Romania’s Economic Growth Boosts Real Estate Investment Sentiment

Romania’s economy continued to expand in Q1 2023 with a 2.8% growth, outpacing the EU average rate of 1%. Expectations are for the country to continue to post above-average economic gains going into 2024. Healthy GDP gains coupled with falling inflation and declining unemployment will help Romania attract more investment in the commercial and residential segments, from both existing players and new companies that are looking to enter the country, according to real estate consultants.

By Ovidiu Posirca

At the start of this year, economic growth in the EU was backed by lower energy prices, abating supply constraints, improved business confidence, and a strong labour market, said the European Commission (EC) in the economic forecast report it published in the spring. Nevertheless, the forecast showed a decrease in investment appetite in the residential sector going forward.

“Housing investment, which is particularly sensitive to interest rates, is set to contract. By contrast, business investment is projected to still increase, though at a slower pace than last year, helped by corporates’ overall healthy balance sheet position. Finally, public investment is forecast to remain buoyant in both 2023 and 2024 thanks to the continued deployment of the Recovery and Resilience Facility (RRF),” EU experts wrote in the report.

Laura Bencze-Dumea, director of investment properties at CBRE Romania, points out that inflation, the source of everyone’s concerns, has started to show the first signs of slowing down.

“We are far from being out of the woods in terms of concern, as high inflation puts pressure on purchasing power and, most importantly for investors, on lending costs. As for interest rates, there is much debate on whether they will go down substantially or stay up in the medium term. Romania overall has shown some of the most positive macro-economic signs of the recent period out of all CEE countries,” she added.

The EC forecasts that Romania’s inflation rate should go into single-digit territory this year and fall to 4.6 percent by the end of 2024. A similar trend is expected to take shape across the EU in this timeframe.

Silviu Pop, director of CEE & Romania Research at Colliers, explains that despite the challenges of inflation and economic slowdown in major economies, the medium-term outlook remains quite favourable for Romania and the region. This is due to the advantages of these markets, such as their relatively low labour costs and more flexible labour markets than those in Western Europe.

“Indeed, if we were to look at potential GDP growth rates for Romania and the rest of the major CEE economies, we’d still see rates well above what is expected for Eurozone economies, so economic convergence is intact. That said, estimates for 2024 are quite tricky to behold, as there are many uncertainties regarding the path of inflation, monetary policy in advanced economies, and how well economies are coping with the rise in borrowing rates. On the latter aspect, we are starting to see cracks in many economies and it is still difficult to say whether we are talking about a soft landing or a full-blown recession sometime soon. Since CEE economies are small—on a global scale—and open economies, a lot will depend on what happens in the US, Eurozone, and China,” the Colliers representative added.

Gauging The Role of Economic Performance in Real Estate Investment

Commercial property investment reached a new high of around EUR 1.3 billion in Romania during 2022, while the overall economy grew by 4.7%. This year, GDP is expected to grow by around 3.2 percent, with real estate investment figures also set to decline compared to 2022. Bencze-Dumea of CBRE Romania points out that the high cost of financing at a global scale has been leaving a mark on the investment sentiment in Romania. This means that investment volumes in 2023 are expected to decrease compared to the record high 2022 levels, falling within levels comparable with the 2016-2018 period.

“In certain Western European countries there has been a rapid readjustment of yields considering the high cost of financing, with variations as high 150 bps versus spring 2022 in some markets. In Romania, the spread between bond levels and prime yields was already at a higher level before, thus less need for adjustment. It does not mean that yields have not moved upwards, but that the rate of growth is lower compared to that in core markets,” she adds.

On the other hand, Pop of Colliers explains that the impact of Romania’s economic (over)performance is not something that can be seen immediately, meaning that if the country’s GDP does well in a given year, then commercial real estate investments will see positive results as well.

”Deal-making depends on many factors, from momentum to overall sentiment to interest rates; currently, we have a decently robust pipeline of potential deals, mostly skewed towards offices, though there is, of course, potential to see more deals for industrial (if owners are willing to sell) or retail (if the right product were to appear),” Pop notes.

Talking about yields, the Colliers representative suggests that there is upwards pressure in Romania amid sharp increases in the cost of risk and prime yields across Western Europe.

“We are currently waiting to see where a few deals may close to get a clearer picture about where the benchmark might sit, but it is becoming increasingly clear that sub-7% prime office yields are a thing of the past for now. The good news in Romania’s case is that local prices did not overextend (particularly in the past two years) as has happened in other parts of Europe and hence, local office yields are some of the few remaining that are still above 2007-2008 lows, offering a somewhat defensive twist to local assets,” he explains.

Last year, the investment market was boosted by Paval Holdings’s takeover of CA Immo’s portfolio in Bucharest in a deal worth EUR 377 million. Following this deal, the Romanian player became one of the biggest owners of office space in the country.

Turning to 2023, the total volume of investment closed in Q1 reached EUR 149.6 million, up 73 percent compared to the same period of last year, according to data by Crosspoint Real Estate. The industrial segment displaced office products in terms of its share of total transactions, at 43.4% (EUR 65 million) versus 30.6% (EUR 45.8 million), followed by hotels (EUR 18.3 million), public sector acquisitions (EUR 12 million), and retail (EUR 8.5 million).

Cristi Moga, head of capital markets at Cushman & Wakefield Echinox, says that Q1 results signal that the market is slightly decelerating, with prices getting readjusted.

“Local buyers are expected to remain the most active, as they have a better understanding of the market. Nevertheless, regional players are still exploring the market, attracted by the higher yields compared to CEE core markets,” Moga points out.

Across Europe, commercial investments were down 60 percent year-on-year to EUR 29 billion in Q1 2023, according to a report by BNP Paribas Real Estate. This is partly due to the extensive pricing uncertainty in real estate, triggered in mid-2022 by high inflation and tighter monetary policy that resulted in rapid bond yield expansion, the report’s authors suggest. The higher bond yields are reducing the yield gap with real estate and prompting a re-evaluation of the prices being paid for assets.

Risks For Europe’s Economic Growth

High inflation continues to pose a risk for the EU’s economy, and this will force a stronger response in terms of monetary policy, according to EC experts. This is already happening as the European Central Bank (ECB) moved in mid-June to raise interest rates by a quarter of a percentage point, while signalling that more increases are on the way. Following this decision, the interest rate on the main refinancing operations and those on the marginal lending and deposit facilities were increased to 4.00 percent, 4.25 percent, and 3.50 percent, respectively.

Carsten Brzeski, global head of macro at ING Bank, wrote in a note to clients that “with the Federal Reserve’s hawkish pause and a eurozone economy not only turning out to be less resilient than anticipated but also facing a very subdued growth outlook, the ECB is increasingly taking the risk of worsening the economic outlook.”

He added that further hikes were likely at least until September, as the ECB would try to lower the inflation rate.

European economies, including the real estate industry, are also dealing with a surge in risk aversion in financial markets, following the banking sector turmoil originated in the US. This could prompt a more pronounced tightening of lending standards, according to EC experts.

The EC estimates that global growth, excluding the EU, is expected to decline from 3.2 percent in 2022 to 3.1 percent in 2023, before rising back to 3.2 percent in 2024.

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