Developers wait to see how the Romanian land lies

Developers and investors played the “wait and see” game during the first months of this year, which was reflected in the smaller volume of real estate transactions. The lack of equity to fund new projects prompted this attitude; and in the case of Bucharest land deals, the soaring asking prices left developers with no choice other than to stop buying land.
For those who already have a land bank in Romania it is easier to wait for a decrease in prices, but this is not the case for those wanting to enter the market.
“We are happy with our present portfolio and we will not spend our investors' money on overpriced land,” Charles Bergen, partner with Dragoman Development, told Business Review. Instead, developers like Bergen are heading to other cities, where they can find land at appropriate prices and where the market is not blocked.
“Because of high pricing, we rarely even evaluate Bucharest land offers these days and made only one offer in Bucharest in the first half of 2008 versus six offers in the first half of 2007,” says Bergen.
There is currently a land crisis in Bucharest, which started in February this year and became more obvious in April, says Dan Ionascu, head of the real estate valuation department with Cushman & Wakefield Activ Consulting. “The phenomenon is resulting in a fall in the number of transactions, mainly on the residential market. This is directly connected to financing from banks, but it was obvious on other markets as well, like land, retail and office,” says Ionascu.
Developers have tended to be more cautious and analytical when deciding to purchase land, which has led to a smaller number of transactions, says Attila Peli, head of the land division with Colliers in Romania.
“Smaller land plots of between 1,000 and 5,000 sqm in good locations are still sought after. However, developers are less attracted by large plots, as they have doubts as to whether the market can absorb large projects,” says Peli.
“Bucharest land is too expensive for speculators and from the developers' perspective, why buy Bucharest land if the banks won't give you money to build on it?” says Bergen. The land crisis in Bucharest is more acute when it comes to plots in northern Bucharest – between Unirii Square and the Pipera residential area. “The price of land has increased so much that developer margins have shrunk. There is no stimulus for developers to buy land at these prices,” says Ionascu.
Sellers of land in northern Bucharest continue to keep prices up. Hence, it is expected that the market will suffer a correction. “The prices of some of these land plots will have to drop to reflect the demand on the market,” says Ionascu. The buyers will be those who in February started to wait and, although they had funds allotted to buying land, were unwilling to take high chances given the market dynamics.
Prices are up, but they didn't increase in the first half of the year, except for land downtown. A sqm of land for residential developments varies from EUR 1,500 to 3,000 per sqm in the north and from EUR 2,000 to 3,000 downtown. Lower prices can be found in the south, from EUR 400 to 600 per sqm. Land in the west of Bucharest is priced between EUR 700 and 1,000 per sqm, according to data from Colliers.
Developers who have bought land in recent years are more fortunate, as they can use more valuable pieces of land as guarantees to receive bank loans and start development, he explains. “A piece of land bought in 2004, when the real estate boom started in Romania, was worth EUR 200 per sqm, while in 2007 it was EUR 900 per sqm for land in northern Bucharest,” says Ionascu.
Developers have few alternatives in facing the crisis. One of them would be to invest in other cities, like Iasi, Cluj-Napoca and Timisoara.
“In certain cities like Arad, Ploiesti, Cluj-Napoca and Brasov, where the number of announced commercial centers exceeds the market absorption capacity, the land market for retail is already saturated. Developers are rather looking at land for residential projects in cities where there is demand for this segment,” says Attila Peli.
Land in downtown Iasi is priced between EUR 500 and 2,000 per sqm, while in central areas of Cluj-Napoca prices range from EUR 400 to 2,500 per sqm, according to Cushman & Wakefield Activ Consulting.
“Presently, we are concentrating on selectively increasing our land portfolio in secondary cities with strong and sustainable industry and developing infrastructure,” says Bergen of Dragoman Development. Importantly, sellers in secondary cities offer better terms, Bergen adds. “We easily receive more than 50 land offers per month from agents and intermediaries, of which about 80 percent are from Bucharest. There is an enormous amount of land for sale in the capital, but Bucharest land plots frequently have defective titles, and prices from agents are based on commercially unrealistic zoning densities,” complains Bergen.
He says asking prices in Bucharest frequently exceed 40 percent of the gross development value of the land, which is double what a developer would pay.
A second alternative for developers is to enter joint ventures with land owners, who can be either investors or private individuals and who are also looking for partners to share risks, says Peli.
He is optimistic, however: “Considering that the demand for final products is higher than the supply, especially on the residential and office markets, we estimate an increase in trade in the next six months compared with the first part of the year.” Ionascu also believes the volume of transactions will increase, but also expects corrections in the price of land. Peli expects an increase of 10 to 20 percent in the price of land in the second half of the year for very good locations.

By Corina Saceanu