About 10 years ago, Lehman Brothers’ bankruptcy would mark the peak of the global financial crisis and would be followed by a deep recession in several parts of the world, including Romania. However, Romania has come a long way in the last decade, with the economy seeing some radical transformations, as well as in real estate; the real estate consultancy company Colliers International Romania sees the next 10 years offering an attractive risk/reward profile.
”Romania’s potential economic growth (the so-called sustainable rate) is currently at around 4%, which compares favourably to the EU average (below 2%) and regional countries as well (around 3%), according to the European Commission. These figures alone offer cause for optimism regarding the Romainan economy, especially as signifcant potential can be unlocked via simple reforms, like improving transport infrastructure. Consequently, the backdrop is quite favourable for real estate over the long term”, Silviu Pop, Head of Research at Colliers International Romania said.
Except for the small Baltic states and Irish “leprechaun” economy, Romania has been the most successful convergence story in the EU in the last decade in terms of GDP/capita expansion, even after suffering one of the biggest recessions in the aftermath of the crisis. Consumption does not look as excessive as it did back then as it is much less reliant on bank loans and more on wages. The domestic economy changed even more into a service-driven economy, including by adding more high complexity jobs.
The Bucharest office market moved from a massively undersupplied market to a relative equilibrium nowadays. The vacancy decreased only gradually in the recovery phase of post-crisis period even as the stock expanded quite significantly, which highlights the increased caution among developers. Still, as developers are very much re-active rather than pro-active, building activity has intensified greatly in the last year amid very favourable economic results in recent years; this has the potential to lead to a possible overloading of the delivery calendar for 2019-2020, with over 0.7 mn sqm slated. What has also changed is the fact that big regional cities represent a serious alternative to Bucharest for companies.
Just like the office market, the warehouse space expanded massively in the pre-crisis period, almost tripling in the Bucharest area, to just under 900,000 sqm in 2008. An interesting change compared to those years is the expansion of 3PL, with logisticians and distributors now holding more than half of the market in terms of demand (versus 38% in 2007); retailers’ share in take-up has decreased steadily compared to a decade ago, with many of the large big box players in Romania currently having developed their own logistic network. Currently, this is the real estate submarket acting as dynamic as before the crisis if we look at deliveries.
At the end of 2006, the total modern retail stock stood at 360,000 sqm nationwide; by the start of the recession, it would increase a staggering 4.6 times. Tenants were lining up and lots of new names have since become established players on the domestic scene, but many had limited or no local market experience. For developers, the surge in deliveries made expanding select retailers quite picky and some schemes ended up opening with just half of the units trading. Also, Bucharest’s high street retail has become a pale shadow nowadays compared to its heyday as local consumers have become accustomed to shopping centers, which offer many alternatives in just one destination.
With an office building in Bucharest yielding selling for what is still the all-time low of 5.5% in 2007, the local investment market was on par with regional peers and even ahead of some; nowadays, domestic prime office assets are the only ones among the biggest CEE economies (Poland, Hungary, Czechia) to have yields consistently higher than pre-crisis lows. The market was quite liquid back then, with 2007 seeing investments of more than EUR 1.5bn. Meanwhile, post-crisis highs are barely nearing EUR 1bn in the good years (like 2017). Today’s market is more challenging and it seems more difficult to close a deal than in 2007, as investors want to make sure they are not overpaying.
In parts of Bucharest, land prices increased more than ten-fold in the years leading to the financial crisis. For instance, prices in the Herastrau-Aviatiei area in Bucharest were around 200-400 euro/sqm; in the first part of 2008, an investor paid around 4,500 euro/sqm in the same region. It is likely that 2007 remains the historic peak: Bucharest saw land deals of over EUR 850mn in 2007 compared to around EUR 230mn last year. In certain areas, prices remain well lower than half of their level in 2007-2008, while buyers seem more cautious.
Residential properties were in Romania one of the most relevant barometers for overall sentiment. As the value of properties (excluding land) owned by households more than doubled between 2005 and 2008, to nearly half a trillion euro, Romanians were on a spending spree in those years. Nowadays, even though more than 400,000 new apartments or houses were built between 2009 and 2017, household real estate wealth remains nearly 40% below its pre-crisis record. While in 2007-2008, the Romanian residential properties were one of the most overvalued in the EU, European Central Bank economic models now show Romanian properties among the most undervalued in the EU.
Predictions for the next 10 years
Looking beyond the poor administrative capacity of the state, growth should continue to take place in Romania, as the country still benefits from one of the biggest differentials between labour productivity and labour costs in Eastern Europe. Internal migration patterns will likely prove another big driver of trends on the real estate market: the population in towns like Cluj-Napoca, Timisoara, Iasi, Brasov or Sibiu should expand greatly in the next years, much faster than Bucharest’s. Consequently, all real estate submarkets have a chance to improve both in terms of quantity (actual surfaces traded/leased) and quality (investment yields).
Modern office stock could at least double by the end of the next decade, from around 3 mn sqm currently, as both regional cities and Bucharest seem significantly undersupplied on a per capita basis, compared even with CEE peers. For industrial, we would normally expect the current stock of 3.8 mn sqm to expand to over 7 mn sqm by the start of the 2030’s, though it is difficult to factor in new technologies that could very well change logistics and warehousing. As for retail, Bucharest could very well receive during the next decade a few more schemes (including at least a large dominant shopping center), as the per capita stock is still a bit below that of CEE capital cities. The biggest growth will come from other parts of the country, as bigger towns have space to accommodate new schemes.