Real Estate Perspectives for 2012 – Interview with Ken Morgan, Franklin Investment


DISCLAIMER: These comments in reply to your request for this interview are the comments and observations of Mr Ken Morgan only and do not necessarily reflect the official opinions of Franklin Investment srl.

Question: How is 2012 shaping up? What are your expectations regarding the real estate investment market?

KM: At this moment in time it is very unclear as to the direction of the property market in Romania. As an example if suddenly the economies and property market tempo picked up in Western Europe, it would take at least six to nine months for the trickledown effect to impact the local Romanian property market. I prefer not to speculate on the property market direction because there are many unknown factors that are having a major negative effect on the world’s economy right now.

First there is the immense problem of the lack of confidence in the strength of the Euro. Second – major political instability in the middle east and certain EU member countries, plus rising unemployment in the euro zone.

Next there will be the USA Presidential and Senate elections in November 2012, that force the major investors to hold back on investments until they have a clearer view of long term government policies and other economic stimulation packages that can be passed into law by their legislative bodies.

The possibility of armed conflict in the Gulf area has to be seriously taken in to consideration again by the major players in the investment market in general.

Unless a more stable atmosphere can be established that takes in to consideration all of the above then I cannot see how financial market stability can be established over the next two-year period. The present economic depression is one part of a cycle of ups and downs that happen on a worldwide basis every ten to fourteen years; look at the overall statistics to provide you with the answer, for another example there have been twelve recessions in the USA since 1945 and those are officially recognized, there were other downturns over short periods. I was not surprised that the property market bubble exploded as the upward spiral of fanciful valuations could not be maintained any longer. I have lived through at least four major economic downturns in my forty plus years in the property profession.  This downturn will take longer to recover from because of its global nature. In the past economic downturns were regionalized to one or two economic zones but the globalization of business and investment has added an even greater dimension and backlash or impact of depression rather than a localized or regionalized recession.

In the Romanian property market there is the added complication of many property owners not being willing or able to face the reality of the first major economic crash that they are experiencing. There are property owners here that I have met that still think they can ask for property prices that were achieved in circa 2006. They believe that if they hold on long enough to obtain these fantasy valuations/prices, then all their problems will disappear, meanwhile their bankers and creditors are calling in the loans and many of these once upon a time paper millionaires are being made bankrupt daily. To make matters worse a reservoir of bankrupt property has to eventually be filtered or placed back on to the market at more realistic prices by the banks and creditors. This has started to happen but I think the flood is still yet to come, as banks cannot continue to hold a portfolio of overvalued property stock on which they gave credit years before. The accumulation of these negative facts and shock must point towards an eventual maturing of the property market in Romania, which is desperately needed. This reality shockwave still has a sting in its tail for Romanians over the coming eighteen months.  


Q: If we were to look at 2011-2012-2013 as an evolution, how would you describe it? What major events have shaped 2011 and what is the outlook for 2012-2013?

KM: 2011 was part of the end product of previous years of speculation and greed particularly in the foreign financial services industry, where certain financial organizations forgot that their principle duty was to protect and give sound financial guidance to their clients, instead the bonus and other financial incentives offered by the employers was the only principle that concerned many of the people involved in this segment of the financial market along with unregulated mortgage loans in the USA to people who could never hope to repay the capital and interest on mortgages freely handed out to them.

These mortgages and loans were then bundled together and sold to speculating investors and other financial institutions around the world, the buyers were mostly unaware that a very large percentage of the mortgagors were unqualified to repay these mortgages even under normal circumstances. The sellers of these bundled investment packages obviously had no interest in pointing out that they were basically selling Junk, they were only interested in the huge bonuses and share packages their employers were handing out. Hence the start of the financial industry collapse that brought with it this major economic depression not recession. There have been incalculable consequences for the ordinary hard working people around the world bringing unemployment, misery, hunger and family disintegration, and even worse into ordinary hard working lives, while the perpetrators of all the above are still spending and enjoying freedom and will do the same thing all over again unless regulations are put in place to stop them. We have not yet seen the future consequences of this period of greed, the financial markets will experience a tightening of the noose around its throat by way of governmental interference and fiscal controls over the money markets and the loss of many accepted freedoms we enjoy today, all because of uncontrolled greed.

I really do not like to speculate on the future of the property market in Romania, but I will try to look ahead and give to the reader of this article my opinion based on my present and past experiences, so if you do not agree with my answer to the above question then please feel free to fall asleep or go and play with your kids, cat or dog, or do something else you enjoy doing.

2012/13 will bring more instability and continued hesitation to invest even in very attractive investment opportunities, for all the reasons stated above.

The middle range and in particular the luxury residential market will continue to suffer from a lack of credit facilities or mortgages over the longer terms that are normally available in Western Europe. This of course results in lower purchase prices being offered and afforded that also results in many property owners having an even greater negative equity commitment hanging around their necks for many years to come. This alone frightens or turns away many new homebuyers, thus reducing the small luxury home buying pool available even further. Eventually Romanian government incentives will need to be put in place to inject life and stability in to this and other segments of the residential property market.

