Why the Romanian Real Estate market will continue its negative course during the second half of the year
* the article was first published on the 29th of May 2012
In November last year I gave you my prognosis for the first half of 2012. At that time I said that the market will continue its negative course, without major surprises.
In January and February we again saw several “parrots” who predicted that the prices will rise. Their arguments were weaker than a lettuce leaf, but as the masses love hearing nice fairytales, we noticed several property owners raising their prices due to this prediction.
(“So, Ilia, you don’t want the prices to go up? If we all speak negatively, then this will happen, we have to be more optimistic”, one may tell me. But this is not the point for me. I just try to share with you my opinion regarding what will happen, using logical arguments. If we approach business only with our heart and feelings, then we will end up with negative surprises. Prices will rise when there is a reason for this, not because we wish it to happen).
The same negative course until the end of the year
Today I would like to discuss with you the evolution of the prices until the end of the year, as the signs are already clear: The Real Estate market in Romania will continue its negative course.
There are many reasons why this will happen. Let’s check the most important ones together:
· The economic environment remains turbulent in local and European level. In the last 6 months we saw the prime minister changing twice, while the Romanian currency devaluated to a new historical minimum. Even if this is not so dramatic, it’s certainly not a sign that investments will be increased, on the contrary. At the European level, Greece, Spain and Italy are in the center of attention, while their banks need new capital, now.
· The banks in Romania do not have available funds to finance many Real Estate loans. “Real Estate” remains a forbidden word for the majority of Romanian banks. Their resources are mainly allocated to problems that need to be resolved, or to short term loans like “working capital for a maximum of one year”. Their interest rates are not attractive, while their appetite for housing loans is at the minimum level of the last 3 years.
· Cash remains expensive. Whether you wish to buy an apartment, a land or a commercial space, you know that the available cash on the market is limited, so you will treat yours as something precious. When you see that cash is expensive, you search for lower prices, in order for investing your money now to be “worth” it.
· Purchasing power remains weak. A banker friend of mine told me that “Real Estate people who deal with residential properties have to be prepared for the new era that has risen: The time of the Romanian pretzel”. He claims that the vast majority of Romanian clients cannot afford the average prices of today, so either prices have to drop or the market will remain frozen. “They like to eat croissant, but they can only afford pretzels, so in the end they will buy just these. The same stands for residential properties, especially out of Bucharest”. (Is he correct? I will write more about it tomorrow).
· Mentality and legal frame remain stable: not good. The mentality on the market remains the same and it is not going to change anytime soon. A minority works hard and tries to build something serious, while the majority continues trying to find easy money, without any rules, self-respect or other “worthless” values. The legal frame remains untouched: A new law is needed, but the politicians have no reason to fight for it, when they see the majority of Real Estate people being indifferent to the issue. So we will continue doing business in an environment that does not provide security to investors = less transactions.
Any exceptions to the rule?
Yes, there are:
· The Retail sector is not at its best, but it has better potential. Also, in case the salaries of public servants will increase this year (with the return of the 25% which was cut in 2010), the consumption power will significantly increase.
· Income properties. The good ones are still sold fast (I constantly have many more clients than good properties for sale).
· Industrial properties are stable as always, with minor declines comparing to other sectors.
· Residential properties in Bucharest targeting clients willing to invest 120.000 – 200.000 Euro. In some areas there are very few options left and the prices do not really seem to decline anymore.
· Specific properties with added value due to their location, quality of construction or other value-add parameters.
PS. All these are valid in the scenario that we won’t witness a “tragedy” with Greece or Spain. If this happens, then the decline may be much worse than “small”. Better days may come in the future, if the structural problems of the European Union are resolved.
What is your opinion?