Romanian Real Estate 2007 vs. Romanian Green Energy 2012. 4 major differences between 2 “golden periods”

* the article was first published on the 28th of February 2012

A large portion (more than half) of foreign investors targeting Romania this year, will invest in the Green Energy sector. The investments will be spread throughout all energy segments: wind, solar, hydro and biomass, since each of them appears to offer highly attractive returns on investment. It is true that the situation and investment climate has some common characteristics with and reminds me of the “golden period” of investments in Romanian Real Estate pre 2008. However, I believe that there are significant differences in the way that the 2012 Romanian Green Energy investment market is structured. Let’s check the four reasons why I believe that the situation is different this time:

1. In 2012 no deal is signed without a proper, thorough due diligence

In 2007, hundreds of Real Estate transactions were concluded without being carefully checked. This was because either the lawyers did not have time to even meet each other and agree on the contract terms or the sellers were forcing the clients to move fast, threatening to cancel the deal. It was a seller’s market, everyone was in a hurry and unfortunately we all know the troubles and dead ends of this approach.

In contrast, in 2012 even the most minor piece of information is double checked before a deal is concluded. In addition, specialized companies undertake and successfully deliver on time the sought after due diligences that investors are looking for. Therefore the investors are cautious and overall everyone is accurate and careful, which is a very positive sign.

2. In 2007 there was only “hope for future income”. In 2012 the income is here and it is real.

In 2007, the expected income and profit for a large portion of real estate investments was estimated based on “optimistic” studies, which allocated a significantly high weight on the “hope” factor, which is difficult to measure and very subjective. This blocked many investors into owning properties that require large regular expenses (e.g. property taxes) but bring zero income.

In 2012, the situation is different. Romania is the first country in the E.U. implementing the new directives of European Commission for Green Energy. It is true that the forecasted price of the “green certificates” may be inflated, however the investment in Green Energy produces a significant income and a monthly return on investment and from day one. This element is strong even when only the minimum prices are considered in the equation.

3. Once more it’s a “beat the clock” game. But now it is a buyers’ market

In 2007 many investors were in a hurry to buy “any property”, being confident that the property would be enormously more valuable within a very short timeframe. This pushed property prices to artificially high levels. Buyers were trying to “beat the clock” and sellers were to some extend… worshiped if they decided to sell their properties.

In 2012 it is also a “beat the clock” game but for the exactly opposite reason. It is a fact that investors that are not able to quickly construct and connect to the grid during 2012 – 2013 are at risk of being excluded from the 3.000-3.200 MW that will benefit from receiving subventions. Currently therefore the challenge is to strike a balance between seriousness, accuracy, careful and well-calculated steps within the established time constraints. Speed is essential, however this time it is the buyers who set the rules.

4. Financing. Extremely easy in 2007. Extremely difficult in 2012…

In 2007, banks were “dying” to sell their financing products to the investors, even providing easy finance to projects that sound ridiculous today. With “fast and generous loans” and liquidity that appeared unlimited, even the most unlikely investor was seduced to claim his piece from “the pie”.

In 2012… the situation is entirely different. Thanks to the excellent work of Mr. Isarescu and his team at BNR, the Romanian banking system is securely protected.  Financing though remains difficult to achieve, even for investments in Green Energy. There are no more than five banks that provide real finance for projects and this financing takes place after going through a lengthy list of procedures.

To sum up and taking into consideration all the above mentioned parameters, who can really be the investors who will earn profits in the Romanian Green Energy? I would say the ones who:

• Know what they are doing very well and why.
• Have a long term strategy for their investment
• Secure the financing of their projects.
• Insist in crosschecking every detail of every deal.
• Select the “right” professionals to advise them during different stages of the investment.
• Don’t believe in fairytales, but remain optimistic with conservative expectation.

What is your opinion?