Developers continue to overlook low earners

In the middle of this year, there were 38 new residential projects under construction in Bucharest, and 13 of them were launched on the market this year alone. Depending on location, facilities, prices and the way the project is promoted on the market, the new apartments are eventually sold.
Most of the projects are sold out before construction works end.
The 38 projects under construction in Bucharest have offered 6,645 housing units for sale in the first half the year, according to a recent report by Colliers. The 13 newly-launched projects of this year accounted for 2,673 new homes.
The projects to be delivered by 2011 will bring 50,000 apartments, while Bucharest needs 300,000 new homes according to data from EuroMetropola.
“The first half of the year saw sales given a boost as a large number of investors descended on the market, buying apartments off plan in practically all projects that were available,” found the Colliers report.
Only a few projects will be delivered on the market in the second half of this year, such as Central Park, Quadra Place, City Center, and the first phases of Rezidenz, Baneasa Residential, Planorama, Terra and Confort Park. “All 1,985 units in these projects have already been sold,” say the Colliers experts.
Approximately 30 percent of this new stock is owned by investors, who will sell to end-users upon completion of projects. “Investor interest in the residential market has been growing recently, and this category of buyers is the principal client in sales of off-plan apartments. On such investments, yields achieved varied between 30 and 100 percent per year,” say the Colliers representatives.
Investors buy new apartments from their off-plan phases, which increase developers' trust in starting a second project, confident that projects will also sell. While for investment funds it is easier to choose between projects and find suitable investments, for end-users things get tougher. “The high demand, the unsatisfying offer and the prices – which exceed the budget of Romanians with average incomes – create a depressing outlook for those who dream of a new home in a modern block,” says Monica Marin, manager partner with EuroMetropola.
The projects now being built are marketed as projects for the middle-income earning class or for the upper-middle class. “Middle class” seems to be, in developers' understanding, those who are able to pay an average of EUR 1,500 per sqm in a new apartment, plus a parking place and, on top of that, an unknown monthly management fee for the entire complex once the project is ready.
The average salary in August this year was EUR 320, according to the National Forecast Commission, while the highest industry average, coming from the financial institutions, was a little more than double the average salary.
A calculation made by Colliers shows that for a EUR 70,000 studio located east of Bucharest, the buyer should pay an average monthly installment of EUR 455. With the new loan rules set by the Central Bank (BNR) and applied by most of the banks in the Romanian system, the monthly installment should not exceed 75 percent of a person's revenue. So the buyer of the EUR 70,000 studio should have a monthly revenue of EUR 606, approximately.
Still in the eastern part of Bucharest, for a three-bedroom apartment the buyer could pay on average EUR 1,290 as a monthly installment, according to the Colliers calculation. A similar calculation pattern as above shows the buyer should have at least EUR 1,720 in monthly revenues, to be eligible for the loan.
The monthly installment for a EUR 275,000 three-bedroom apartment in the north of Bucharest would require the buyer to earn EUR 2,380 per month, according to a Business Review calculation. The calculation is based on a 20-year loan and a 25 percent down payment. Meanwhile, several banks have reduced the down payment to as little as five percent of the apartment's value.
Sorin Istate, managing director with Europroperty Development backs the argument that new projects do not target average earners. Moreover, according to Europroperty, “the average income per family for a two-room apartment in a new complex must be at least EUR 3,000, while for three rooms it is EUR 5,000.”
So who would be able to afford these properties? According to salary data from various sources compiled by Business Review, such projects would rather target business development managers, marketing managers, sales managers and HR managers, managers in banking institutions, and, of course, top managers from all fields.

