Long live the demand

The Romanian office market is evolving rapidly, with the most important characteristic being the fact that supply continues to be outstripped by the huge demand. Secondary cities are also starting to appear on office developers’ maps, rents are growing and,
as a more mature market emerges, yields are being pushed down

Matei Roman

Affected by the unstable Romanian economical and political situation, the real estate market was only able to take its first real steps in 2003, with the office sector being the first to emerge. In fact, there were only a handful of major projects at that time: Opera Center, developed by Portland Trust and Polish-Israeli developer GTC’s Europe House. Another important office building, Xerox from Baneasa, was also being developed by Romanian businessman Marius Ivan. After completing this project, Mr Ivan went on to form
a partnership with Irish developer and investor Tom Quinn. The two set up the Creativ Global Property Group, which then successfully developed NorthGate. “I’m glad that we formed this partnership. I know the Romanian market, while Tom Quinnhas huge experience on the European real estate market, so we have to succeed. We intend to be active in every sector of the market, but the office sector is special for me. It represents the beginning,” says Mr Ivan. Creativ Global Property Group intends to develop at a cost of at least EUR 500 mln, the PiperaCity project on a 12-ha plot of land in north Bucharest, which will include residential, retail and office buildings. The project will add 80,000 sqm of space to the office market in the first phase of development alone.

According to Colliers International, the supply of quality office space continued to grow last year, demand was still much stronger and the year ended with a historic low vacancy rate of close to 0 pct in prime locations. The stock of office space will be close to 1.9 mln sqm at the end of 2008, as a result
of more than 400,000 sqm to be added this year.

Huge demand encouraging developers

In 2007, the total absorption of office space was 203,800 sqm, up almost 25 pct from 2006. Limited alternatives forced many tenants to choose between abandoning their requirements, or waiting for up to 24 months for the delivery of a suitable building. Large companies opted instead not to compromise on location or the quality of their workplaces, and signed pre-leases for new projects with deliveries scheduled for 2009. But few have any chance of finding quality offices already built. “The demand is so huge that we had to leave the offices we kept for ourselves in NorthGate in order to make room for the two big tenants we have here, Renault and BCR,” recollects Marius Ivan.

On the other hand, companies with a more immediate need for space had to settle for leases in either potentially less than ideal locations or premises lacking their specific needs. Overall, the first of these two situations was more common, with pre-leases accounting for 60 pct of the transactions signed in 2007.

Supply tries to follow the demand

Fifteen new projects brought 194,000 sqm of office space to the Bucharest market in 2007, of which only 30 pct were in prime locations. The business park concept, pioneered in early 2000 by IRIDE, and later by Bucharest Business Park, is now becoming more popular. Encouraged by the success of these two schemes, several other companies began to develop buildings with large floor plans and pleasant landscaping, including: Victoria Park, S-Park, West Gate Park and Băneasa Business & Technology, which were all fully leased upon delivery in 2007. The record low vacancy rate of almost 0 pct at the beginning of the year, represents a milestone, and not only for Bucharest but for regional cities too. Under these circumstances, almost any new, high quality project was pre-leased even before construction began. Rents are growing slowly, but the maturation of the market is insignificant in terms of the levels of yields. Company analysts estimate that compared with the rents, yields will go in the other direction and reduce this year as they did last year. “In 2007, transactions were made with yields of under 6 pc, so for 2008 we should see them going down as well or remain at this value,” predicts Mihaela Cnobloch, senior consultant of DTZ Echinox. So will the players become cautious? “Oh, come on. I’ve just come here from London and there yields are something like 4 pct, so who wouldn’t be interested in earning 2 pct more? No way – investors and developers will continue to flock to the Romanian market,” believes Jonathan Youens, managing director of Creativ Clobal Property.

In the first six months of 2008 alone, 200,000 sqm is to be delivered to the already established business areas of the city. Out of this new supply, 72 pct has already been pre-leased and, given the zero vacancy rate, the rest will most likely be leased before completion. However, according to analysts at Colliers International, this is still not sufficient to satisfy current demand levels. According to research carried out by the company, the office stock per capita in Bucharest is by far the lowest of both
Europe’s emerging markets as well as the more developed ones, indicating a significant local growth potential. Bogdan Georgescu, managing partner of Colliers International, describes the situation in the following terms: “Office stock grew by 50 pct in 2007 compared to 2006, and investment yields for prime office properties reached a historic low with the sale of America House for 5.55 pct to a French investment fund.” The office market, therefore, would seem to be on the right road for development. The only problems that could crop up include the delays experienced by developers in obtaining building permits and the lack of sufficiently experienced construction companies active in the country. These factors have resulted in a situation in which most office are completed between 3 and 9 months late. As there are no foreseeable remedies for these problems, delays are likely to persist throughout 2008 and 2009, but the market is still growing and analysts are in agreement that its expansion will continue for at least 3 to 5 years.

Provinces playing catch-up

Evidence of increased demand has finally started to emerge in smaller cities, such as Cluj Napoca (332,000 inhabitants), Timişoara (317,000 inhabitants), Braşov (320,000 inhabitants) and Iasi (340,000 inhabitants), which have been chosen as business locations by large companies opening local branches, service centres or development and research centres. Companies such as Nokia, which has opened a factory close to Cluj Napoca, have been forced to find office space in such locations, according to a company representative. Emerson, an American producer of electric engines, finds itself in the same situation. The company researched the Bucharest market, before finally choosing Cluj Napoca, where they have invested EUR 125 mln in the development of an industrial park with 16,000 sqm of office space. Cluj Napoca now has nearly 100,000 sqm of office space completed or in development, according to Doru Lupeanu, marketing manager for real estate consultant Grup de Lux. One of the problems faced by developers is how to find plots of land situated close to the city centre. A few of them have managed to start projects in central areas, such as 1 Decembrie 1918 street (Maestro Business Center, 10,000 sqm), or Mihai Viteazu Plaza (City Business Center, 3,000 sqm). Generally, these are areas dominated by old buildings, some of them beautiful architecturally, but not practical for use by a growing company.

On the other hand, one large investor which
saw an opportunity is investment group CA Immo. In a joint venture set up with a local company, the Austrian investment fund will develop the first modern office building in Timişoara for EUR 30 mln. “Foreign companies continue to enter the market, local firms are growing and the demand for office space is increasing. This is what is creating the interest for developing these kinds of projects in secondary cities,” believes Simona Lazăr, PR and research coordinator of real estate consultant Casadomi
in Timişoara, a city that has just 40,000-60,000 sqm of office space. A similar volume of office space exists in another important city, Iasi, which now has around 50,000 sqm, some of which is in old buildings. The same situation is repeated in all the other important Romanian cities and, as far as the tenants are concerned, there is a problem because of the facilities offered by this kind of building. A businessman from Iasi gives as the only reason why he remains in the old office buildings where he rents 300 sqm, is the proximity of the city centre: “They are expensive to refurbish, and honestly I’m bored by the dusty woodwork and the scratchy floor,” says Iulian Mitu, administrator of a service company
in Iasi. Another disadvantage of old buildings are the small surface areas and the poor overall quality, all of which combines to deter big companies from moving in. The level of rents in these buildings is EUR 7-15 monthly. Interestingly, however, some tenants in Romania are known to be trying to buy office buildings that have the potential to become symbols of the city. In this way they can enhance their own company’s image in the eyes of potential business partners and the citizens themselves. ν