The battle for Bucharest

An investor’s Eldorado or an exaggerated market? Too many projects in one city? To pay or not to pay city officials for ‘assistance’ – David Sharkey, chief executive officer at Caelum Development dispels all doubts over the Romanian retail market

Mladen Petrov, ‘Eurobuild CEE’:  To kick off – why is Romania an attractive investors’ market?

David Sharkey, Caelum Development: The structure of Romania’s modern retail is still underdeveloped, which means that a project that is the first to make a real impression on customers is a winner and achieves a major part of the market and, as a direct consequence, registers the greatest return from the investment in the shortest time. Bucharest is very like Warsaw when Galeria Mokotów was being built and which remained the leader of the modern shopping malls for many years in the city. In Romania, too, much greater rents can be demanded than in other countries – and new tenants can be secured at relatively low costs.

Opinions are frequently expressed on the property market that the money spent by Romanians – especially in shopping centres – does not always shape up as expected. Salaries may be rising rapidly, but a shopping centre is, for Romanians, an alternative for dirty streets and not necessarily a place to do your shopping.

I beg to differ! The demand is clearly huge, and this can only be satisfied by the entry of a good number of retail investors with the largest international tenants – who have recently discovered what is one of the most rapidly developing markets in Europe. Romania is moving in the same direction as other CEE countries, but doing so at a much greater speed.

The residential market is also growing. This will probably turn out to be an 
over-inflated balloon. The prices in Bucharest are already slumping and we, on this magazine, have often written of empty estates in the capital. Despite this, news is still coming of new projects. I would like to find out why the Businessstandard.ro website has revealed that your company is not going ahead with the residential towers planned as part of the 
ParkLake Plaza mixed-use development?

We have divided this project into two stages. The retail section, with more than 110,000 sqm GLA, is being constructed first. The project, the logistic conditions and also the fact that we are, first and foremost, a developer of shopping centres, means that the commercial part is treated by us as of absolute priority. The residential section is still at the design stage and will be built in second phase of the investment. There will be one tower since the place where the second was to be built is where we will have a large area for recreation.

When will Bucharest be spoken of as a city swamped by projects and investors? To judge by the press, that moment is not far off.
Many projects are still at the design stage but only a very few are being or ever will be built. But one thing is very clear – there is not going to be enough space for everyone. I would like to quote a few figures at this point: the latest data reveals that there is 15 sqm of shopping space per 1,000 citizens, whereas the same figure is eleven times greater in Western Europe. I feel certain that Romania will catch up with Western Europe within 5 to 10 years.

How would you describe the health of Romania’s economy at present and what can the market expect in the near future?

Romania intends to enter the Euro zone in 2014. The government will have to cope with many strict regulations and requirements, including capping inflation and the budget deficit to 3 pct of GNP. What is all-important to us as investors is that Romania will have to maintain a stable exchange rate, to avoid oscillations being so drastic. With the currency displaying such irregular movements it is difficult to estimate a return rate generated by an investment, and the costs involved.

. . . and these are not all the problems you are facing?

As with many emerging economies, Romania has a corruption problem. However, throughout our entire investment process we have never encountered this phenomenon. You must remember that the term corruption covers small-scale examples, such as taking advantage of one’s position to favour particular projects, as well as the simple human desire to do or return a favour. Corruption in Romania, as was the case many years ago in Poland or other CEE countries, stems from the culture and a misconceived desire to assist a friendlier investor. Romania clearly suffers from a bureaucratic disease which slows down every economic initiative.

To sum things up, what worries you most as an investor?

My two greatest worries are  the very strong currency and also the extremely high land and construction costs. The relatively small number of available skilled and specialist workers is another difficulty. I also often wonder about the competitive nature of the market. A great number of investors have published plans to build another shopping centre, though many have no experience nor the finance needed to complete such a project. The majority of such projects will surely never see the light of day. But such market movements lead construction companies to hike up prices, causing material prices and the costs of an investment to surge in an unpredictable manner. The aforementioned limited number of construction workers is yet another problem. Romania has a population of 22 mln, 10 mln of whom constitute the national labour force. 3.5 mln of this group of 10 mln are employed abroad, with the result that there is a clear shortage of construction workers. Indeed, Romania needs half a million construction workers, as some general contractors are already having troubles meeting contract deadlines. ν

This interview took place before the ParkLake Plaza project was halted by Bucharest city council due to the need to draw up a new zoning plan for the site.