My comment: Real Estate shrinks but still thinks big

This week “Business Review” magazine explores the new situation in Real Estate market. A very interesting article is presented in their edition, printed and online one (www.business-review.ro). There is a small comment by me as well, where I explain that I don’t consider Real Estate a niche business (on the contrary). But definitely it is not a business for everyone, especially not for unserious guys, searching for “easy – fast money”. Also I speak about the volume of transactions and the size of the market, where I predict that in 2008 we will go down to the figures of the past. You will also read more opinions by very serious and well informed people, so…the whole text, written by Corina Saceanu, is here:

Real estate shrinks but still thinks big

The shrinking investment volumes on the local real estate market, decreasing number of projects still on track for delivery, and small volumes of investments put forward by those who still want to invest in Romanian properties, all point to a real estate market downsize. Is local real estate becoming a niche business?
The lack of new money and the losses posted by foreign investors on other markets have triggered a drop in the number of ongoing projects, slashed the number of active developers and will eventually lead to a forced flight to professionalism for the industry. “In other words, fewer people doing fewer things but in a professional way. Basically, a niche market,” says Muler Onofrei, country manager at Goodman.
Return margins will drop on average, and those who invest will have to think long term, but the fact that the real estate market responds to a basic need means it does not risk becoming marginal. “It is not the end of an era, it is just the beginning of a new cycle,” says Francisc Peli, partner with PeliFilip law firm.
“Everybody is struggling not to make a loss, and to keep feasible projects running. It is definitely not a fabulous time to sell, so margins are more or less a remote subject,” says Peli.

Others take the same tone. “It is doubtful that real estate will become a niche business in Romania. Romania continues to be undersupplied in quality modern commercial and residential stock. While demand has slowed, it should improve when economic growth returns,” agrees Charles Krick, managing director with Jones Lang LaSalle Romania. “What will change is the public perception of real estate. In recent years many market participants believed real estate was a path to quick riches given the relative ease of success during the real estate bubble period. No longer is this the case,” Krick explains.
Even if the real estate market does not become a niche, it will continue to see some shrinkage, which will make it a smaller pond than the sectors in which the little money there is left is pouring into nowadays, like renewable energy, for example.
Investments in Romanian real estate have significantly dropped from the previous years. “One could say that at this moment, the level of investments barely reaches 10 percent compared to the previous years,” says Eran Kremer, shareholder in Anteea Estate.

Other players also foresee a continuing decline, but not to the extent of becoming a niche market. “Real estate will not become a niche business in Romania. I would describe it as complicated, not something for anyone who doesn’t have anything else to do,” says Ilias Papageorgiadis, CEO of More International Invest real estate brokerage firm. He believes the real estate market in Romania will stay below EUR 10 billion, with the average price per transaction dropping by 30 to 50 percent compared to last year. The volume of real estate transactions in 2007 was four times the level in 2004, followed by 2008 at only two times the 2004 level, while 2009 will be the first year with transactions at 50 to 70 percent of the 2004 threshold, according to Papageorgiadis.

Most of the investments this year will be opportunistic, and the market will once again be dominated by foreign investors, believe market players. “The foreign investors who will come will be those who need to recover some of the losses from neighboring countries, where the market has collapsed,” says Eran Kremer.
Opportunistic funds have already expressed interest in the Romanian market, looking for distressed sellers, or properties whose prices have been slashed after they previously failed to sell, explains Dan Ionascu, head of valuations with Cushman & Wakefield in Romania.
But Romania as a real estate investment target now faces competition from more mature, Western markets. “The increasing globalisation and transparency of real estate investment means that many investors can now easily compare the fundamentals of a Bucharest office building to an office building in Paris for example. So until real estate in Romania offers significantly better return potential or other significant advantages, many investors will focus on other markets,” explains Charles Krick of JLL.
The number of foreign investors checking the market will be down by up to 80 percent on last year, as in 2008 there were thousands of “window shoppers” or serious investors who got scared by the asking prices, says Ilias Papageorgiadis. But he thinks that the number of foreign investors who finally invest in Romanian real estate this year could be even higher than in 2008, when the level of investments was low anyway. Currently investors are looking at income properties, agricultural land and land suited to energy projects, unfinished projects with potential and apartments, he says. There are several retailers investing as well, which now enjoy lower pricing.
Foreign investments in real estate have made up the majority of investment volumes in recent years. “Given the pullback in foreign capital, there is a possibility that some local investors may step forward and fill some of this gap in 2009. However there is limited financial capacity from local investors so I don’t see a huge change in the ratio,” says Charles Krick.
Foreign investments will remain important, but the way Romanian capital works will change. “Locals were usually involved in development, and ended up selling projects to foreigners. This will change. Local investors which used to build average quality buildings and get top prices will have to think of building top quality and think long term, keep the buildings for a while. The idea of an exit will be a rarity for some time,” says Muler Onofrei. The local-to-foreign investment ratio will not change much, but in absolute terms, there will be less money invested in real estate, he says. The Romanian market, which has grown more in the last three years than Western markets in the last ten, says Dan Ionascu, has been fueled by foreign investments, either equity or debt from foreign banks. “Those who lead the market are foreign investors, and local ones usually follow suit timidly,” he believes.
Profit margins on real estate investments in general are also expected to go down, although opportunistic deals may enjoy higher margins than in the previous years. “On the residential segment, where margins could reach 75 percent in previous years, we will see 10 to 30 percent maximum,” says Eran Kremer.
On a shrinking market, with stalled or frozen projects, any profit, however small, is still good news. “Profit margins could even exceed those of the previous years in some cases, based on opportunities,” says Ionascu of Cushman & Wakefield. Papageorgiadis agrees. “What I can tell you for sure is that those who invest in 2009 will probably have double the profit margin of the ones who invested in 2008, as it is not so easy anymore for someone to invest all around the world nowadays,” he says.
Final investors asking for double digit yields will prompt developers to settle for lower profits, and in some cases even make a loss, says Muler Onofrei. But in the post-crisis world, real estate will again become the steam engine of the Romanian economy, as the demand exists and it has great potential, when many major mistakes are corrected, Papageorgiadis concludes.