Some of the 10 lethal mistakes: Arrogance, greed and tremendous expected profits

Part 8

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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.

Yesterday I described to you the first 5 typical mistakes that many developers did during the previous years:

1. The Romanian middle class never afforded to buy apartments worth 200.000  -300.000 Euro2. 90% of housing loans never exceeded 150.000 – 170.000 Euro3. All European cities have expanded. But throughout decades, not in just few years time4. People prefer buying their first home inside the city, not very far from "civilization". A future shopping mall in the area is not enough…
5. Developers and consultants focused on buyers' wishes, not their real budget.

Let us check now another five very important mistakes…

6. Surface, such a wrong surface…
Go to the streets and ask 1.000 people: "If you would like to buy a new apartment, in how many sq.m. would you like to live in?" 90% of them will reply by describing a surface which is larger than the one they actually live in today. Almost all of them probably can not support the cost of buying a larger apartment and living in it. But they will tell you that they want something "spacious". You read a survey like this and you think that this is the reality and the demand in Romania. So you develop apartments of 90 – 150 sq.m in order to adjust to it. These projects are approved by your banker who is usually a top level executive and likes living in a spacious apartment too. Most of your consultants probably told you the same. You start developing… and then you wake up and you realize that 80 – 90% of people can pay a specific sum of money, either they buy 50 sq.m. or 150 sq.m.

Romanian market requires (for the moment) small units of 40 sq.m. (1 room), 60 sq.m. (2 rooms), up to 85 sq.m (3 rooms). Less than 20% of clients can afford something larger. Guess what… almost 30 – 40% of new apartments are larger… *

7. Quality of finishings, controlled by whom?
This is a challenging task all around the world. Usually the foreign developers have their trusted people back in their countries. Here in Romania either they trusted a construction company, or they got involved themselves. The result? Unfortunately many times it was very bad. Especially when they tried to save money and avoided the costs of a thorough control of everything. Whoever did this ended up having more expensive costs in order to repair the bad quality of work. But is it easy and possible to be really repaired …

8. "If prices go up, don't worry. We will charge our clients more, accordingly"
Developers were among the "guilty" ones who pushed the prices up. They risked to buy more expensive properties, hoping to sell at a higher price. Then they accepted even higher costs for the land, targeting even higher incomes. In the end many of them were moving around the cities offering tremendously high prices, based on their "belief" that they would be able to sell with an even higher price as well. (Ofcourse in order to justify a higher price, the project was presented as a more "sophisticated" one. Who would be the buyer of it? We still don't know…)

9. Arrogance, greed and tremendously high expected profits
We have to admit it. A serious part of the people involved in the Real Estate market showed unforgiven arrogance and greed during 2006 – 2008. Maybe I was one of them too (only my colleagues, collaborators and clients at that time can reply on this), but sadly there were too many developers behaving badly to people. Clients were treated with 0 respect, prices were changing very fast, without any special reason.

Back in the summer of 2007 Ron was strong, climbing up to 1 Euro = 3,07 Ron. So, there was a residential developer who was changing his rate card EVERY DAY. "If you have a client, call me to tell you the prices of the day, plus which currency we choose this day. Sometimes we sell in Euro, sometimes we sell in Ron". Is it by coincidence that his project remains 90% vacant nowadays?

Also. How much is the "normal profit after taxes" for a long term investor? 20% / year? 30% / year? 50% / year? During the "golden years" the majority of developers targeted profits of over 100% / year (if possible). This is why there was a developer who told me once: "I can not sell to you too many apartments today. I will not be able to sell them more expensive in 2 – 3 months". Today, 50% of his project is unsold and 95% of apartments remain vacant…

10. Romania is Romania. Neither France, nor Germany, Spain, Greece or Italy
Romania is Romania. With its advantages and drawbacks, but also with a specific potential. Romania will not become Germany, France or Spain anytime soon. We should respect the country for what it is, a big European country with great potential and a lot of opportunities. But not a place where everything will work perfect anytime soon (unfortunately). Or where all the changes which happened in other counties during some decades will happen here during few weeks or months.

This approach was the reason for plenty of mistakes, in many different subcategories. And we still pay for it… trying to become something we are not able to be anytime soon…

* Please don't start with "yes, but people deserve to live in large apartments like in other countries". I agree, they do deserve to live in the best possible dwellings, even in villas or palaces. But do they afford these larger properties? If not, isn't it wiser to "lay their feet up to length of their sheets"?

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).