Real estate gets ready for new benchmarks

“It is a totally different world this time,” says George Leslie, a real estate professional who has spent the last four years investing in the CEE region, recalling other real estate crises he has witnessed in his career. Leslie, who has been working as head of acquisitions in CEE with a real estate investment fund manager, is now on a retainer contract for the same company while preparing a transition to a new position in either corporate recovery or working with another institutional fund manager at regional level. He is also looking forward to a move back to one of the CEE region centers from Munich.
The market is not functioning at the moment, but a lot of operators, developers and investors, are not feeling direct pressure, says Leslie. “It is not clear yet how they will be affected – it may depend on their capital structures or degree of leverage, open positions with respect to refinancing or ability to comply with the terms of existing debt facilities. But it is clear a lot less debt will be available and there will be a de-leveraging process,” he predicts.
Highly leveraged assets or projects will often not be refinanced at all or refinancing will have unfavourable terms. In these situations, if principals do not have equity capital to pay down debt then they will have to sell equity or an entire asset or project. “This will lead to an increase in the volume of distressed sales, which is the next step for the Romanian market. […] During 2009 we'll start to see more of these situations in Romania, but it is hard to tell when we'll see enough distressed volume to establish new benchmarks,” he says. Until new benchmarks are established by a sufficient volume of distressed sales, realistic valuation won't be possible in Romania. Now it is merely a guessing game, he says.
His view is shared by other investment funds. “There have been no investment transactions for valuers to provide evidence upon which to base the valuation yields for open market valuations of properties. Therefore there can be no certainty that the yields used in determining the above NAV accurately reflect the current open market,” say representatives of investment fund Fabian Romania.
Distressed sales may happen either through legal actions, when the bank or equity investors haven't been serviced, or as bilateral deals. “Usually this is a silent process. Nobody wants to let people know how much they've lost through a sale, as the information may affect their other assets or projects,” Leslie believes. In other countries in the region voluntary deals are already taking place.
Romania is at the beginning of such a period. Spanish developer Martinsa Fadesa, which went bankrupt this summer, said it would sell most of the land it owns in Romania, while looking for a partner for the planned residential project Bonaire. The firm owns 80 hectares of land, and has so far invested EUR 80 million in the country. Representatives said it would continue activity in Romania, where it has no debt, and the money received from selling from its land bank would go on financing some projects the firm will still pursue.
“The current financial crisis is generating many opportunities for us, since we are pretty liquid at the moment, and there is an increased number of investors and business people willing to sell their real estate portfolio and/or businesses, partially or totally. That means a lot of work evaluating the proposals and offers we receive and trying to decide what is the best investment opportunity for us” Dimitrios Sabalis, executive director with Global Eye Investments, told BR.
The situation is uncertain for CEE, as it is for the continent, as the crisis has no precedent in Europe. “There will be a lot of unknowns when investors are buying distressed loans and assets,” says Leslie. Emerging European economies are facing the worst crisis since the fall of communism, according to the European Bank for Reconstruction and development (EBRD). “Clearly, this is the most profound crisis we have faced since the EBRD was created,” says EBRD president Thomas Mirrow.

Institutional developers to benefit from deleverage situation
Romania still lacks the presence of several important institutional developers, which haven't been able to enter the market because of excessively high land prices, but this period of deleverage will present interesting opportunities for those developers or investors who have available cash, believes Leslie. “Recently, developers have been paying a lot for the land, and typically cost engineered projects to a very low quality in order to maximize profits. A prolonged period of excess demand for space and high rents have facilitated a situation where users of space have had to accept poor quality even though rents have been high,” says the specialist.
Institutional developers will bring welcome change to Romania, to users of space and to people wanting more functional and aesthetically attractive urban environments, as the market here has suffered too long from poor quality development. This will be a prolonged cycle and institutional developers and investors who remain interested in Romania will nevertheless be cautious.
The fact that there has been no proper town planning has made it even worse, as this can stabilize the market. “If there is no effective town planning and zoning which restricts development in terms of density and use, everyone naturally attempts to sell property as if the Empire State Building could be developed on their plot. There have been some absurd cases of this in Romania in recent years. I believe several banks operating in Romania who have funded land acquisitions at excessively high prices will have serious levels of risk exposure,” says Leslie.
“Standard & Poor re-rated Romania as ‘non-investment' grade this past week. Likewise, banks and institutional investors are re-rating the Romanian market. I do not believe Romania will benefit from the same FDI it has recorded in recent years,” says Leslie.
The market was so hot in Romania that there was no distinction between properties. Bucharest saw several transactions involving B or C grade properties that institutional investors shouldn't have even gone near, as they were below their standards.
This is not the first time in Leslie's career when he has seen a downturn on financial and real estate markets, but this time the crisis is a lot bigger. He worked in Asia in 2001-2002, when that region was facing a similar plight, and came back to Romania in 2003, when it was the beginning of the boom period. “Romania's boom was shorter and faster than many other countries in the region. Many institutional developers were squeezed out, and Bucharest didn't get good products,” he says.
Among the CEE region investment markets, Bucharest, on the whole, has the poorest quality assets. “I see this downturn as a four-year cycle or more, and we should see a highly restricted debt market for at least four years. Equity investors with available capital for deployment will be in a strong position,” says Leslie. This period, although it will be a long journey, will be the time for institutional developers to come in. “Some have a lot of cash, but they will be cautious,” he warns. “Some of these distressed deals will compensate for some of the bad deals these funds may have made in recent years in the region.”

By Corina Saceanu