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14/05/2018

Why look at the Romani­an real estate mar­ket is worth­while

by Andreas Schlote

Romania has been a member of the EU since 2007. In just over ten years, the country has written an impressive economic success story. In 2017 alone, the Romanian economy grew by 7 percent. This means that the Balkan republic in Europe can point to the highest growth rate in addition to Ireland.

The main reasons for this positive momentum are the increase in industrial production and private consumption. The real estate sector has benefited greatly from this rapid development in recent years, especially in the areas of office, retail, industry and logistics.

Real estate market profits from economic growth

Attractive pay levels and low taxes, coupled with young, well-educated residents, have resulted in many European companies outsourcing their service units, such as HR, finance or IT, to Romania, or setting up and continuing to establish local production sites. In the meantime, more than 8,000 companies have settled in Romania with their German share capital alone. This is not surprising, as Germany is the most important trading partner of the southeastern European country.

This development has also fueled the real estate market massively. For example, market observers expect investments in this area of ​​more than EUR 1 billion for 2018. As in the past record year, around 80 percent of these investments will flow into the retail and office sectors. The most obvious development in this segment has certainly been the capital Bucharest. There, the newly developed Class A office space has increased fivefold since 2004, from around 170,000 to around 2.7 million square meters. Outside Bucharest, comparable office space stock rose from zero to around 700,000 square meters over the same period.

Despite the great demand, the square meter prices, according to the Romanian real estate portal imobiliare.ro, are far from reaching the highs of the years 2007 and 2008. For example, the average price per square meter for a new apartment in Bucharest today is around EUR 1,300 compared to EUR 2,300 in 2008. In the same period, the average price per square meter for a property in Bucharest has fallen from EUR 933 to EUR 184. The trend is rising. For example, over the past two years, prices have risen on average by around 10 percent annually.

Bucharest no longer in focus alone

Overall, the Romanian real estate market does not offer a uniform appearance. After the boom of recent years, Bucharest is slowly reaching its limits. The companies pushing for the Romanian market need space, and this is becoming scarce in Bucharest. For the capital, no really big projects have been announced for the coming years. Here investments will focus on expanding and modernizing existing properties and neighborhoods. This will benefit the retail segment in particular. More and more brands and retail chains are discovering the attractiveness of the Romanian market with its emerging and increasingly affluent middle class.

The space requirements of expanding or newly settling companies in Romania are now moving to emerging and vibrant university cities such as Cluj-Napocca, Timisoara, Craiova, Iasi and Constanta. Here, companies and investors not only find enough space for office, industrial and logistics projects, but also well-trained work and junior staff, as well as the opportunity to create attractive new living spaces for high-earning professionals, managers and, increasingly, expats. According to imobiliare.ro, more than 1,500 housing projects, especially in the new so-called hot spots, are currently under construction or have already been approved.

But subordinate areas such as Sibiu (Hermannstadt), located north of Bucharest in the geographic center of the country, flourish due to numerous industrial settlements.

Change of cityscapes

All in all, these cities are creating new central districts with modern infrastructure and mixed usage concepts, in which living, working, consumption and leisure take place in a state-of-the-art, campus-like and at the same time eco-friendly environment. An environment in which modern and solvent employees, managers and freelancers feel comfortable. These districts are characterized by flexible working areas, the connection to an efficient IT and transport infrastructure, have "green oases" and offer ample opportunities for a varied and lively leisure activities.

This development will also change the Romanian housing market. The total home ownership rate in Romania is 97 percent. An extraordinary value, which comes from the fact that tenants were able to buy their former state apartments at reasonable prices after the Romanian revolution of 1989. For the old stock, this sometimes has the disadvantage that repairs and renovations are postponed, as many owners lack the necessary money. On the other hand, rising wages of a growing middle class are increasing the demand for property ownership, especially in attractive urban areas. This is one of the reasons why the numerous new housing projects are aimed at residents with a heavier financial cushion, such as employees of many foreign companies working in Bucharest and the other regions.

Construction can hardly satisfy demand

However, there are a few factors that are currently disrupting the otherwise positive investment climate in the Romanian real estate market: the number of available plots for real estate development, especially in Bucharest, has fallen sharply, as a result of which the number of transactions is also declining. In addition, the completion of the new buildings lags behind the demand of investors.

Banks increasingly rely on their own due diligence

The Romanian banks have also recognized that the real estate market has potential and have increasingly given up their initial reluctance to finance development projects in recent years. They too want to benefit from the investment opportunities and are now more willing to invest in development projects. They focus on sustainable and high quality objects. At the same time, they have also expanded their capacity for due diligence on property valuation, with the result that developers have to wait longer for the green light for their projects.

Positive outlook despite existing risks

The fact is, the real estate market in Romania is booming, and that may possibly remain so in the coming months and years. The demand for office and retail space remains high. Further growth potential exists in the Industrial and Logistics segments.Overall, the Romanian real estate market remains attractive, not least because of the relatively high yields of currently more than seven percent compared with other countries in central and southern Europe. This puts the Balkan republic more in the focus of investors, both from Europe and overseas.As long as the political conditions and the financial markets remain stable, further investors will push for the Romanian real estate market this year and in the coming years. Risk factors include corruption, which is still widespread in some areas, and a lack of a long-term and reliable political perspective. Since December 2016, the Romanian government has changed three times. However, in summary, Romania offers investors and project developers far more opportunities than risk to engage in a dynamically growing real estate market with attractive returns.

About the author: Andreas Schlote is the managing partner of REC Partners GmbH, which has been involved in the valuation, development and implementation of real estate projects in the Romanian real estate market since 2006 with its 100% subsidiary in Bucharest.