BRICKS & MORTAR: A Roman holiday (home)

By bne IntelliNews November 23, 2006

Adina Postelnicu -

Romania's real estate market has the glamour of designer jewellery – everybody wants a piece of it.

Characterized as frenetic by analysts, the property market offers yields that jumped to over 20% in the last two years and has even accelerated as Romania gets closer to joining the EU. Apartment prices have risen by as much as four times over the last three years, reaching more than €1,000 per square metre, while house prices in parts of Romania’s main cities go for half a million euros in some cases, an inconceivable sum just two years ago.

Can it continue? Needless to say, it all depends on who you talk to.

“There is pressure coming from expectations of a sudden increase in prices once Romania will join EU in January 2007,” says Lacramioara Isarescu, associate director at Trammel Mackenzie Risk Control, a property development, consulting and brokerage company. “These are false expectations.”

Isarescu does not expect big changes, rather a market that will cool towards the end of 2007. From her perspective, Romanian real estate is a sellers’ market, with lots of money but a lack of many viable projects.

Many are more pessimistic. Recently, economists began drawing attention to the danger of an overheated market. Valentin Lazea, chief economist of the central bank, went so far as to warn the public earlier this year of a bubble and a collapse in prices.

Others, however, predict more good times ahead.

Myths and money

“It’s a rolling stone… 2007 will be a very good year for real estate investors in Romania,” argues Philippa Weitz, managing director of PWT Overseas, a UK company that represents a Romanian real estate firm.

A study done by PricewaterhouseCoopers (PwC) reckons that EU accession will help propel the market onwards and upwards. "The prices for new residential properties should continue to rise as the expectation is that post-accession prices will align to the ones in the European Union," the consultancy says.

Certainly, the geographical spread of investors is widening. Investment funds that are pouring money into Romanian real estate now hail mainly from Austria, Germany, Italy, Ireland, and more recently as far afield as Lithuania and India.

In Timisoara – a city in northwest Romania where PWT Overseas' Romanian partner is based – Weitz is expecting “a buoyant market, with prices increasing sharply over the next two years.”

Only afterwards will prices cool, she adds, as the market can't maintain such growth for too long.

Indeed, Timisoara, where the Romanian Revolution began 16 years ago, is the fastest growing city in Romania, with zero unemployment and investments that are the envy of the rest of the country. Yet the British, known for their obsession with property, have so far been “a bit nervous" about investing in the country, Weitz says.

She attributes this to myths about Romania that are perpetuated in certain quarters of the British press. “Romania is capable of offering the same love affair that British people have for France and Italy – all the ingredients are there,” Weitz says, alluding to tradition, fantastic architecture, good music and fine wines.

There are other, more “serious,” reasons behind her expectations: a fast growing population that will push government to expand Timisoara, and the fact that two main routes of the fourth Pan-European corridor - which will enable travel between Europe, the Balkan Peninsula and the Near East - will meet in the Timis County area.

In comparison with Bulgaria, Weitz thinks Romania has the advantage of having very little off-plan selling. Therefore, the market is less speculative and resembles more what she would describe as a “proper real estate” one, where people sell what they already have, not what will be built at a future date.

Weitz also says that while Bulgarian real estate is enjoying a boom too, supply there is not so diverse, as the market has been inflated by overseas investment. Bulgaria is thus more vulnerable to sudden changes overseas.

Fanning the flames

The main cause of Romania's frothy property market is the simple fact that demand far exceeds supply. The PwC study says that, “at the current construction pace of 30,000 houses per annum, the estimated deficit of 1m dwellings could only be covered in a time span of 30 years.” In addition, the price of land and properties is still relatively low compared with other markets.

There is another fundamental reason. Lending, once a forbidden fruit for most Romanians, has became more readily available in a booming economy with lower interest rates and inflation, as well as a stable and restructured banking system. Non-governmental lending jumped 56.9% in the year to August. Lending in the national currency surged 126 % during the same period. Still, analysts say Romania’s relatively low level of financial intermediation indicates there is more room for future growth.

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