Construction company representatives say developers look for bigger profits by asking a price per sqm much higher than their costs – up to four times – while construction companies' profits are stalling. Construction companies find it hard to keep the pace with the large number of real estate projects in the country and the lack of workforce will drive them to look for people abroad. The shortage of workers may lead to some of the residential developers' bankruptcy. Developers still blame it on the increasing costs of land and construction, and see 2008 less bright than this year. Teaming up with construction companies and boycotting overly expensive land deals are two of their strategies to avoid disaster.
Housing prices soaring artificially, constructors say
The new housing price increase is artificial and is decided by developers rather than being triggered by increases in the construction prices, according to representatives of the Romanian Construction Companies Association (ARACO).
Moreover, due to the lack of construction workers, the market may become overheated and some of the real estate projects may be delayed or even halted on this account.
“The cost for a sqm of built area stays between EUR 600 and EUR 700 and developers are selling housing units at between EUR 2,000 and EUR 3,000 per sqm. If the profitability margins don't balance, the market will see imbalances and developers won't have anyone to build their projects,” said Laurentiu Plosceanu, head of ARACO.
Developers are selling new homes at prices up to four times higher than the construction costs, according to the ARACO representative. He complains about real estate developers registering double-digit profits, while construction companies are merely making an average of seven percent in yearly profit.
Besides the construction costs, the final price of a real estate development is also influenced by the price of land, which is another issue developers complain about. The land influence in the final price of a project in the case of a 4,800 sqm plot close to Spaiul Unirii is EUR 920 per sqm, according to Mike Hapoianu, sales manager with GVA Asco Property.
Another complaint from developers is the increasing price of construction materials on worldwide markets, also reflected in Romania, due to the increasing consumption on Asian markets. ARACO representatives say the cost of construction materials is 40 to 55 percent of the total construction cost. “Cement producers are among the top ten most-profitable companies in Romania. The price increase needs to be tempered especially on the segments which have a bigger weight of the final price. Increasing the cost of construction materials means selling less and at a slower pace,” says Plosceanu. The price of construction materials are sometimes going up without any solid ground, triggered just by speculations on the construction market being one of the top increasing segments, he adds.
Developers' solutions: teaming construction companies boycotting expensive land deals
Some of the developers believe the price increase won't be sustainable anymore in the following years, but still blame it on land and construction costs. “I am worried about the price increase for land and for construction. If these increases could have been transferred to the final price so far, in the future this will not be possible anymore. I believe developers will be able to sell new apartments at prices between EUR 1,500 and EUR 2,000 per sqm as maximum prices in the next seven years,” says George Margescu, general manager of Cefin Real Estate in Romania. Land and construction prices could go up so much that developers won't be tempted to go into residential anymore. Antonela Marchievici, head of the real estate department with UniCredit HVB Tiriac Bank shares the view. “The number of new housing units to be delivered is limited by the construction companies' capacity. For this reason, we are likely to soon see the first bankruptcies on the residential market,” says Marchievici.
Next year will be a very hard year for developers, says Margescu. “Two solutions at hand for developers would be to start partnerships with construction companies and boycott land deals at unrealistic prices,” believed Margescu.
He says construction prices were up 30 percent this year on 2006. The increasing pace of price for new homes will become stable next year, at 15 to 20 percent, following an increase in offer, according to data from Colliers. The average price per sqm in a new residential compound this year was of EUR 1,500, while the same price was of only EUR 1,200 in 2006. The biggest price increase this year was in the eastern part of Bucharest, with prices 33 percent higher than in 2006, followed by the new units in the center and the southeast of the city, with up to 26 and 23 percent respectively bigger. The western area of Bucharest witnessed the lowest price increases for new apartments due to the scarcity of new projects there. “Old apartments in the west are still highly valued due to the lack of new offers,” says Ilinca Paun, head of the residential division with Colliers in Romania.
Companies search for construction workforce abroad
The construction market will increase by 35 percent this year, reaching EUR 10 billion by the end of the year. This year is so far the best year for the construction market due to the boom of the real estate market and infrastructure works. The market could go further up by 20 percent in 2008, according to Razvan Niculescu-Aron, vice president of the Construction Companies' Employers Association.
The overall increase of the construction market, which basically meant more projects for a stagnating number of companies and employees has led to a 15 to 20 percent increase in the human resources costs and also to delays for some of the projects. The lack of construction workers made developers impose more drastic conditions when tendering a project to the construction companies.
“I know about companies which cannot finalize all their projects because they lack the needed workforce and the technical support to go on with works,” says the ARACO representative.
Around 150,000 people are needed to complete the construction workforce in 2008, and the gap can be covered by people coming from countries such as China, India and Pakistan, as well as from the former Yugoslavia.
“There are companies having already looked for personnel from such countries and I suppose more companies will bring personnel from abroad to cover their gaps,” says Laurentiu Plosceanu. ARACO is planning to negotiate with construction companies from Macedonia to subcontract some of the workforce there. Construction company representatives believe an answer to this problem is the increase in wages for construction workers, up to EUR 600 – EUR 700, similar to the one in Poland and Hungary. This should stop the local workforce from going abroad.
The minimum gross salary in the construction field has been set for EUR 160 for next year, and it could reach EUR 220 a month by the end of 2008. A recent study issued by the Soros foundation has found that Romanian companies prefer to hire Romanian workers having traveled abroad instead of hiring foreign ones.
The companies with difficulties in finding personnel are rather looking to increase their productivity or use newer technologies to compensate the lack of personnel. However, Romanian employers that plan to bring in foreign workforce are looking into countries which are geographically closer to Romania, such Bulgaria, Yugoslavia, Macedonia, Serbia, Ukraine, Moldova or Turkey.
According to the Soros study, around 400,000 people are working in the construction field at this moment in Romania.