Romania returns to transaction graphics, but for how long?

Although there was an interesting rise in the real estate investment volume in 2011, the situation now seems to be just a mocking reminder of the fragility and volatility of the real estate market during economic and financial crises.

Andreea Ceasar

Last year Romania recorded a real estate investment volume of EUR 328 million, up 23-25 percent on the previous year, according to the global property consultant Cushman & Wakefield. More than 70 percent of this value was linked to three main transactions: CA Immo’s acquisition of Europolis – which meant no less than EUR 174 million for Romania – followed by the takeover of residential property group Adama by Immofinanz (a transaction with a total value of EUR 42.4 million) and the acquisition of the retail center City Mall by Ioannies Papalekas for EUR 17.3 million.

“In 2011 we saw an increase in foreign investors’ interest in acquiring properties in Romania, determined by the economic stability, the falling off of inflation and the slight increase in the economy, among the price boosts in other CEE countries,” says Costel Florea, head of capital markets at Cushman & Wakefield Romania. In fact, the investment activity in Central Europe grew substantially in 2011, with EUR 6.1 billion invested in the core markets of Poland, the Czech Republic, Slovakia, Hungary and Romania. This is more than double the EUR 2.9 billion invested in Central Europe during 2010.

“Most CE markets in 2011 experienced a significant increase in activity due to much improved investor appetite and a reasonable supply of quality assets,” says Charles Taylor, partner at Cushman & Wakefield. But this previous increase doesn’t imply that the volume will continue to accelerate in 2012, as by the end of Q3 of 2011 investors’ confidence had started to shake due to the market turmoil that returned to the Eurozone, as bank lending slowed.

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The blockage was keenly felt locally. Despite the fact that Colliers International, another international consultant present on the local market, announced in November 2011 that in the next four months the market should record an extra EUR 300 million in transaction volume for commercial property (office, retail and industrial), the expectations changed visibly in just two months.

“From the EUR 300 million that was in due diligence late last year, a number of deals have stalled, largely due to the difficult financing conditions and banks moving very slowly, even carrying existing loans over. As such, we predict that this figure will not fully eventuate and that those deals that are closed could take a number of months longer than predicted. While, generally, there are a number of aspects specific to each deal, the availability of finance at reasonable terms holds the key for most of these deals,” says Blake Horsley, director of the investment division at Colliers International.

The firm was not the only one expecting great things on the marketÈ® The majority of consultants were aware of the discussions and were optimistic about their results. Most of the talks started at the beginning of 2011 but, as the summer came, the financing conditions had become more difficult to meet.

Foreclosure property auctions could and should start this year
Although expectations are now far lower than four or five months ago, there is a segment that might raise investors’ interest. “The banks are generally constrained to execute the guarantees of nonperforming loans which can no longer be restructured,” says Marius Grigorica, senior business consultant at DTZ Echinox. These constraints are
determined by the tight deadline given by Basel III, the global regulatory standard on bank capital adequacy and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11. As Basel III has strengthened bank capital requirements and introduced new regulatory requirements on lender liquidity and bank leverageing, some real estate assets will finally be foreclosed.

“We expect an important percentage of total assets foreclosed by the banks to be the ones which cannot generate incomes or whose incomes cannot sustain the repayment of the loans. These kinds of assets could be mainly plots of land and residential projects, but there will also be cases of nonperforming commercial spaces or office buildings without tenants,” adds Grigorica. “We could see more properties auctioned by the banks, either properties on their own books or assets owned by debtors who can no longer pay their credits,” adds Florea of Cushman & Wakefield Romania. But in general, properties with problems will be hard to sell. The City Mall project is one such example, as it was sold after many attempts and with a 50 percent cut in price. As for quality properties, the majority of them have an occupancy rate of 80-90 percent and developers can pay their installments to the banks, without being forced to do so.

Realistic expectations
For 2012 Cushman & Wakefield estimated a real estate investment volume of approximately EUR 350 million, based on the discussions started in 2011. Most of the investments will go into office buildings and retail projects, like last year. The higher interest in office buildings has been caused by some five-year rental contracts with important creditworthy companies that pay similar rents to those in other CEE countries and by building yields, which is similar to European trends.

“If there is financing, in 2012 we will mainly be talking about transacted assets that can and will bring incomes such as office buildings and retail space. Also, the expansion plans of the large retail networks and the entrance onto the local market of new ones could generate important land transactions,” predicts Grigorica of DTZ Echinox. “Office stock in good locations with low vacancy levels has been on investors’ target list for some time, due to the lower risk associated with this asset class, and the undersupply in these areas in the near future may also lead to rental growth,” adds Horsley of Colliers International, stressing that he does in fact expect a lower deal volume due to financing restrictions and the weaker investor sentiment in the context of the European debt crisis.

Bucharest will remain the main target for investors, though well leased retail outside the capital and quality development plots for big box retail will also be considered nationwide. “The main factor that can influence the revival of real estate investment is the cost of financing and obtaining the financing. If financing costs continue to be high and the process of obtaining credits is taught, we will record a low volume of transactions, with few transactions of over EUR
50 million,” concludes Costel Florea of Cushman & Wakefield Romania.

andreea.ceasar@business-review.ro