“We don’t negotiate too much with the clients. If you teach them like this, you will spoil them”

Part 5

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Mr X is a serious successful medium size developer in his country. After having heard so many people talking about Romania, he decided to come over here and invest as well, targeting bigger profits than what he could earn at his place (do you know anyone who would leave his country in order to earn less than back home?). More or less his project reached a budget of 15 million Euro. About 10 million was the bank's participation and he also invested another 5 million Euro cash, without taking into consideration the hundreds of working days he invested.

But things didn't turn out to be how he expected. After a good start, he got blocked in low sales, higher costs than his initial budget and "not too many solutions" by his Real Estate consultant. The official beginning of the world economic crisis was the beginning of his new "Odyssey" and he had to fight with many new problems in his "Romanian adventure"…

An "ugly" reality…
Mr X came in Romania in order to develop a project, offer to the market something good and exit with significant profits. Noone can blame him for this plan, it is absolutely healthy and logical one for an investor who leaves his home country and enters in a new market.

But in 2009 and 2010 he had to face a new reality, something for which he was not prepared. This reality was "ugly", as apart of the problems, there were too many behaviors that made him feel uncomfortable…

The 10% advance became 10% payment and then "bye bye" or "let's go to court"
When the crisis began, thousands of people started losing their jobs or saw their income shrinking. So except from the "frozen" new sales, there were thousands of clients who wanted to exit from their agreements to buy an apartment. They preferred to lose the advance payment they gave in 2007 – 2008 and save the rest of the money, or asked to renegotiate the price, or searched for reasons to send the developer to court.

There were tens of developers who didn't behave seriously, but also there were many others who respected themselves and their word. Guess what… some of the media presented only the bad cases, thus creating an "investment environment" where "the poor people were tricked by the bad developers". For someone without much experience, it was easy to confuse himself and consider that almost everyone behaved wrong.

To protect himself from this new situation Mr X had to practically replace his Real Estate consultants (who were not so eager to help, as there were not any high commissions included anymore) with lawyers. In the end he decided to change Real Estate consultants with some new ones who appeared to be more willing to defend his interests.

Many foreign investors and speculative funds disappeared
The bubble with investments in apartments had some different characteristics comparing to the other ones. Too many people invested, having in mind the following strategy: "I pay today 10 – 20% advance from my own cash. Then I sell the apartment with 10 – 20% higher price before the project will be delivered and I double my money, letting the final buyer pay for the rest of the costs". This worked good in papers, but the implementation of VAT 19% and the crisis changed the rules of the game.

Too many private persons or speculative funds paid these advance payments, without having secured the rest of the money. Or without being forced to provide guarantees for the rest of the money. When the problems started, they preferred to lose this advance and go, instead of investing more. So the developers discovered that their "sales" were "hopes for a sale"…

Higher interests, higher costs…
Banks are not welfare institutions. Mr X knew this and he confirmed this opinion once more. When the crisis started, banks increased their interests, reaching in 2010 6 – 8% (comparing to the 3 – 5% in 2008). This was the "good scenario", as most of them tried to help their clients just by increasing his costs (don't forget that the banks themselves had to pay much higher interests, in order to collect deposits). Mr X was lucky as his bank respected his efforts and continued the financing of his project, until the final delivery to the clients.

Painful decisions…
Many other projects were stalled, in different phases. The banks had to choose between: Financing a project without sales, increasing their risks? Or to stop the financing of it early, risking less money but practically reducing their hopes to get this money back (either by future sales or by pledging the building later on)? And what kind of presales were sufficient for them? It was proved that even projects with "100% presales" ended up almost empty, due to the cancelations of the final contracts by the buyers.

Developers failing to deliver on time
Mr X had foreseen the danger to deliver his project later than he committed himself to his clients. This was why he "accepted" some unfair policies by the construction company and some of his suppliers, in order not to risk delivering late (and he couldn't believe how was it possible for so many people to behave completely unprofessional, just in order to practically steal a small amount of money, destroying their reputation forever). But there were too many other developers who preferred to fight and deliver much later than they should. Sometimes they were right, they fought for serious reasons. For example, why to pay someone who didn't build the finishings of the apartments according to the initial agreement? But the insolvency law in Romania allows to almost any supplier take his client to court, asking for his insolvency, even for minor amounts, without checking the basis of his arguments.

Many other developers simply didn't have money to invest anymore and delayed their projects (or reduced the quality of finishings). But this cost them more. They failed to deliver their projects on time or at the standards they had promised, creating new obligations towards their clients. A new vicious circle started for them, with "unhealthy" procedures for everyone.

"Prima Casa", a solution or a new problem?
When the State announced the "Prima Casa" project, many people considered that this happened in order to "save the developers". But this was not true. Most of the apartments available for sale still have much higher prices than 60.000 Euro (or 70.000 Euro at "Prima Casa II"), the limit of this project.

Overviewing the whole market, Mr X realized that most of the people who benefited from this programme were the owners of old apartments, plus some developers with small units. The ones with bigger units and high costs simply can not enter in the programme. In many cases this became a new problem for him, as his clients were using the limits of "Prima Casa" as an argument, in order to lower the prices much more (from the deductions he had already performed himself)…

Most of developers were not ready for this new environment
Most of the above mentioned problems happened because the developers were not ready for a "worst case scenario". They had created their strategy having in mind only a positive market evolution. For example, most of the contracts to sell apartments were made taking into assumption that prices would always raise and the developments would be delivered on time. These 2 parameters proved to be wrong, causing to many developers huge losses.

Like in every domain of business activity in Romania, the crisis revealed many other problems too. Some developers simply disappeared, having cashed in the advances and refusing to invest money in order to deliver the project. Some others simply delivered very bad projects, trying to save money from all possible sources. Most of them failed to restructure their business and projects according to the new market standards…

Now Mr X has to decide…

On Monday, 19.07:

• A difficult dilemma for many developers…

(Necessary clarification
Please allow me to clarify something: I strongly believe that a big part (maybe half) of the residential developers being active in Romania today are people who either were tricked while chasing easy money or they developed on purpose bad constructions, in order for them to cash in more money in shorter time. But for every developer who behaved like this, I also meet one more serious, professional, with strategy and plans. A person or company who tried to develop something good, with respectable quality, civilized, aiming to build a strong brand name and to achieve his clients to be happy for buying his property).