Aversa sale: The investor’s risks (that we finally have to respect) and the correlation of risks and profit potential
Last week an important transaction was concluded in the Bucharest Real Estate market: Aversa industrial platform, in the center of Bucharest was sold to Benevo group, directed by the famous Michael Topolinski. Media focused on the fact that there were 14 unsuccessful auctions and Mr. Topolinski’s offer was submitted in the 15th one, being the only “brave” investor who decided to invest there. Why did this happen?
The risks of an investor in today’s Romanian Real Estate market
The vast majority of people have the impression that “investors have money to lose” and that “it is easy to handle big projects”. This is the way they were taught, they are not to blame. But the reality is completely different. Let us check some of the risks that Mr. Topolinski (and similar investors) undertake by paying 17 million Euro for an industrial platform in the center of the city of Bucharest:
- He bought a company in bankruptcy since over a year ago
- He bought a property with 2 litigations which are not finalized (positive result in first levels of Justice)
- He has a factory to move in a new, modern factory, always keeping a minimum of 200 employees in place (don’t tell me “this is easy, I can bring you tens of examples of entrepreneurs who signed the same obligation and did not keep it)
- In case he decides to develop a Real Estate project, he needs some 1 – 2 years for PUZ and Building Permit, with the risk that the Law of Urbanism may change (and diminish the value of his property).
- If he develops a Mall or Shopping Center, the risk is not to find financing for such a large project
- In addition, he may fail in renting a possible Retail project, due to “reasons beyond his will”, as if it happened in 2009.
- The same may happen with a residential project with apartments to sell.
- The list can go on and on…
Great upscale potential, but still an investment full of risks
This property has a great upscale potential and I am sure that someone experienced like Mr Topolinski and his team in Benevo will exploit it to the maximum. But there are also many hidden and visible risks as well, this is why a serious investor who “bets” 17 million Euro hoping to start earning money in min. 3 – 4 years’ time needs to buy at an attractive price.
Too many people out there have the impression that “even buying expensive, the investor can still exit with profit”. Even when this is right, in business there is a reward in correlation with the risks you undertake. So if you risk 0, you cannot expect to have the same profit with someone who risks millions. Yes, he may resolve all problems and earn even more, but this is the idea of capitalism and our civilization in general: The more you risk in business, the more you should be rewarded in case of success, as you will be the one to pay in case you fail.
No risk: High price. Risk: Low price. Risk with high price: Unsold, until the price to become low again
The Aversa platform in the center of Bucharest (Piata Obor) is a perfect example of reality versus “dreams”. This kind of property can be sold only to institutional investors, who have a clear view of what they want to do, how to implement and how much time it is going to take them to accomplish their plan. They have a track record of success that can convince a Bank to finance them, even in these difficult times.
A big property full of “challenges” (the polite word of risks or problems) cannot be sold at a high price, because there is a limited number of the institutional investors mentioned above willing to “bet” with it.
Most of the times the media presents to the public only the result: “He made this move and he reached success”, saying nothing for “perfect plans and projects” that failed due to something unpredictable, leading the investor to trouble. This is why many people out there have the impression that all is easy. No, it is not, on the contrary. Especially investments that may exceed 100 million Euro (in a market like Romania) is a game for big boys, not for everyone to play.
As I explained to you in the past as well, an attractive price for the investor will be a very important “key” (together with others) for the transaction of a big property, even in an excellent location. This leads to the next big question: “So what will happen with the billions of Euro that the Banks own in properties?” but we will discuss about this issue in the near future…
What is your opinion?