High-Interest Rates Pushing Down Residential Demand

Although the residential market saw a record number of deliveries during 2022, demand is being sapped by the high-interest rates for mortgage loans. On top of that, developers in Bucharest are waiting for more clarity from authorities on the permitting process for new projects. In terms of pricing, developers suggest that the prices of new homes will continue to grow due to high costs, particularly for land and construction. Despite all this, Romania still has one of the highest affordability rates for residential units across Europe, according to statistics.

By Ovidiu Posirca

Last year, Bucharest and its metropolitan area registered new residential deliveries totaling 21,328 units, down 3 percent compared with 2021, according to Colliers. But at the national level, the market saw a record number of 73,332 newly delivered homes, up 3 percent from 2021.

Aside from Bucharest, drops in deliveries were recorded in western and northeastern Romania. On the other hand, there was a growing number of completed homes in Constanta and the coastal area as well as in the metropolitan area of Cluj, the city with the highest average prices for apartments in the country.

Home Sales To Accelerate as Mortgage Rates Fall

“Apartment sales registered an almost 30 percent decline in the first five months of 2023 compared to the same period last year and they are expected to remain subdued compared to the previous two years. (…) When compared to the pre-pandemic period, 2023 sales are still quite a hefty measure above that level, which is proof of a resilient and more mature residential market. Demand is not likely to pick up until interest rates come down in 2024, as inflation cools. Therefore, the outlook for the second half of the year should bring little change from current conditions,” says Gabriel Blanita, associate director of valuation & advisory services at Colliers Romania.

Romania’s inflation is projected to drop below 10 percent in Q3 2023, but it still too early to say when the central bank will start to lower the key interest rate, which currently stands at 7 percent.

Alexandru David, head of research at JLL Romania, says: “Demand for residential will continue to be weaker, as many potential buyers will find it difficult to qualify for a mortgage loan considering the high interest rates. Others might simply wait until the market stabilises to increase their chances of obtaining attractive offers.”

Market players expect the interest rate for new mortgage loans to accelerate in its downward trend by 2024, which should in turn contribute to a recovery of sales in the residential sector. Despite the challenges, developers are sticking to their plans to deliver new residential units, especially in the upper segments of buyers, who tend to rely to a lesser extent on bank financing.

For instance, Romanian developer One United Properties has 5,692 residential units under construction, with a gross development value of EUR 1.48 billion, in sustainable projects like One High District, One Lake Club, One Peninsula, and One Cotroceni Park.

Beatrice Dumitrascu, CEO of the Residential Division at One United Properties, says the company has another 3,056 residential units in the planning phase, with a gross development value of EUR 858.5 million.

“Demand for homes is increasing and construction standards have become more robust. At the same time, home sales are always depending on the client’s decision to buy. Good sustainable developments located in desirable and well-connected areas will always be sold. In general, customers understand that prices will not decrease and that the supply of new apartments is lower than the demand, so in this context they usually have to decide to buy,” Dumitrascu explains.

She adds that Bucharest’s metropolitan area generates 28 percent of the country’s GDP, which is driving demand for high-quality office and residential projects.

“These are all premises for a rising demand for sustainable housing. Furthermore, the average price for residential properties in Bucharest is significantly lower than that in more developed cities across the CEE region, such as Prague and Warsaw, which in turn gives way for significant opportunities on the local market,” adds the One United Properties representative.

Average asking prices for homes in Bucharest remained largely unchanged in May 2023 compared to the same period of last year, at nearly EUR 1,500 per sqm, according to an index by real estate classifieds platform Imobiliare.ro. Across the major cities, the average price stood at EUR 1,427 per sqm in the 12 months to May 2023.

“Generalised price drops are not likely at this time, with only a few of the most under pressure developers offering discounts. Some others are increasing their prices, as they benefit from a stronger demand for their products. The market’s evolution will most likely remain mixed for the second part of the year,” Blanita notes.

Cosmin Savu-Cristescu, founder, Redport Capital says that this year can be seen as another challenge among developers and projects.

“The best ones should have a good start and the ones that do not prove to be viable from the perspective of sales or the bank financing will stay away from the big table. As long as the construction price does not allow the sale price to fall, and as the building materials market and the labor market will continue to grow at their own pace, probably the housing prices will continue to rise, at least on the residential segment,” says Savu-Cristescu.

The Redport Capital founder suggests that in the low-price residential segment there will be lower transaction volumes, which will see developers offer more discounts in a bid to secure deals.

In the region, Warsaw had average apartment prices of EUR 3,000 per sqm in Q1 2023, while in Prague the average stood at EUR 3,950 per sqm, according to data from Catella Group. Across Europe, the average price reached EUR 5,235 per sqm.