Low income areas stay off developers' radars
It is noticeable that the investors are still not targeting lower income earners as only a few projects have been launched in areas like Berceni, Ferentari, Rahova and Progresul. “The first large project in this area launched in the first half of this year was Monaco Towers, in Berceni, which offers 304 apartments,” reported Colliers. Usually, the few new residential projects built in these areas – where the land is cheaper, which means lower prices per built sqm – are smaller ones, built by local developers. These blocks offer cheaper apartments not only due to the lower land prices, but also to smaller costs for marketing and promotion, which is reflected in the fact these projects are less known on the market than larger and more expensive schemes. These areas, along with Balta Alba and Titan, are also targeted by buyers of old apartments.
Old property is now overpriced, say Europroperty specialists, and although prices increased by 100 to 150 percent between 2005 and 2007, old apartments are still being sold at the same volume of transactions as new ones. The difference for end-users lies, in most cases, in lower final prices for old apartments, in the chance of securing a mortgage for the old apartment and in the possibility of moving into the new home quickly. Buying a new apartment requires a down payment, which can vary between 25 percent and 95 percent, and the final price of the apartment is slightly lower when the down payment is higher.
The cheapest new apartments – studios and even two-room flats – are being sold first and are among the most sought-after when a project is marketed. The trouble for those end-users who can't afford to buy even the lower-priced apartments, between EUR 65,000 and EUR 100,000, is that they can't get a mortgage to buy the new apartment in its off-plan stage, because banks do not offer loans to purchase future assets at the moment. So the cheaper apartments are snapped up by institutional investors who will resell when construction is completed and buyers are able to apply for a mortgage.

But the merry-go-round continues. By 2011, more than 340,000 residential units will be delivered on the market, and that will massively impact on the prices of old apartments, which will reduce sharply, say the Europroperty specialists. The market will be saturated and despite the large demand, there will be few buyers, they predict. “The customers with the right debt profile will be already in debt,” the Europroperty study suggests.
Moreover, the old property owners will want to move to new homes and that will further decrease the prices of old property.

New and old compete, but comparison is unfair
Specialists say the final price of new apartments is higher than the final price of a similarly-roomed old apartment as the newer ones are bigger in size than the apartments in old blocks. “The final price of new apartments may thus be 20 to 30 percent bigger than for an old apartment,” say Coldwell Banker specialists.
The price per sqm of old apartment on Calea Victoriei is EUR 2,100, and a new apartment EUR 1,950 per sqm. In the Tineretului area, the prices are close in value, some EUR 1,600 per sqm, while in Giulesti it is EUR 1,000 per sqm for both old and new apartments.
Data from real estate agencies shows that the new apartment projects launched in 2007 feature smaller apartments than in 2006, in order to compensate for the constant increase in prices on the market.
The apartment surfaces have been reduced by 20 percent, according to Colliers.
There is another problem, however, with new apartments. A new project may start with one price and end up with a higher one during the construction works.
Developers say it lies in the cost of construction materials, which goes up during the construction works.
Those who sign presale agreements with the developer in the stage when prices are lower are guaranteed the lower price, although in the meantime the prices may have risen.
Research conducted by Business Review revealed that in some cases, the price per sqm almost doubles in the year since the projects are launched.
For all residential projects, the prices are lower at the launch date. This is because the project is not yet built. Buyers need prompting to overcome their reluctance to pay for something not yet constructed. “Moreover, for apartments with smaller surfaces, the increases will always be bigger than for those with larger surfaces.” Colliers specialists told Business Review.
Initial prices usually come with a 20 percent discount and this option may be applicable to those who are in no rush to move into an apartment, as the waiting period can reach up to two years, says Monica Marin.
There is also the cost for a parking place, which may vary between EUR 4,000 and 9,000. Buyers of new apartments also need to pay a sum to reserve the apartments, which can reach as high as EUR 10,000.
The money is taken out of the final costs and guarantees the buyer gets the new apartment at the prices initially advertised.
A fair comparison between prices for new residential units up for sale on the market is hard to compile, as each developer gives out various data: price per built sqm, price per usable area, surfaces including or excluding common areas. Additional costs such as whether a parking place is included makes the comparison even more difficult.

Corina Saceanu

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