Anca Paduraru in Romania -

The minivan packed with would-be investors crawls past the narrow alleys that run between rows upon rows of yellow-washed, two-storey houses built at an arms-length to each other. The PR assistant proudly points out that all 202 of these houses went for €300,000 each. One potential Swedish investor in the minivan raises his eyebrows and mutters: "I would have said these were bungalows…"

"One man's bungalow is another's upper middle-class home," pipes up Carmen Sandulescu, CFO of the local property developer Impact Developer & Contractor, which built these homes in the Class district, situated north of Bucharest and a few hundred meters away from the Baneasa airport.

Sandulescu says Impact has already repositioned itself in order to secure a piece of this segment of the country's real estate market, which she estimates is about the size of 100,000 Romanians willing to pay such prices for such houses.

That may seem small, but the total size of a housing market where the average bread-earner makes just €300 a month yet would require a monthly net income of €1,000 to qualify for a mortgage is estimated at a maximum of 1m housing units. "Even so, there is a lot of room for growth," says Sandulescu.

New niche

Of the total 38,200 new houses that the National Institute for Statistics estimates were built in 2006, she reckons only 15,000 were put on the market by developers like Impact, with the rest built by the homeowners themselves.

Impact has built and sold 1,400 new homes since it began operating in 1996, Sandulescu says. Listed on the Bucharest Stock Exchange the same year and also included in the Dow Jones Wilshire Global Total Market Index, Impact plans to increase its current RON100m (around €30m) share capital with a capital increase of some €60m by the end of June. This money will be used to develop its land bank of about 1.7m square meters in six cities, of which 1.0m is in the capital Bucharest, and go into large-scale real estate development, beyond the residential market it has catered to until now.

"Repositioning meant giving up our building division and using subcontractors instead. It also meant scaling down our workforce to a couple of hundred, which now focuses solely on managing the design and authorization of the projects," says Sandulescu. "We moved from residential only into developing whole neighbourhoods, with office buildings, recreational areas, shopping malls, daycare centres and the like."

She put the slump in the firm's business in 2005 down to this repositioning. After selling 380 homes in 2004, Impact sold just 160 in 2005, but in 2006 this figure recovered to 320 houses. This was mirrored in the company's financials, which showed net profit bouncing back in 2006 to an estimated RON18.7m, after coming in at RON10.7m in 2005. She also attributed the weakness in 2005 to the fall of the euro against the leu, with the company having to pay building costs in the local currency while most customers paid for their homes in euros.

Why this restructuring in the business? “We had to change; the profit margins went down rapidly and there was no more room for growth,” Sandulescu explains.

Indeed, Impact more than doubled its profits every year between 1997 and 2002, but after reaching the RON18m mark in 2002, income has remained there with the exception of that rotten year in 2005.

Sandulescu says subcontracting the construction work will allow them to raise the price of houses above the amount needed to cover the 15% profit margin of the construction companies. Profits margins for Impact would be far higher still if all the work was focused, for instance, on having building licenses upgraded from erecting three-story buildings to eight-story buildings on a given plot of land.

"There are more than enough customers willing to pay the extra price for the extra comfort," said Dan Popp, Impact CEO. "Just look at how many BMWs, Mercedes Benzes and Humvees drive around in Bucharest."

There are 5,597 of them registered in Bucharest alone, to be precise, the city police say: Ferraris, Porsches, Masserattis, Bentleys, Rolls Royces, Lexuses, Lamborginis, Infinitys, Humvees, Mercedes Benzes, Cryslers, Jaguars, BMWs, Aston Martins, Audis, Alfa Romeos and Cadillacs. And Impact says most of its clients didn't need a mortgage, as they paid in cash.

"To assess if there was a boom in sight or at least a steady growth, one should be able to gauge on how many people with that kind of cash are walking around in Romania," says a Swedish investor who did not want to be identified. "And for how long they would be able to do that."

Impact is also having a spot of bother with Romania's anti-trust regulator, which announced Wednesday it's investigating Impact's acquisition of the local insurance broke Hobbit Intermediere Asigurari in 2001. The Competition Council says this acquisition was made without its prior approval, the deal being approved only in December 2006.

"Under current legislation, it is forbidden to perform an operation of economic concentration before the Competition Council has issued a decision," the Competition Council said in a statement.

Sandulescu says Impact already paid a fine of RON3,000 in December for delayed notification to the Competition Council for this acquisition, but said it has yet to contact the Council and find out why it has opened an investigation into an alleged breach of the law prior to their approval of the deal in December.

"Our company notified the Council in December 2006 that it had bought in 2001 an insurance broker," she says. "It is difficult for me to understand in what way Impact could have breached the law since, on the one hand, the company it bought did not operate in the same industry and, on the other hand, the latter had a 0.8% share of its market, and now is down to 0.4% of it... We still have to contact the Council and find out why it opened now an investigation into an alleged breach of the law prior to their approval of the buying deal in December 7. It does not make sense."

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