BR ANALYSIS. Get real: Romanian property market negotiates brave new world

Newsroom 06/12/2018 | 08:08

Apartment prices in Bucharest peaked at EUR 2,058/sqm, in March 2008. In November, they were down to EUR 1,637/sqm. Over the same period, rents for offices tumbled from EUR 24.4  to EUR 18.5/sqm/month, while the retail and investment scenes have also endured their ups and downs over the last tumultuous decade.

by Razvan Zamfir

Home truths

The past excesses of Romania’s residential segment have long made the headlines. Back in 2007-2008, prices could jump by 5-10 percent from one month to another. The all-time record annual growth in Bucharest was nearly 60 percent (seen at the end of 2005 and 2007).

At the same time, it was not uncommon for a single buyer (including individuals) to purchase over 100 apartments in one go as “investments”. Residential properties were one of the most pertinent barometers of overall sentiment and to a certain extent, this remains the case today.

This is because the bulk of Romanians’ wealth is concentrated in their homes (in 2008, over 90 percent of total wealth was in real estate and just 10 percent in financial assets). As the value of properties (excluding land) owned by households more than doubled between 2005 and 2008, to nearly EUR half a trillion, morale was riding high and Romanians went on a spending spree.

Nowadays, despite the fact that more than 400,000 new apartments and houses were built between 2009 and 2017, household real estate wealth remains nearly 40 percent below its pre-crisis record. This is because prices languish below the levels seen in the crazy days of 2007- 2008 (down by around 40 percent in Bucharest). The market seems to have matured to a certain extent as both individual Romanians and developers have been through an economic cycle with an exceptionally steep downturn.

Another aspect worth pointing out is that while in 2007-2008, Romanian residential properties were seen as some of the most overvalued in the EU, if not the most, European Central Bank economic models now show that Romania is at the opposite end, with properties actually significantly undervalued (particularly if the price to income ratio is taken into account).

As things look right now, we cannot exclude a more challenging period for the market in the next couple of years as deliveries are set to accelerate, while monetary policy tightening and the upcoming demise of the state guarantee scheme are likely to dent demand going forward.

Office market rings the changes

The Bucharest office market has changed significantly in the last decade, moving from a massively undersupplied market to relative equilibrium nowadays. The vacancy rate jumped from just a bit over 0 percent in 2007 to upwards of 20 percent in the aftermath of the 2009-2010 recession, and though it has since recovered to healthier levels, rents remain far lower than a decade ago. The scale is also very different, as the total stock was more than four times smaller back then.

Alongside an improvement in tenant quality, this suggests the market should be better prepared to face a new economic correction. Still, as developers (not just for office) are very much re-active rather than pro-active, building activity has intensified greatly in the last year amid very favorable economic results in recent years.

Meanwhile, other cities, such as Cluj-Napoca, Timisoara, and even Iasi and Brasov, have become tempting for developers.

Shop ‘til the drop: retail market waxes and wanes

At the end of 2006, total modern retail stock stood at a very subdued 360,000 sqm nationwide. By the start of the recession in Romania two years later, it would have increased by a staggering 4.6 fold.

In  those days tenants were lining up, with lots of new names that have since become established players on the domestic scene, like Peek & Cloppenburg, Deichmann, Bershka, Takko, Hervis, New Yorker, and Zara Home. In 2007, since space was limited, many of these new players had to take what they could get and ended up opening their first store not in Bucharest, as would have seemed customary, but in towns like Cluj-Napoca, Timisoara and Targu Mures.

But the scene would shift rapidly. Fast-forward about a year and it had become very much a tenants’ market. Retailers found that as the economy was cooling off in the second half of 2008, Romanian stores had fallen far short of their expected results, especially outside Bucharest.

Developers probably had it worse, especially as banks pulled the plug aggressively during the second semester of 2008. Due to the surge in deliveries (especially in 2008-2009, projects started when everything seemed fine), the select retailers that were expanding could afford to be quite picky and some schemes ended up opening with just half of the units actually trading.

Meanwhile, a few developers that suffered both from a poor tenant mix/positioning and too much leverage would go bankrupt in the post-crisis period, but insolvencies were not widespread.

A significant change compared to those years is the fact that Bucharest’s high street retail scene (upwards of 70,000 sqm in 2008, mostly in central locations) has become a pale shadow of its former self, as local consumers have become much more accustomed to going to shopping centers.

Investments go up and down

Even in Romania’s emerging economy, prime office yields reached 6 percent (with the America House transaction below this benchmark).

“Indeed, with an office building in Bucharest selling for what is still the all-time low of 5.5 percent in 2007, the local investment market was on a par with regional peers and even ahead of some if we take into account strictly this figure. How things have changed: nowadays, domestic prime office assets are the only ones among the biggest CEE economies (Poland, Hungary, Czech Republic) to have yields consistently higher than pre-crisis lows, for office assets,” said Silviu Pop, head of research at Colliers International.

More importantly, the market was much more liquid back then, with investment in excess of EUR 1.5 billion in 2007, and several of the big global investors joining the frenzy. Meanwhile, post-crisis highs barely approach EUR 1 billion in good years (like 2017) and were as low as EUR 200 million in 2011 and 2012.

“Today’s market is a bit more challenging than a decade ago and it seems noticeably more difficult to close a deal than in 2007, as investors want to make sure they are not overpaying. While this is a positive sign in that it heralds a more stable market over the long run (including during downturns), the lack of liquidity (particularly compared to CEE peers) is still something of a drawback in spite of the recent improvements,” continues Pop.

Banks put brake on land deals

In parts of Bucharest, land prices increased more than tenfold in the years leading up to the financial crisis. For instance, Colliers’ reports dating back to 2003-2004 note that prices in the Herastrau-Aviatiei area of Bucharest were around EUR 200-400/sqm. In the first half of 2008, an investor paid around EUR 4,500/sqm in the same region; the all-time record (and likely still unsurpassed) was for a small plot in the Aviatorilor area which sold for EUR 7,000/sqm.

As the global financial system was hemorrhaging money, domestic banks stopped handing out funding in the second part of 2008 and activity froze.

It would take until 2014-2015 for the market to start thawing and, ironically, many of today’s sellers are the buyers from back then, often having taken big hits. 2007 probably remains the historic peak in terms of market activity. Bucharest alone saw land deals worth over EUR 850 million in 2007 (probably well over the EUR 1 billion mark for the whole country) compared to around EUR 230 million last year (or EUR 350 million for the whole country).

In certain areas, prices likely remain below half of their level in 2007-2008, while buyers seem much more cautious. For instance, when a plot was sold at auction, it wasn’t at all uncommon for the starting price to double; nowadays, despite the strong competition, sellers may get some 10-20 percent more.

Good, but not at all comparable with the past highs, which, say some analysts, will never return.

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