target a global market,” advises Pitis.

Drawing a profit from art
The launch of a Romanian Art Market Index and an investment fund dedicated to this market by local auction house Artmark last year were signs that a huge, untapped investment potential had finally been unleashed. According to figures from the auction house, which cover all the public transactions in Romania between 1995 and 2010, with more than 1,000 local artists taken in consideration, the average annual return on investment for a well traded artist such as painters Nicolae Grigorescu, Ioan Andreescu or Nicolae Tonitza is 20-30 percent.

While classic Romanian art is not yet valued on the international market, contemporary works are already being exhibited at international fairs by local galleries. Last year the European Parliament bought works by several contemporary Romanian artists (Ioana Batranu, Horia Bernea, Geta Bratescu, Daniela Chirion, Florin Ciubotaru, Suzana Dan, Sorin Dumitrescu, Daniela Fainis, Stela Lie, Valeriu Mladin, Gili Mocanu, Teodor Moraru and Mihai Topescu) for its collection, for almost EUR 100,000.

Simona Bazavan, Otilia Haraga, Ovidiu Posirca, Anda Sebesi

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