Romania on the European real estate map but still risky for some

Although CEE and SEE have become more important targets for both real estate developers and investors recently, Romania and Bulgaria are still seldom mentioned by companies doing real estate business in the region. A report on emerging trends in European real estate, issued at MIPIM by the Urban Land Institute and PricewaterhouseCoopers, underlines the main targets for investments and the changes in European real estate, but says almost nothing about Romania as an investment opportunity.
The report, put together following interviews with top managers from real estate companies registered with ULI, however mentions several Romanian cities, including Bucharest, Constanta, Brasov and Timisoara, which came out as new opportunities – although they require challenging strategies.
Romania currently stays in the shadow mainly due to its rising country risk on general economic grounds. “People mentioned their concern over a real estate bubble for Romania. The country's economic risk was also important,” John Forbes, real estate specialist with PwC and leader of the report, told Business Review.
Romania is also mentioned in the report as one of the European countries which have attracted dedicated private property vehicles – single-country funds. The number of single country funds for Romania is however below that in Poland and the Czech Republic, but close to the number in Hungary and equal to the number of funds dedicated to Austria.
Romania and Bulgaria seem to have been shunted into the shadows as investors and developers move into the region depending on asset type and country. With Russia and Turkey hugely undersupplied and offering greater overall opportunities in real estate, and with neighboring countries such as Hungary, the Czech Republic and Poland already well known paths for real estate investors, Romania and Bulgaria seem less attractive.
The situation is not worrying, however, as plenty of capital is pouring in anyway, as investors have started to feel more comfortable with emerging markets and even with countries with higher risks. Russia and Turkey top wish lists, although they involve higher risks.
The battle between Old Europe- represented by Western European countries, some of which have lost their charm for real estate investors due the effects of the recent financial crisis – and the emerging Europe is more evident than ever, reveals the report.
“The chance is on for yields, for performance, and to identify new opportunities and new markets,” found the report.

Residential to become a place for serious, long-term developers
Several new trends underlined in the report and picked up by investors during the MIPIM fair have also been witnessed in Romania lately.
The fear of a correction on the residential market, a segment which is still top of the list, but looked at more cautiously, has been evident in Romania.
“As a consequence of positive economic trends, house prices in the region have dramatically risen in the past decade. Prices were further driven by recent speculative investment, of which a good part was from foreign investment capital flowing into the region,” found a report by residential consultancy company REAS and real estate consultancy firm Jones Lang LaSalle. The report looked at 12 capital cities in the region, Bucharest included. One of its findings was that the recent flood of short-term speculative investors in search of quick money has led to an imbalance of supply and demand structures, resulting in tremendous price rises and less affordability, despite a clear need for housing in most of the cities.
The report concludes that given the growing prices of land, construction materials and labour costs along with a labour force shortage, developers' potential margins have narrowed in the region. However, with a growing awareness of quality and higher selectiveness of potential home buyers, REAS suggests that CEE will continue to become an arena for serious long-term developers and investors.
Green buildings were an important topic at MIPIM this year, but in Romania only a few such projects have been announced.

Effects of worldwide financial distress
The recent financial distress has led developers to balance their risks. On one hand, they have borrowed money from various banks; on the other, they have tried to go for niche developments, like hospitals and shelters for the elderly, which are picking up as investment alternatives in Romanian real estate.
Signals from the Romanian market show that several deals have been delayed or even cancelled after a first round of discussions, as buyers are more cautious than ever. International players are saying this real estate correction period will lead companies to go back to the basics of real estate and work assets hard to deliver their profits, as opposed to the previous period of financial engineering. Buyers' cautiousness is evident on other markets as well.
Romania is expected to see another effect of the financial crisis, which has alarmed developers and made projects impossible to finalize. They will seek buyers for their underway projects, and will sell at lower prices than in other circumstances. “This will happen in the second half of the year,” Marian Hlavacka, CEO of HB Reavis, a company making its first steps on the Romanian market, told Business Review.
Tim Slattery of APN Funds Management, owners of City Mall in Romania, has been invited to invest in two such projects, where he was not sure whether the developers were actually in distress. “It is certain that financing is more expensive now, which is due to the global repositioning of risk. So there have been such opportunities, but I wouldn't say there were a lot of distressed sellers coming into the market. I think that in Romania things have been done more cautiously than in other countries, so the developers we expect to be in distress are more active in Western economies,” Slattery said.
On the other hand, Guy Barker of Palmer Capital told Business Review he didn't expect distressed developers in Romania, unless financing costs go too high along with interest rates or the tenant market crashes, which is not the case for the country.

East Vs West, investors choose camps
The credit crunch had hit hard in London and Paris, two property cities which were top of the list but went down last year to 14th and the 15th position in the investors' targets. The situation does however have its ups and downs.
“The market has dropped hard in the UK. You can buy good office buildings in the UK, outside London, for a yield of over 8 percent, which is cheaper than Romania. For certain types of investors, that is attractive,” says Guy Barker. “The difference is that Romania has very high rates of GDP growth at the moment, while the UK is growing at a lower pace, and rental rates in the UK are currently much higher. You can make a case to say that you will get a higher growth in Romania than in the UK, even though the starting yield in Romania is slightly lower,” he explains.
Investors like Palmer Capital take into account the risks of the Romanian market. “A 7 percent yield in Romania is not fully reflective of the specific risks of that market. I think it reflects a lot of money coming in, and few deals concluded. So there is a little bit of mispricing in Romania. One can now buy more cheaply in the UK than in Romania,” Barker concludes.
It is not particularly attractive at the moment to invest in SEE. A lot of money has been raised to invest in those regions, there is not much to buy, and the margins are not that high, says Barker. “By the time you have added costs to that, including travel costs, the creation of complex tax structures, and working with different currencies, you find you are competing with seven or eight other purchasers to buy something at a 6.5 percent yield”
He added: “There is an opportunity in the development sector. If we can find a way of backing or investing in development schemes, then it will be more interesting.
I am looking at that for the moment.”

By Corina Saceanu in Cannes

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