Is it a paradox? Too many unsold apartments, while some developers prepare new residential projects!

On Monday I explained to you why the Romanian residential market looks (to me) like a “department store during end of sales period”. To check this text, please press here.

But is there any reply to this issue? Is it possible for the market to continue moving towards an unclear direction? Can we continue having too many unsold apartments in some areas and shortage of good offers in other zones?

Several new residential projects in the pipeline. A paradox? Or a solution?
Since the beginning of the year I have participated in several discussions about new residential developments, or about buying unfinished projects and continue their development. I can not tell you that there are hundreds of investors for this kind of properties, but the interest exists.

Is this a paradox? Are all these people crazy and they risk to lose their money? Or have they discovered a problem in the market and now they are ready to solve it?

Only myself, I know more than 10 cases. So there must be plenty more. No?
I know more than 5 new residential developments, which either began or they are about the begin during the following 6 months. In the same time I expect that another 5 – 10 deals to occur, in the field of buying by the banks blocked projects. More or less, I personally know / am involved in more than 10 cases. Common sense says that there must be plenty more. No?

So what is going on? This is not just a random case or two. It looks like a small trend being created…

What kind of developers decide to invest now?
2011 class of developers is not the same with the ones of 2006 – 2008. The majority of the active players of that period is either inactive or in trouble. There are just a few of them who survived without major problems, plus there are new names who enter now in the market. If we would try to identify them, we would probably find people who have:

• Spent hundreds of hours in market studies.
• Identified the areas that are attractive for Romanian end users.
• Found a “modus vivendi” with their bank.
• Carefully designed everything, in order to adjust to the worst possible scenarios.

Also they have

• No target (or very low) for sales to foreigners.
• A clear view for what they want to do.
• 0 tolerance to arrogant people.
• Bought properties with all approvals in place.

No more fast decisions under pressure. No more blackmails to accept any possible cost. No more “apartments for a middle class who can pay 200.000 – 300.000 Euro for a property”. No more properties without approvals “because the owner can not wait”. In periods like this everyone prepares himself for the most difficult option, but he also makes sure that he will play the game using all the aces he can.

What are the risks these people assume?
These investors do not have an easy task to accomplish. Before they make sure that they will avoid losses, they would need to resolve several problems and face many challenges, because they:

• Start investing during a period when recovery is still at the very beginning. The investment environment in local and international level is still not very clear, despite the visible growth comparing to 2010.
• Might enter in competition with many projects for sale at distressed prices. Some of them appeared already, some others are “one the way”. And this will not be easy for the new ones to fight with.
• Are challenged by reluctant banks, who are very cautious when it comes to any investment and especially a new residential development.
• Are seen with suspicion by 90% of population here. After what happened during 2009 – 2011, it is clear that many people don’t trust a developer until he finishes his project.

What are the advantages that trigger investors’ interest to begin or unblock residential developments nowadays…
The risk is still here. Ask everyone you want to. But we can also easily identify several advantages for the investors who will start developing now. So these pioneers:

• Target areas where there is already verified strong demand. So they know that they will not sell just by “hoping for the best”.
• Choose zones where there is verified low supply of good offers, while the demand is stronger. Like this they will be able to sell at decent prices and remain in their budgets.
• Take advantage of the lower cost of construction, comparing to the past. Even now, with the oil at 115 – 120 dollars / barrel, the overall construction cost is 25 – 35% comparing to 2008.
• Buy only very good properties / at very attractive prices. Expensive or bad locations are out of question.
• Control their expenses much better comparing to the past. Most of negotiations are on their favour, people are more down to earth. All soft costs are cheaper than during the past.
• Expect to enter the market during 2012 – 2013. At that time they will be among the few ones with really new properties. If the market changes a bit, this will give them a major advantage.

During 2011 we will notice several new projects. If you ask me, I see between them some of the new success stories of 2013.

What is your opinion?