“The fundamental conditions on the European residential property markets remain intact. However, the more difficult financing conditions are leading to a sharp decline in new building permits and thus the supply of apartments will fall noticeably in coming months. At the same time, demand remains at a high level, driving up rents and occupancy rates,” said Dr Lars Vandrei, senior research manager at Catella Residential Investment Management, in a press release issued in May.

Across Romania, Speedwell is primarily focused on developing existing projects in the residential segment in the second half of 2023.

“This year, we have started works on the third building of the THE IVY, our premium residential project in the Baneasa district, and we are pleased to see that close to half of the total of 128 apartments available in the third building have already been sold. In the east of the Capital, in a well-connected area, we are preparing to deliver Phase 2 of TRIAMA Residence and kick off the works on the third phase which will add a total of 67 apartments, underground parking spaces, and a children’s playground. In Sector 1, we are preparing to launch sales for The MEADOWS, a unique concept offering modern, low-height townhouses, on the shore of Grivita Lake,” says Jan Demeyere, co-founder and partner at Speedwell.

The developer also purchased a 14-hectare plot of land with direct access and visibility to Lake Ostratu in Corbeanca, near Bucharest, for its new GLENWOOD Estate residential project. Speedwell is also developing homes as part of mixed-use schemes in Bucharest and regional cities.

Elsewhere, Hagag Development Europe is working on the development of about 1,000 residential units spanning across 3 projects: H Eliade 9, H Primaverii 1, and H Pipera Lake, of which 53 address the upper-premium segment and 950 target the medium market.

Focus On Metropolitan Areas

One of the trends on the residential development market is the increasing investment activity in cities’ metropolitan areas.

Whereas currently, for every home delivered in the city, two houses are delivered in the metropolitan area, in the next two years, for every house in the city, there will be three houses delivered in the metropolitan area, according to Blanita of Colliers Romania.

“The substantial pipeline of authorised projects makes a supply shock very unlikely in the coming period. Still, better predictability and transparency regarding the status of urban plans would contribute significantly to easing the real estate market and mitigating the wide variations we have become accustomed to in recent years,” he explains.

Blanita adds that the fundamentals of the residential market remain strong, with wages expected to increase faster than prices for the first time in three years, which will lead to better affordability of residential properties on the market—but the largest impact is expected to come from the easing of financial markets.

Residential developers are also still grappling with the high costs of construction materials. Colliers data shows that in the beginning of 2023, material prices were down by an average of 10-15% from the peaks reached in the middle of 2022. However, they remain about 8% higher compared to the beginning of 2022, and well above the levels of previous years.

“Together with the decline in demand for residential properties, the prices of materials have contributed to a slowdown in construction, with developers increasingly reluctant to start new projects,” Blanita points out.

Differences In Apartment Accessibility Indicators

For a 55 sqm apartment in Cluj, you need a decade to fully pay off the home, without considering living expenses or bank financing. By contrast, in counties such as Giurgiu and Teleorman, you need less than seven years, according to research by the National Bank of Romania (BNR). If we were to factor in a mortgage loan, accessibility would fall significantly due to the sharp increase in interest rates. Interest rates for housing loans are pegged to the ROBOR or IRCC indexes, both of which have risen in the past year, leading to increases in the monthly instalments paid by home buyers. In Q1 2023, the average level of the IRCC was 5.94%, while the 6-month ROBOR stood at 6.63% at the end of June 2023. Yitzhak Hagag, co-founder & controlling shareholder of Hagag Development Europe, says that in this environment banks have become more flexible when it comes to financing.

“They are now promoting new products with fixed interest rates for mortgage loans,” he notes.

Hagag also suggests that the residential market should get back on track once urban zoning plans (PUZ) are unlocked and real estate companies can resume their investment projects. On this backdrop, the central bank says that real estate price increases will be toned down this year by the high financing costs and the geopolitical tensions in the region.

The market could also see an increase of the build-to-rent segment, which is already attracting investment in other CEE-based markets such as Poland. However, developers say that it might take up to five years until Romania has a stock of residential units for rent that could attract strategic investment.

“The local residential market looks set to receive a couple thousand units in build-to-rent projects in the coming years, as developers and investors gain an increasingly favourable view of these products. Demand for rental properties in Bucharest has continued to increase in 2023, pushing rent levels almost 10% higher since the beginning of the year. However, the gap between rent and monthly mortgages remains well within rent’s favour in most parts of Bucharest and the largest cities in the country,” says Blanita of Colliers Romania.

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