The 20.000 Euro / sq.m. commercial space in Bucharest and the “zombies” that try to confuse the market (once again)

This summer has ended with an “interesting” announcement in the Real Estate segment, which gave the media what they want: a story that sells and attracts people’s `attention.

Cocor is a company that owns a shopping gallery in the center of Bucharest and several commercial spaces around the city, which is currently facing economic trouble. During the following days, the Cocor board will decide if they accept to sell a commercial space of theirs for the price of… 20.000 Euro / sq.m! The property is located around Unirii square, in the heart of Bucharest and it benefits from an impressive pedestrian traffic.

So congratulations to Cocor. This unusual story would end here, being the exception that confirms the rule. Cocor has an excellent deal as a seller, the buyer probably knows why he is paying so much, so everyone is happy. Well… not exactly…

“Zombies” are back

Since the beginning of the economic crisis, there are many “zombies” of the past that try to confuse people, lying to them, announcing that the crisis is over and that the prices will start rising again. They usually hit twice per year: Once in December – January, predicting “an excellent year, with huge prices” and then in September, being positive that “the prices will increase by the year end”. We saw this attempt in 2009, 2010 and 2011.

In 2012 they were a bit more careful, as the economic environment makes it difficult even for the dreamers to believe such unjustified theories. But now, once the 20.000 Euro / sq.m. news was spread in the media, many experts and “experts” declared all sorts of things, trying to tell us that “the market is rising again”.

Why do they do it?

One may ask: “Why all these people desperately trying to convince us that “the glorious days will be back”? It is simple: This is how they learned to do business: Telling the property owners that their property is worth much more than it really does, sometimes comparing it to German and Austrian assets. At the same time, they were urging investors to buy anything available for sale, at any price, because “soon the price will be even higher”.

This behavior created the bubble that multiplied the prices and burst officially in September 2008 (unofficially since the end of 2007). Since then all these “experts” have not managed to adjust to the new world, where the “client is the king”. This is why they have gradually become “zombies”, relics of a past which is not likely to return in the following years. And they are determined not to change.

How people are loinge money by listening to them

Since the crisis started, I personally know more than 100 (one hundred) Real Estate transactions that were stopped because the owners were still dreaming, using as arguments the analyses of the “zombies” above. Looking back at all these stories, I can guarantee to you that in 90 – 95% of them the owner who refused to sell for 100 Euro has finally sold for 30 – 50 or did not sell at all (and in half of the stories he also lost his property to the bank).

The worst thing that you can do during this harsh economic environment is to listen to all these “wishful thinking stories”, refuse to accept reality and keep on waiting for the “hero client, on the white horse and pay you the price of your dreams”. The way that the 20.000 Euro / sq.m. sale is promoted in the media has exactly this effect: Distorts people’s mind, confuses them and makes them risk their future, hoping that they will also find someone to buy their property for a huge price as well. If these people are wealthy, the damage is small. They will simply be disappointed. But if they are stable from an economic view point, especially if they have obligations to cover, by not selling at the market price, most of them will sell for a much lower one in the near future.

“So what is this 20.000 Euro / sq.m. deal? Is it justified?”

This is a deal that has similar effects to the illusions in the dessert. As we can see movies, one is wandering around and suddenly his eyes convince him that he is seeing a paradise full of water waiting for him. He starts running towards it and ends up jumping “in the water” and landing in the same hot sand he used to walk on before…

Each investor has his own strategy, or at least he should. So the one who pays 20.000 Euro / sq.m. probably knows why he is doing this. I do not know all the details of the story, but generally speaking a high price is paid for the purchase of a commercial space when:

• The location is excellent, one of the best in the country.
• The pedestrian traffic is the maximum possible.
• The location is also used as “exposure” for the tenant, justifying a high rent which includes marketing costs.
• The tenant is a strong local or multinational company, successful in his field of activity.
• The lease is a “closed” one, unbreakable for many years to come.
• (Many investors are asking for corporate guarantees in the lease agreement, making sure that the tenant will not exit before the end of the lease, but there are very few contracts in Romania that include such terms).

This 20.000 Euro / sq.m. deal comes in a critical moment, just before the European and world economy enter a very challenging economic period. Apart from the directly involved people, no one else knows all the parameters of the agreement. This is why using it in order to speculate for the future of the whole Romanian Real Estate market is, at the very least, wrong. If not dangerous…

What is your opinion?