Real estate downturn teaches local players the lesson of fundamentals

Real estate has gone from frenzied to frozen, which in Romania has triggered project cancellations, falls in sales and stalled construction works. Some players are keeping an optimistic eye on the future, while others say we haven't seen the worst of it yet. Like any other downturn, the first real estate downturn in Romania after eight years of continuous growth is also a learning process.
So what does this low in the real estate cycle teaches players on the Romanian market?
This is maybe the first true bubble of the capitalist rebirth of the Romanian economy since December ‘89, says Lucian Danilescu, partner with Zamfirescu Racoti Predoiu Law Partnership.
“I think the lesson that should be learned is a decrease in the appetite for risk, on an insufficiently mature market, which is very debt-dependent and which doesn't have any actual appraisal and estimation mechanism,” Danilescu tells BR.
“As for services related to real estate, and I refer especially to legal services, another lesson we should learn is to decrease our dependence on a single field […]. Many law firms have developed disproportionate real estate departments compared to the rest of the business, and now they are seeing the results of such trend,” he goes on.
The lawyer thinks the market is in the crisis stagnation stage, with a slow, but constant decrease in prices. “If the market does not recover fast in the next period, in my opinion, an actual downturn will follow,” Danilescu forecasts.
Turning to residential projects, he sees buyers becoming more mature. Before purchasing a property, they will thoroughly analyze the existing offers and go for the best price and quality. Now buyers can impose certain conditions on developers, which probably would not have been accepted one year ago, he continues. “Nevertheless, I do not think one can say that we are facing a total lack of purchasing resources, but rather a prudent attitude from potential buyers/investors, who do not want to buy until the market has stabilized,” Danilescu concludes.
We all have a lesson to learn, individual and banks alike: “live within your means,” says Jonathan Youens, managing director of Creativ Global Property. Individuals should learn how to ask questions and take independent advice. “Pay for independent advice if necessary. If buying property, research and get to know the market. Do not make a decision on false promises. If making an investment abroad, go and see it. Don't borrow too much, make sure you can afford your mortgage. If buying an investment property, make sure that you have a fund to cover your finance payments if the rent stops being paid for a reasonable period while you re-let the property,” Youens says.
Companies should learn to take advice from properly qualified professionals and pay realistic fees, Youens goes on. He also says banks and financial institutions should make sure not to repeat the mistakes of the last 30 years. “It was so common in the UK during my career in London to see a major property crash and then a few years later the banks were back lending money to those who lost money in the last crash and history repeated itself,” Youens goes on.
“The economic downturn is of course because of the global situation and largely not of Romania's making. Although it is interesting to note that the residential market had slowed almost to a halt before the large public announcements by the banks in Europe and America,” he says.
Radu Boitan, director of King Sturge in Romania, also refers to the fundamentals. “All the factors seemed to be forgotten in the last two to three years, the only scope being to buy any piece of property”, preferably land, planned or not, and try to resell it in couple of months time with a 100 percent price increase,” says Boitan. “All this happened due to the extremely high interest from buyers of all types, investors and final customers, local and from abroad, as well as the necessary price correction for the real estate assets in Romania compared to European levels,” he added. “Many experienced investors decided not to invest in Romania even from the end of 2007 due to the very high prices, their reference being again the fundamentals,” says Boitan. The USA crisis did faster a thing that would've happen anyway: a blockage of transactions because of unhealthy and inefficient level of prices, he adds.
“There are many lessons to be learned, but in my opinion there are three main ones,” says Charles Krick, managing director with JLL in Romania. Real estate is
and remains a cyclical asset class that gains and loses value based upon changes in supply and demand.
“These changes are largely driven by economic activity that then influences occupier demand, investment demand and supply,” explains Krick. Further on, he says, infrastructure development and master-planning attracts occupiers and investors while the lack of those deters them.
The third lesson Krick sees in the downturn is that Romania's attractiveness for real estate will be viewed in the context of other European markets.
“Investors and occupiers are finite in number and Romanian real estate must compete against these other markets. In a simplistic sense there are two ways to compete with these other countries: cost and quality. Until Romania has the capability to produce higher quality projects it must offer lower costs,” concludes Krick.
Michael Lloyd, chairman of Quintet Asset Management and shareholder in Baneasa retail, points to two main lessons: always stick to the fundamentals, and don't underestimate the lack of support you'll get from the authorities. “The latter is a real problem, and one of the biggest impediments,” says Lloyd.
A return to fundamentals is one of the lessons Muler Onofrei, general manager with Goodman Romania also points to. “Notwithstanding the international crisis, what Romania has to learn now first hand is that fundamentals and real quality of products stand behind value creation in real estate,” he says.
“Long before the crisis, many investors were starting to look the other way because of high land prices, poor quality of design and construction and, last but not least, major infrastructure issues for Bucharest and second tier cities,” adds Onofrei.
This is a necessary, yet harsh, correction, he goes on, and will hopefully give players enough breathing space in order to judge what is important and what real value is.
“If the credit markets had not noticed the international gamble at the level of securitization of real estate, the Romanian market would probably have continued to inflate for a little while, without a real sound basis of value,” says the Goodman Romania GM. While acknowledging the market changes, others do not see what is happening on the real estate market as a downturn. Ilias Papageorgiadis, managing director with More International Invest, would call it a correction, “as in 98 percent of the cases, the prices were reaching insane levels,” or a return to reality, “as most of the people were dreaming of crazy profits.”
It is the end of aggressive speculation, with most of the speculators having remained with expensive properties, and a real test for everyone, because it will now become clear who can really adjust to the new world and proceed under the circumstances, says Papageorgiadis.
“It is also a lifetime lesson for many Romanians, and for some foreigners too, […] and a punishment of greed, for many real estate agencies who were trying to pump the prices even when the market was already on a downwards trend,” he explains.
Andrew Prelea, CEO at real estate developer South Pacific, says one of the main lessons is that “we should always rely on the domestic market, not on foreign investors or the speculative market, to fuel the local property sector.”

By Corina Saceanu