 The rental market for apartments up to 450 euro per month will continue to grow as many young people who cannot obtain a mortgage and are living with their parents or a relative wish to have some form of privacy and independence in their life style, so leasing is the best temporary answer for them, this segment will continue to expand for years to come as this pool of eventual home owners grows each year until easier credit lending facilities become established.  This area I suggest will be the most active for some years to come. Anyone building small modern apartments to rent not too far away from public transport & (Metro in particular) in the residential areas of Bucharest and some other well populated cities will find it easy to lease out these apartments to young married couples with or without children. These types of investment properties will become very popular with the financial community whom I believe will offer the necessary funding for such projects.

The retail market has recovered with vigor and continues to surprise me with their smartness and foresight in the way they are correctly starting their projects to develop future shopping and entertainment facilities now as land and construction cost are at their lowest. I think that the intimate knowledge retailers have of their customers desires and needs and the clients opinions of market trends including how they see the future of the economy have always been a good barometer of future events for retailers. Retailers have for many years conducted their own market research and I believe they have learned to ask their clients the right questions. The majority are very good at forecasting when to invest or not. But remember the retailer will start a project now and will pace the project according to the circumstances and health of the economy, and as such they are not a good barometer for the general property market because building a large box for people to shop in is far less expensive than building an apartment block or individual houses that are major financial commitments for individuals to take on as a long term commitment. However they do generally point in the right direction the economy is heading towards.

 The office Market Place

This is the dreaded area and is not for the faint hearted. If you are brave enough to enter you can win big time, but you can also lose out big time. Circumstances beyond your control are the killer here. At this moment Bucharest is littered with empty office developments that are either finished or incomplete and have very little chance of being completed in the foreseeable future. This portion of the property scene is the most sensitive to outside influences or forces; some of the earliest symptoms of an impending downturn in an economy can be seen by the number of vacant offices dotted around a city. Those of us who have eyes to see and experience will remember the cold shivers felt when it sank in to our heads how the trend of vacant offices was expanding, this being the first sign of impending doom in the market. Naturally the speculators did not want to accept the reality so they plowed on with unrealistically overpriced projects, while the professionals in property development quietly sold off their projects that were not pre-let to 50% or 60%, all the signs were there to see.

The projects in prime locations will always have a suitable tenant. However it becomes very hard to find suitable well-financed tenants as you move down market. Of course this is not always the case. In Bucharest today if you can find a high rise building that gives you a panoramic view, then you can scan the horizon to see the ribs of almost dinosaur like unfinished office developments and some apartment blocks that were overpriced to start with standing out in sharp contrast to completed buildings around them including many unlit completed but empty office blocks.


Q: From your experience, how are institutional investors approaching Romania at the moment?

KM: Institutional Investors and the Private Investor

As a general rule Pension funds and similar are in for the long haul as their investment policy dictates they look to the long term for any investment they purchase. They are well managed and professional and they will hold on to investments for many years depending upon the quality of their investment and the returns or yields produced over a given period of time.

The private investor is generally looking to make a profit over a much shorter time frame (usually three to six years). It usually depends on the local taxation code on profits and other tax breaks that can be legally employed.

The major property investors are nervously standing on the sidelines waiting for more stability and other parameters that have to be in place before they re-enter the Romanian property market in greater numbers than there are at present.

They have never really stopped investing in property throughout this economic depression but the investments they are making are few in Romania, they are investing in other CEE countries or similar such as The Czech Republic, Poland, or on their own core territories, where they feel more secure and have political and economic stability. Much investment finance is being taken up by buying Government bonds issued by major economies, however this cannot continue forever as the returns on bond investment yields are much smaller than property investments, the pension funds must generate large incomes to sustain the continued flow of cash out, compared to inflow of contributions. Bonds can never give the returns that good property investment can provide.

There are however some enlightened and skillful investment fund managers that are spending substantial funds on some very good property investments right now in Romania. They recognize that some owners have good reasons to sell the investments they have produced or created and that the owners are mature enough to ask only for a realistic selling price at today’s market value. So again it comes back to having a mature property market established in Romania which is not the case at the moment.


Q: From your point of view, what is the present percentage of “attractive properties” on the local market?

KM: (when you say attractive I take it you mean attractive by value for money)

As an example on a scale of 1 to 100.

I would say maybe five or seven percent are realistically priced for today’s market values, the majority of property owners will not listen to professional advice about the market value. So we have the old problem of the Arab market prices where he says 100 you say 60, he says 75 you say 60!!!! It just goes on and on. But because the initial marketing price is so high it frightens away people who can afford the real eventual selling price so the owner eventually accepts because no one will pay more for it. Meanwhile maybe two or three months have gone past, wasting time and money because the owner would not face the truth about the market value.  

I hope this short general and personal overview of the property scene in Romania has not upset or antagonized the reader. That was not my intention.

Please remember that when something is in short supply the price usually rises.

The manufacture of land stopped several billion years ago and it is in short supply which is why in the end the best investment is property.


Ken Morgan,

Property Development & Sales Director.


Real Estate,

7 Benjamin Franklin Street

1st Floor,

Sector 1

 010288, Bucharest, Romania.

Mobile +40724 22 28 09

Tel +4021 313 77 35

Fax +4021 313 93 11