Just a few weeks ago, in early 2008, I was back in Romania for two reasons; firstly to give myself a first-hand update on the property market, and secondly to look for new opportunities. Given the sub-prime crisis in the USA and the ripples that have adversely impacted the property market in the UK and elsewhere, this was an opportune moment to take stock.
Once again, as I left the airport at Otopeni and drove (by taxi - the drivers are lethal here!) into the city of Bucharest, I was overwhelmed by commercial activity and continued building activity. One quick count revealed 22 large cranes within sight, each one on a major construction site.
And the roads – amongst the beat up old Eastern European cars are now a significant number of large new shiny 4×4’s. VW Toureg, BMW M5, Toyota LandCruiser, Mercedes ML and more. You could be forgiven for thinking you were in central London.
I’ve always been critical of Romanian hotels and the cuisine – at best it’s been barely satisfactory, at worst a trial. But on this trip I noticed more and more international hotel brands with superb service and great food in many new restaurants.
Basically everwhere I went, in Bucharest and in Brasov, you could get a palpable feel of the energy.
What About The Credit Crunch?
Frankly this has not impacted Romania in any significant way. Demand is still intense and will remain so. Most of the local banks are either Romanian or from Greece or Cyprus. All are awash with cash and did not take part in the massive mortgage securitisation market for the simple reason that there weren’t any mortgages in Romania and they didn’t need to buy parcels from other banks.
I spoke to a number of banks. They are lending aggressively for both land purchase and development – that indicates their confidence in the local market.
They are also continuing to develop the mortgage market. It’s only just started here and is so small that there is no question of a cut back. In fact I believe it will continue to grow strongly for many years – maybe ten or more.
Most importantly, Romania is seen as a property market for local people. Of course foreign investors are buying, but the bulk of sales are to Romanians. That’s critically important and a huge difference from many other countries such as Bulgaria where sea coast property sells at inflated prices to foreign investors with virtually no local buyers.
How Can Romanian’s Afford To Buy New Property?
I often get asked this very important question, given that Romania is still a pretty poor country. I will answer again now because it’s so important to understanding the Romanian property market.
There are four reasons for Romanians purchasing new property:
- Historically, the communist government knocked down much of the existing housing, particularly in the cities, and erected monstrous grey prefabricated apartment blocks called Panelaks. These were rented to people, but at the end of the communist era were given, FREE, to the people living in them. At a stroke the government created a massive property owning democracy with no mortgage debt.
- Secondly, the Romanians are completely nuts about owning property. They absolutely want to do it and will sacrifice all kinds of things to have their own place. And now they are completely fed up with living in a Panelak – they want individuality, they want everything Western, they want a new place.
- During the last few years there has been massive investment by overseas companies in the Romanian market. Banks, financial institutions, major companies like Vodafone, Siemens, Ikea, KPMG and more. They are paying staff huge wages by Romanian standards and therefore creating a new middle class with surplus cash.
- The mortgage market, in the last 18 months, has begun to open up for Romanians (and now for foreign investors!). This makes it possible for Romanians to bridge the gap in price between selling their old Panelak for (say) 50% of the price of a new property, and purchasing a modern apartment.
The result is a massive local demand for new property, which at current construction rates will take at least another five years to satisfy.
In the meantime, we are seeing price increases of 15%-35% a year depending on location, quality and competitiveness of the starting price.
At Axis, our target growth for an emerging market is at least 15% for at least three years. We expect Romania to comfortably beat that – as has been recognised by other commentators who have placed Romania as the Number One property investment destination in Europe over the next 10 years!
Are You Too Late?
It’s a funny world. Go to a third world country that is yet to modernise and the biggest question is “am I too early”. Go to a country that has just started the process, as Romania has, and the biggest question is “am I too late”.
So what do I really think? The first point is that you have to separate the real estate markets in Bucharest and that in the major second cities.
New property development in Bucharest started barely 4 years ago, and with most project taking 2-3 years to complete that means we have only seen a tiny handful of project actually finished.
The price rises on these has been astonishing. Many have doubled in price in two years. From €900 psm to €1800psm is fairly typical. In high end locations we are seeing property reaching €3,000psm to €4,000psm with local agents saying that they now think property in the most expensive areas could reach €10,000psm. To give you an idea of what that means, a 75sq m two bed apartment could cost €750,000 or £600,000. Still cheap by central London standards, but a 250% price rise even to get to this amount!
Advice for Bucharest
It’s clear that some developers have taken advantage of the massive demand, and have started pushing prices higher than can really be justified. Others have gone to market with one specification, and then during the build lowered the specification to deliver and inferior product.
So my message is ‘buyer beware’ – there are still projects to be had in Bucharest with excellent growth prospects – maybe 20%-30% a year for the next three years, but you need to choose wisely. Good locations, good value for money, competitive pricing. With these three you stand to do well.
Take care to avoid overpriced developments in poor locations.
Investment outside Bucharest
With land prices in Bucharest reaching astronomical prices, there is an increasing trend for developers to look at the major second and third tier cities, like Cluj, Brasov, Arad, Timosoara and more. Development here is not so well developed as Bucharest, with the possible exception of Cluj which is experiencing massive activity.
Most development has only started in the last year or two, which means that very little has actually been delivered to market. The demand is huge – most cities have levels of demand many times that of current planned and built developments.
As an example, In Brasov there are approx 4,000 units either under construction or planned. Not all will be built, so let’s say 3,000 finished units. The town council estimates current demand at 10,000 to 15,000 new units – or between 3-5 times current supply.
This massive imbalance will rectify itself over the next 5-10 years, but in the meantime we will see substantial price rises.
One result of the demand is that prices in the second cities are not necessarily any lower that Bucharest. The primary cost is the construction, which is very similar wherever you build. The land price may be cheaper, but that is a relatively small amount of the final price.
So we have, in Brasov for example, typical apartment prices of €1,400 psm up to €2,200psm – already at Bucharest levels.
But even at this pricing, it’s easy to see- particularly if you visit and check the reality on the ground – that an apartment at €75.000 could easily be €175,000 in a few years. Again, 20% - 30% annual price rises for the next few years are going to be commonplace.
Summary
I came away from Romania with these conclusions:
- Economic activity is powering ahead
- The country is being rapidly transformed from a communist third world state to a westernised first world democracy
- The Romanians love property and this underpins the strong national demand
- The global credit crunch is unlikely to impact Romania with developers continuing to get the development funds they need, and the growing mortgage market making it easier for buyers.
- Given the continuing shortage of new property, prices are likely to remain strong and increasing for another 3-5 years – with growth rates between 15%-35% depending on the location, price and local demand.
- For investors, Romania should be at the top of their list, combining strong growth underpinned by real fundamental demand, economic development and a population that wants to buy, buy, buy new property!
- And finally, for those who want to buy but can’t because they don’t have the money, they want to rent instead. So there is a growing rental market for the first time.
It’s a wonderful scenario. Axis will continue to search for good value propositions. If you are specifically interested in Romanian property and/or Romanian land deals, please register by clicking here, right away, as you will be the first to receive details of new investment opportunities in Romania.