Investments during crisis: Lands: inside the city or around it? Advantages and disadvantages

As the economic crisis has just entered in its fourth year, the strategies for Real Estate investments in Romania are conceived, organized and implemented in a completely different way compared to the past. This is a fact that applies in any kind of investment, lands included.

How the majority of investors used to invest

Investors in lands enjoyed some “golden” years in the past. The joke was that their investment strategy was “close your eyes, put your finger on the map and buy a property there. You will double your money in six months, wherever this property may be”. The same approach was for lands inside the city, especially since the first residential projects were developed. People realized that a land can be part of a project and its price can rise accordingly. Then the urbanity parameters started changing, increasing, (sometimes) multiplying. And prices rose, up to incredible hights.

Everyone was happy. Whether you bought with 5 or 20, if the asked price has reached 100, you were happy for your profits. Owners were feeling rich, investors were feeling “ready to get rich” etc.

This bubble exploded in 2008 and it is not expected to return in the following 3 – 5 years, at least.

Nothing is the same nowadays

Things have changed dramatically over the last few years. Nowadays the majority of investors search just for very cheap properties, refusing to invest in anything expensive. The minority who is disposed to pay more is the one that analyzes every property to its last detail. These people are ready to add on price, but they will know for what they paid, no possibility for someone to fool them.

Most people target lands inside the city, while very few “dare” to invest far from it (with the exception of end users who buy a small piece of land in order to build their own home).

In this investment environment, it would be interesting for us to verify the advantages and disadvantages that each of these two categories has.

Lands inside the city

We usually refer to properties which are inside the city limits, the more central the better. They are ready to host a development and their price is influenced by many parameters.

Advantages

·         They are always easier to sell, in case you might need to liquidate them.

·         They represent a more conservative investment, being more like a “bond”.

·         (In 98% of cases) Utilities are available.

·         They can host a development, which can start (relatively) soon. It might be residential or commercial, but it is always quite easy to get the necessary approvals and to find a “market” for the project. The options are endless and the feasibility study can easily identify the best of them.

·         After the crisis burst, their price fell a great deal, but now it is more or less stable (I refer to the transaction prices, not the asked ones).

·         Their investment value is always easier to identify, the same with the potential factors for a future appreciation (neighborhood, new developments in the area, big number of transactions to be used as data base etc)

·         They represent what Romanians choose, when the mind is choosing.

Disadvantages

·         Sometimes their potential is specific and there is not much to expect from other factors. So their value is more or less determined.

·         They are not suggested for the ones who want to earn more (in longer time and assuming higher risk of course). They are like “bonds” and bonds don’t offer high profits.

·         They have higher property taxes.

·         Their development means for the investor to deal with too many authorities, in order to receive the necessary approvals. This is also translated into higher costs.

·         There are more factors that can hurt the property’s potential. For example, the fact that we might find many unfinished developments in an area, means that many investors will avoid purchasing one more land. They will avoid attempting to develop one more project which might end up having the same result. So the price of lands in the area will drop, despite the land’s characteristics.

Lands out of the city limits

These are properties that are located close to the city, either in or at the vicinity of villages. They mainly represent a more speculative investment and their price is based on more clear parameters

Advantages

·         Their potential is usually un-exploited. This fact allows the investor to benefit from future price appreciations, even to multiply his investment much faster than the lands inside the city. They are more like a “stock”.

·         As Romania develops its infrastructure slowly, too many areas are “about to rise”, with utilities “to be constructed”, new roads “to be built”, new residential zones “to be formed”. All these improvements have not occurred yet and allow to an investor who will choose the right property to benefit out of their future existence.

·         They have lower property taxes.

·         Usually their development requires much less approvals comparing to the lands inside the city. This means lower costs as well.

·         There are less parameters that can influence negative their potential. Usually the investors already see the (undeveloped) status of the land around the city and know that they start from a low basis.

·         They represent what Romanians choose when the heart is choosing.

Disadvantages

·         It is always more difficult to sell them, in case you need the money fast. Should the market blocks, you will wait for years to unblock and sell at a “decent” price.

·         Speculation means higher risk and (without patience) probable major losses.

·         Utilities are not available and it is always a major advantage if you have them. Keep in mind that progress will happen slowly.

·         Sometimes they are unable to host any kind of development for many years. When they have the potential, they are usually either overpriced or have just two destinations: Residential for villas and (rarely) industrial.

·         Their prices collapsed after 2008 and (in the majority of cases) they have still not reached a minimum.

·         Especially now with the crisis it is difficult to identify the property’s price, as there are not many transactions in the area, helping you to find the value of your own property.