Why the low absorption of European Grants hurts the Real Estate market

Last week I attended an important conference for European Grants in Romania. I heard Mr. Orban, the minister responsible for European matters, explaining his strategy and challenges, then several other officials, economic counselors, the president of the Cypriot Romania chamber of commerce, plus several top bankers and consultants. The experience was very interesting, as it was a short of guide for the previous 5 years (2007 – 2011) and the following 2 (2012 – 2013) of the 2007 – 2013 time frame.

The actual situation in Romania, according to officials and consultants

According to what officials and consultants explained during this conference, the actual situation in Romania is not very bright:

·         After 5 years in the European Union, the absorption rate is just 14% (including the pre-approvals) and… 5% (according to finalized projects)

·         The target for the country is to reach 20% by the end of 2012.

·         Procedures move slowly, as there are all sorts of problems.

·         Officials consider that they do their best, but they have many issues to resolve.

·         Consultants said that the authorities are not ready while their clients are making many mistakes.

·         The banks stressed that financing these projects is not an easy mission, due to various reasons.

·         The Polish economic counselor explained how Poland benefited from the grants, while her Austrian colleague explained his country’s policy and interests.

·         Almost everyone pointed out that the majority of beneficiaries are not very mature and many times they cannot absorb the grant that has been approved for them.

The next 2 years: Very critical…

According to this feedback, it is easy for us to understand that the next 2 years are very critical. If Romania fails to absorb the grants, not only will it lose the money now, but it will receive fewer grants in the future as well. As you might know, if the European Union saves 100 Euro for one program but if you manage to spend 50, then in the next program it will tell you that “if you can absorb only 50, I will give you 50 – 60 and I will save the rest for someone else, who can absorb more”.

I am not here to discuss politics and tell you why Romania did not absorb more. This is other people’s job. Focusing on the issue we discuss, it is clear that the rhythm of absorption must multiply in the following years, despite all the problems, elections and God knows what else might happen.

…but also promising as well

Let’s approach this issue from a different point of view. The fact that Romania managed to reach a neutral or slightly positive GDP growth without the help of European Grants means that if we succeed to increase the level of absorption, we have a strong weapon to fight the new recession, that is knocking our door.

All the projects that will be approved during 2012 – 2013 will have another 2 years at their disposal in order to be implemented. So the Romanian economy can benefit until 2014 – 2015 respectively. In an uncertain environment like the one we are living in, this is very important for the country.

(Personally I would accept an additional tax, just to finance the State’s participation that would unblock the grants. Because in many cases the State was simply unable to finance its own small participation and the grants remained frozen).

But the situation so far hurts the Real Estate market

Once the crisis started, the first solution that everyone proposed was to absorb European Grants. The same reply was also given by Real Estate experts, but so far this has not become true. This low rate of absorption has caused the Real Estate market in multiple ways, because no grants absorbed means that:

·         There was no new demand for people to be hired. No hired people = less consumption, less houses bought etc.

·         The B’ Class office market was not aided. Many projects require additional space for the companies that will implement them. No projects = no requests for spaces.

·         The construction market lost good clients. Some of the projects refer to construction of warehouses, offices and all kinds of buildings. Less implementations = less work for the construction market

·         Several segments of Romanian economy were not boosted / modernized. The first segment which benefits from an improved economy is consumption. Right after we have Real Estate.

Can we win this bet?

The situation is not so dramatic, yet. But can we move faster and win the bet of absorption in the following 26 months? If the answer is yes, everyone will be happier, including the Real Estate market. If not, we will add more problems on our long list…

What do you think?

PS. This text has nothing to do with politics. I am not member of any political party and I do not write in order to support the ideas of someone in particular.