10 lethal mistakes that many residential developers did in Romania

Part 7

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During the previous days we followed the adventures of a foreign developer in Romania, Mr X. He came with lots of hopes and dreams, invested some million of Euro cash, but he ended up in trouble. Now he is blocked and he has to choose only between painful options for his future.

But what were the main mistakes of Mr X and plenty of other residential developers, foreigners and Romanians? Why did they… "hit the wall" so bad, risking to lose their money and reputation? Let us identify 10 big mistakes that too many developers did during the previous years.

1. The Romanian middle class never afforded to buy apartments worth 200.000  -300.000 Euro
Romania is Romania. A country with great potential, but its middle class does not afford to buy today an apartment of 200.000 – 300.000 Euro (or more). Actually it never afforded this sum. Tens of developers created projects targeting this market segment, because they wanted to do in Romania what they were doing back to their own countries. Guess what, almost all of them failed.

2. 90% of housing loans never exceeded 150.000 – 170.000 Euro

All these developers collaborated with a bank and a branch manager, where their company had its accounts. Despite the fact that usually they had their accounts opened in the branch of the bank's headquarters, or any other big one, I am really curious: How many of these investors (or their consultants) did actually ask the branch manager for the average size of loan he was approving? During the best period of Romanian economy, with banks almost… begging you to borrow money by them, 90% of housing loans had an average value of 150.000 – 170.000 Euro. Not more. This was easy to identify, just by asking 10 branch managers.

3. All European cities have expanded. But throughout decades, not in just few years time
I came in Romania in 2004. In the first 18 months of my presence in the country I kept listening many of my friends telling me that "Pipera is the future of Bucharest". Each of them (according to his nationality) was comparing Pipera area with a district he knew back at his own country. It was useless to insist, trying to explain to them that the new districts of Athens (for example) were developed throughout the decades, especially after the public infrastructure improved. Here in Romania, how was it possible for the city to expand while there is still plenty of land inside it and the infrastructure around is "not sufficient" (to be polite)? Now they all agree, but for some of them it is too late…

4. People prefer buying their first home inside the city, not very far from "civilization". A future shopping mall in the area is not enough…
Too many developers and investors considered that Romanians will enjoy living out of the city or by the city's limits. Following the wrong assumption above, they created projects targeting people who would desire "a higher status of life, closer to environment" etc. I will not comment upon the final status that some of these projects finally had (what kind of environment is this, when next to your villa there are 3-4 blocks with 10 levels each or everything is dirty…). I am just wondering… Isn't it known to Real Estate experts that normally people buy their first home closer to the city's center and throughout the years they move away from it, to the suburbs? How is it possible for a future shopping mall to be sufficient for someone, in order to change his residence (as so many people supposed)?

5. Developers and consultants focused on buyers' wishes, not their real budget
Even before the official start of crisis, it was obvious that there were too many people who were tricked, having reserved apartments which they were unable to pay. Not even to furnish them! Many others would have to buy one or two cars, in order to move from their new home towards their work. Some others would have to pay for a private school, in order for their children not to travel 1 – 2 hours daily, until the public school. (Don't forget that we talk for the period of 2006 – 2008, when traffic was much more intense than today). Most of these developers did not sit down and create the family income of their potential clients. If they would have done so, they would have realized that it was wrong trying to sell properties which would lead the buyer in a fixed cost of 2.000 – 3.000 Euro / month just for several loans. The clients who didn't do the same math ended up in trouble as well…

On Thursday 22.07.2010

• Surface, such a wrong surface…
• Quality of finishings, controlled by whom?
• "If prices go up, don't worry. We will charge our clients more, accordingly
• Arrogance, greed and tremendous expected profits
• Romania is Romania. Neither France, nor Germany, Spain, Greece or Italy

On Friday 23.07.2010

• 10 readers' questions about residential developers and one confirmation

(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).