Bucharest blues?

Romania has been the most recent CEE country to see rapid development and lucrative returns, but now the credit crisis has worked its magic and the future is uncertain. At the end of 2008, ‘Eurobuild CEE’ sat down in Bucharest with LEADING FIGURES IN THE ROMANIAN MARKET to find out more about how the country IS BEING affected. The meeting took place just after the GRI CONFERENCE in the same city, where senior European property figures gathered to discuss the crisis and its effects on the CEE region. THERE the bankers present dampened any hopes for a return to lending in 2009, certainly in the first half of the year

Richard Stephens, ‘Eurobuild CEE’: Mark, in 2007 Fabian made a couple of property purchases. Do you regret them in the light of recent developments?

Mark Owen, Fabian: Not at all. No-one foresaw the market changing so massively. Our drive was to buy properties in 2007, particularly in the residential market and not just in Bucharest. But since the market drastically changed, especially the residential market, we’ve decided not to develop our sites for the time being. We’ve still continued to actively pursue commercial acquisitions in Bucharest.

Richard Stephens: Can you see anything happening in the next six months?

Mark Owen: No, I think we’ll hold off for the moment. It currently looks like it’s going to get far worse, so it’s better to wait and see where the market levels out and starts to recover.

Richard Stephens: Tim, you were at GRI. What did you pick up from there?

Tim Wilkinson, DTZ: The most surprising comments related to the extent to which some of the banks plan to hold back on property finance in 2009. It seems they are intent on keeping volumes low, effectively waiting and seeing and not starting to finance, particularly on the development side. It was suggested that the first type of financing to come back will be income-producing property. This gives me concern because there is demand and intent for development and demand for space. Unfortunately there’s no glue – banks – to put the two together. There’s a standoff between the sellers’ perception of pricing and the buyers’ willingness to pay a certain price.

Mark Owen: Until the banks get active again we can’t do anything as we’re not going to buy only with equity. There are quite a lot of bargain hunters out there, but are they going to buy with cash? I suspect not.

Richard Stephens: What was said was that the international situation hasn’t hit home in Romania, that sellers are still asking for too high prices.

Charles Krick, JLL: There’s truth in that, but a lot of investors looking here are also investigating other markets and currently some distressed opportunities may exist there which may offer better pricing than in Romania. However, investors need to ask themselves in some of the other European markets, particularly the more mature ones: “Do they have the same long-term growth story as Romania?” In Western European countries this is probably not the case, but you also have a lower level of risk in more mature markets, so it depends on what perspective the investor is willing to take. At the moment I think investors are not focusing on long-term growth. They are concentrating more on risk aversion. As a result, investors are viewing relative pricing, comparing Western Europe to Romania and saying: “We need more of a yield spread to make it interesting”.

Richard Stephens: At GRI there was a feeling that Romania has grown too fast. Does there need to be a period of inactivity?


Viorel Lacatus, Atisreal: What’s happening now is good for Romania. Prices had increased a lot. There was a lot of speculation, especially on land. The margins for the developers were huge compared with other European countries. I think it’s time for the markets to settle down and have real prices according to what Bucharest actually offers as a capital.
Tim Wilkinson: I agree. In the medium and long-term it’s a good thing. It had to slow down and adjust. It’s part of the maturing process. It’ll come out of this adjustment stronger.

Richard Stephens: So what sort of time perspective are we looking at?

Tim Wilkinson: It comes back to when the transactions can be facilitated, but I think the tenant market will drop further in 2009 and we’ll see the lag from the banking crisis affecting the corporate sector. Companies are having cash-flow problems. I expect corporate demand to slow in 2009 as companies look more carefully at their occupancy costs and whether relocation is feasible. The second half of 2009 could see an improvement, but I think we will have to wait until 2010 to see more encouraging signs. 2009 will be characterized by a further re-pricing of the market and a learning curve.

Mark Owen: The market got too hot. Seeing yields down at 6 pct and below, coinciding with a lack of core product around the rest of Europe as well, investors had to spread their wings and look further afield. They saw good quality product in Bucharest so they swooped down; it became too competitive, driving the yields down to unrealistic levels. I don’t think we’ll see those sorts of yields again for some time, and this is a good thing.

Viorel Lacatus: It is the time for experienced developers who are here for the long-term.

Charles Krick: The banks will act as an extra check on development now so quality will improve. Some projects delivered in the last couple of years shouldn’t have been developed. More positively, if we go back to the medium to long-term fundamentals, then the Bucharest office market still looks attractive. It has less than half of the total office stock of Warsaw, so there remains plenty of growth potential.

Mark Owen: I also think the office market here is still strong, although we may see a slowdown in rental growth.

Richard Stephens: How about the office sector in other cities?

Tim Wilkinson: They are small local markets which tend to be fuelled by the financial institutions effectively linked to local business and demand. The main tenants tend to be banks. There’s a growing level of investment, particularly associated with manufacturing, which is fuelling office demand in these cities. If you look at Bucharest, with over 200,000 sqm of take-up per year, these cities tend to have about 1/10 in terms of take up, depending on individual cities. But there is good potential because the labour force is very strong in such cities.

Mark Owen: I think there are certain cities where there is demand for office development going forward. The only drawback, as an investor, is your exit. Are these cities mature enough for other buyers to come in? In certain cities, such as Braşov, Sibiu, Cluj and Timişoara, we would consider carrying out small-scale office development, but would be very choosy about the location.

Richard Stephens: What are the fundamental difficulties here in the residential market?

Viorel Lacatus: I will start with the good news. Potential buyers will start looking in their pockets and saying: “Can I afford this?” People who were buying with credit have now started to evaluate their financial strength – they will stop buying off-plan projects. And they will wait to see the finished product. Experienced developers will dominate the market.

Richard Stephens: And the bad news?

Viorel Lacatus: Customers will face difficulties in getting loans in 2009. Developers will not get the same margins. They will find it hard to sell their products.

Mark Owen: I think it’s a dynamic market in some ways. We’ve seen a lot of pent up demand here in Bucharest, something between 8,000-10,000 apartments under construction and a population of somewhere over 2 mln. There’s still a low level of supply. But the