Old City 2011. Did we reach the ceiling for rental prices?

* the article was first published on the 1st of November 2011

Today my company, MORE Real Estate Services, is publishing the first detailed market study for the Old City of Bucharest, with a focus on the High Street Retail market. Aside from the information about the 3 commercial zones of the area, the tenants mix and many more details, the main conclusion is this: All rental prices have increased.

This is also confirmed by the asking prices of the empty spaces today. Property owners have raised their expectations further. Sometimes they even ask for the same price for the ground floor, the basement and the first floor, despite the obvious difference of value for the tenant.

In a market that registered rental declines or stability in almost all areas of Bucharest, the impressive rise of the Old City has become “the talk of the town”. The interest is still very strong, with tens of new players willing to make a bid for it. But there is a major difference compared to one – two years ago: now retailers are more skeptical, evaluating the proposed rent. They do want to invest, but not “at any cost”.

The main question that clients have about the Old City is: “Do you expect the prices to further increase or did we reach the ceiling?” I think that we reached it and I consider that I have strong arguments for this:

·         The economy is slowing down. With Europe and the world entering the new phase of the crisis, Romania will slow down as well. It is true that during the crisis we choose the top locations and we pay for them, but investors are reluctant to risk.

·         The asked rental prices reach or exceed the average quota of rent in the total revenues of a company. You cannot have a healthy business by paying 30 – 40% of your revenues for rent. Except if you make other compromises.

·         The competition is very hard nowadays. Tens of new players have entered the market in the last 12 months, boosting the competition furthermore. The number of clients has increased as well, but not as much as the options they have.

·         Many available properties need heavy renovation. This means big costs as well, which cannot be recovered if the rent is high.

·         The actual offers require very capable business people, who will be able to develop their business model despite the high rental costs, the competition and an economy “without strong growth”.

·         More than 10% of actual projects are for sale. This is the first part of the city where we see people who want to sell their business and exit. This means that their project failed, due to various reasons. It is good that we see new investors taking their place, but this is a sign that “the Old City is not for everyone”.

All these do not mean that the area lacks potential. On the contrary. But it is important for us to bear in mind that a different approach is needed, before we invest there. The majority of success stories in the Old City area are based on an affordable rent, aside from the viability and all the other parameters of a Retail project.

Exceptions confirm the rule. A top corner, a newly renovated street, a successful shop nearby may add value to a property, increasing its rent compared to the past. But the rule is one: It would be dangerous for us to go higher than these levels. If we do it, a bubble will be created. If not, “the sun is shining” in this part of Bucharest.

To find out more about this report, enter in our company’s site: www.more-group.eu