Megabucks in Bucharest

After two years in the EU, the Romanian property market is in overdrive. Following the pattern of the CEE countries that went before them, the office, retail and residential sectors are seeing the biggest expansion. But can the industry still keep going at full-pelt in the wake of the financial crisis?

The growth of the Romanian real estate market began two years ago when most of the players realized the closing date for membership of the EU meant that everything or almost everything had to change. With new demands, the new competition and new investors were looking at their game and realised things had to be altered. So, the evolution of the Romanian market accelerated and everyone was able to see a new industry emerging. Along with it, new residential, office, retail and warehouse projects were launched. After the pioneers, most of them Romanian, Israeli, Spanish (their market had begun to dry-up) Irish, Turkish and British developers and investors appeared on the market.

In 2006 and for the first half of 2007, the main targets were residential projects, which had evolved from a few units schemes to thousands of apartments and houses. These were included in the same project as Cosmopolis a scheme which is being built near Bucharest and includes almost 5,000 units at a cost of EUR 700 mln or Bonaire, with 7,000 apartments and an investment of EUR 1.2 bln. However, the second half of 2007 and 2008 is the time for shopping centres. Almost one hundred of them are being built in all the important cities throughout the country and the battle for land to develop new schemes continues everywhere.

At least for the moment, the strong economic development has made developers determined not to overlook office buildings, especially in Bucharest, but the sector has also started to be taken seriously in other important cities.

Last year, the Romanian construction market had the biggest growth in Europe, according to Eurostat, close to 38 pct and its value closed at EUR 10 bln. Experts estimate this year will see further growth in the market of at least 20 pct.

The hotties – office and retail sector

The essential word for shopping centre developers is speed. This year could be a boom for retail schemes. “We have to react quickly. If an investor wants to develop a project in a certain city it has to respect the deadlines and deliver in time”, says Tomer Barhom, director of Euromall group controlled by Israeli and French investors. Last year, the company delivered the Euromall Piteşti shopping centre which was immediately acquired by Austrian Immoeast, for almost EUR 90 mln.

One hundred commercial centres have been announced and by the end of 2008, more than 19 new centres are due for completion, adding 603,600 sqm to the market. This will almost double the amount of space to 52 sqm per 1,000 people, which is still low by European standards. “The delivered projects will represent a plus for their developers. It’s normal that those who move slowly will have difficulties in such a dynamic market. Those that are first have an advantage that is hard to beat”, concludes Georgiana Andrei, retail broker of Colliers International. Regional cities are growing in importance, with seven out of the top ten pipeline schemes located outside Bucharest. Projects are also increasing in size, with four of them being over 50,000 sqm and a number of even larger schemes due to open after 2008. Most notably: the 162,000 sqm Colloseum in Bucharest, developed by Modus and due in 2010; the 100,000 sqm Park Lake Plaza, also in Bucharest, which is being developed by Caelum Development and also due in 2010; the 50,000 sqm Polus Centre Constanta, being developed by TriGranit, and due for completion in 2009; the 100,000 sqm Dambovita Center developed by Plaza Centers due to open in 2010 and the 75,000 sqm Cotroceni Park in Bucharest due in 2009.

The developer’s strategy is to create chains of schemes under the same brand and the most important companies acting on these markets are BelRom, Mivan, GTC, Plaza Centers, Atrium Centers, Iulius Group, TriGranit, RED, Euromall, Sonae Sierra and Africa Israel. The estimated yield for 2008 for retail centres is between 6 pct to 7 pct and in order to build such projects, EUR 1.1 bln had been invested last year. The leasable area to be delivered in Bucharest alone is close to 300,000 sqm and the most important project that will open is the Baneasa Shopping City (85,000 sqm) “Anyway we’re going to have a busy year. Transactions, promotions, more investments and so on,” continues Tomer Barhom.

In 2007, the Bucharest office market has been characterised by increased supply, rental growth, strengthening demand and further improvements in the quality of stock. The supply will reach 1 mln sqm of modern office space in early 2008. The number of speculative (construction commencing without a pre-lease) projects have increased with developers seeking to take advantage of the undersupply on the market. It is common for projects to be fully let prior to completion and there is often the possibility for developers to secure premiums for any space that is vacant at later stages of construction due to the ongoing lack of supply for office space in the short term in Bucharest. The under-supply reflected in a vacancy rate at under 1 pct, according to Colliers International for existing stock, will result in landlords maintaining a strong position in negotiation with tenants, continuing into 2008. The availability of office space to be delivered in the following 6-8 months stands at 45 pct. And even if the supply grows, Mihaela Cnobloch of DTZ Echinox, believes that rents will rise this year due to the highly increased demand.

Encouraged by the positive trends in the Bucharest industrial market, a large number of developers have started to secure sites in other major cities, the most aggressive being the Austrian developer Eyemaxx, and CTP Invest, the market leader in the Czech Republic. These projects will be delivered from 2008, and should result in a significant increase in the share of transactions outside of Bucharest. The developers’ favourite regional cities are: Timisoara, Arad, Oradea, Cluj-Napoca, Brasov, Sibiu, Ploiesti and Constanta. Rent levels are between EUR 3.80-4.25 per sqm per month for areas bigger than 10,000 sqm and EUR 4.70-5.00 for areas up to 3,000 sqm. For units between 3,000 sqm and 10,000 sqm, the rent ranges from EUR 4.25 to 4.70 per sqm per month.

Investors\' eyes fixed on to the market

Investment is especially focused on office and commercial projects, with the biggest acquisition until now – EUR 210 mln – by Immoeast in 2006 for Polus Shopping Centre in Cluj Napoca, the real estate capital of northern Romania. Immoeast is the most important investor in the Romanian real estate market and its CEO, Karl Petrikovics, has predicted the earnings that have accumulated here since 2004. Actually Immoeast, part of Immofinanz fund, was created by Petrikovics in order to manage the company investments in Eastern Europe. The Austriac investment fund will use, according to Mr Petrikovics, 20 pct. from the EUR 7.5 bln budget, for the Romanian market. Since last year the strategy has changed. “We will buy projects, but at the same time important local developers will be composite in developing new projects,” says Mr Petrikovics. For this project Immoeast has bought a quarter of the shares from two major developers, Israeli Adama and Hungarian TriGranit. Also, the Austrians, in a joint venture with British-Israeli developer European Future Group (EFG), have started a project which includes ten warehouse parks for EUR 300 mln.

For this year, transactions are expected to decrease due to lower demand caused by financing problems, but the expected investors will no longer be speculative funds, but rather the institutional ones. Growing demand from investment funds will continue to facilitate the supply of new properties, either through the provision of financing via forward purchases, or through joint ventures. This will generate even stronger demand for development sites, so driving land prices up. However, the increasing supply of new projects will also create competition between them, so leading to lower rents. Developers will continue to enjoy the current situation, where investors buy almost anything that is being built, for maybe another 12 to 18 months. But, as the new projects enter the market, and some have problems leasing out their space, investor sentiment might change.

For now the future belongs to strong investors, who are sitting on piles of cash and intend for it to grow. For this, the Romanian market is the perfect place to be, at least for next 5 to 10 years.

Matei Roman