Residential market gloom lifts despite short-term price drops ahead

After years in the doldrums, green shoots are appearing on the housing market. Banks are more willing to finance property purchases, demand is on the rise and so is the number of transactions being closed, say developers and real estate firms, leading them to make optimistic forecasts for 2014. However, there is good news for prospective buyers as well: apartment prices dropped by 8.2 percent on average in 2013, and the slide is likely continue this year too.

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Simona Bazavan

The cost of loans in the national currency has dropped below the cost of borrowing in foreign currencies, for the first time in recent years banks are showing greater willingness to grant loans in the first place, house prices have dropped to fresh new lows with further price plunges looking unlikely in the current market conditions and, since last year, demand has been picking up, Alina Necula, head of marketing & sales with Adama told BR.

The developer sold about 15 apartments each month on average last year, up by 25 percent compared to the previous year, and now hopes to surpass that.

“Compared to the way sales evolved last year, we expect 2014 to be at least at the same level as in 2013. A slight increase is possible, meaning that we could surpass the 200-220 units sold last year,” she said. Bucharest will remain its most dynamic market, both because of the larger portfolio the developer has here but also because of the higher purchasing power.

Necula is not the only one who is optimistic about how things are shaping up so far.

The online real estate platform Imobiliare.ro has been reporting record traffic this January. “We expect the number of transactions to go up, especially for small apartments. Old one-bedroom units are still popular for perspective buyers. We also expect a growing interest in new apartments, especially those with two and three bedrooms with a good location and realistic prices,” Adrian Erimescu general manager of Imobiliare.ro, told BR.

Claudia Scarlat, associate director research & consulting with DTZ Echinox agrees that there has been an upturn in transactions on the residential market, “especially on the premium segment which is once again interesting for private investors after undergoing a process of price adjustment over recent years. Today there is balance between supply and demand,” she told BR.

On the low-end segment too there are more deals, with the number of transactions involving properties which qualify for the Prima Casa (First Home) government-backed loan scheme going up. However, the higher number of transactions on both segments is due to owners reducing asking prices, says Scarlat.

What keeps going down and is anything going up?

Initial expectations were for 2013 to be a year of stabilization, and yet apartment prices dropped by close to 10 percent, more than in the previous two years combined. Sellers cut asking prices by 8.2 percent on average in 2013, according to data from Imobiliare.ro.

The sharpest drops were recorded in Bucharest where apartment owners lowered asking prices by 6.7 percent on average. This meant that the average price per sqm dropped from EUR 1,138 to EUR 1,062 by yearend. New apartments posted a steeper slump than old flats – 7.4 percent compared to 6.1 percent. Even so, at the end of 2013, the average price per sqm was higher for new properties – EUR 1,184 against EUR 982.

Many pundits think the market has further to fall. “Despite the fact that the signals from lenders are improving – one indicator in this regard is the unlocking of advertising budgets for credit products, as we have fielded a relatively large number of enquiries from banking clients to promote their products – we think that 2014 will bring a further slight drop in prices,” said Erimescu. Properties that are harder to sell, such as large apartments with two and three bedrooms, will be the worst affected by this, he added. “Also, we are not neglecting the foreclosed properties owned by banks whose share in the market, although still relatively low, is beginning to go up,” he added.

One thing is for sure, Erimescu stresses, the prices of old apartments – meaning mostly properties built before 1990 – are still falling. However, more significant price drops could take some time to kick in, especially in homes located in so-called working-class neighborhoods.

“In Romania, the prices of old apartments are still too high compared to those of new units, the, the difference between the two reaching as much as 20 percent in Bucharest, well below that across the rest of the country. In Cluj-Napoca, the two have relatively similar levels. In mature markets, the price differences between old and new apartments are significant,” he said.

Scarlat, on the other hand, predicts that residential prices will remain constant throughout the year, with any decline mostly affecting properties not bought through the First Home program. Although demand for premium apartments has gone up, this isn’t enough to guarantee that prices will follow suit. “Only premium locations will be considered attractive by private investors,” said company representatives.

Any price variation this year will be below 5 percent, Razvan Iorgu, managing director of CBRE Romania, told BR. “In a volatile market, which depends on macroeconomic developments and the progress of the First Home program, it is very hard to predict what prices will do.”

The market is currently polarized between two segments, cheap and very cheap locations below EUR 800/sqm and expensive ones, costing above EUR 1,200, he added. “For these two segments we don’t foresee significant price changes, but it is possible that apartments priced between these two levels will post slight declines,” he added.

Should there be no major economic changes, 2014 will not bring about steep contractions, thinks Necula. Moreover, price corrections of up to 5 percent are usually a feature of mature markets and prices have now reached a fair level, evidenced by the fact that demand is picking up, she added.

Nevertheless, prices may have further to fall for properties which are unprofitable on the long run, such as apartments that are more than 30 years old, for which it makes little sense to take out a 30-year loan, Adama’s head of sales believes. At the other end of the spectrum, prices could go up where demand is highest, meaning mid-range apartments with a fair price-quality ratio, she added.

Adama has invested in building over 1,600 apartments in various residential projects in Bucharest and outside and has sold over 1,100 homes, according to company data. Last year it invested EUR 14.1 million in expanding two of its Bucharest projects.

Prima Casa fuels the market

The government’s First Home loan scheme has been, since its launch, and will most likely continue to be the main thing keeping the market afloat.

The program was set up in 2009 to help first-time buyers get on the property ladder. The state guaranteed loans of up to EUR 60,000 (for old apartments) or EUR 70,000 (new apartments) allowing would-be homeowners who would otherwise be ineligible access to mortgages.

Beneficiaries of the Prima Casa program could buy an apartment or house with a deposit of only 5 percent compared to the 20-25 percent required for regular mortgages. Last year the scheme was changed to cover loans in the national currency only. The new lending conditions, combined with more apartments coming onto the market, led to prices dropping by as much as 4 percent in September last year.

This year some RON 1.2 billion (approximately EUR 260 million) will be available for guarantees under the program, to which will be added the leftover sums from last year.

The fact that the funds have been supplemented has reassured prospective beneficiaries, who previously feared the money could be used up, thinks Necula. “Therefore, sales through this program will not see major changes compared to 2013. What will be interesting to see is how the banks’ strategies will influence the program. Given that banks have launched attractive standard mortgages which successfully compete against the First House scheme when comparing monthly installments, the government-guaranteed mortgages will most likely be limited to those who can’t raise more than the 5 percent deposit,” she said.

Of course, the fact that 2014 is an election year has helped persuade the authorities to continue with the program and supplement funds, and should help boost confidence in the outlook for the local residential market even further.

One thing remains clear – until more consistent economic growth is a reality, acquisitions made through the First Home scheme will continue to account for a significant share of the market, pundits agree.

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