Clare Nuttall in Bucharest -
The search for lower costs and an available workforce have led industrial and services companies alike to invest in Romania’s regional cities, spurring the development of their property markets.
The trend for investors – both domestic and international – to fan out across Romania comes amid the migration of investors to lower cost parts of Europe. A similar trend has already occurred in Poland, which often serves as a model for Romania’s development.
“Moves from Bucharest to the Romanian regions are part of a wider shift in manufacturing and IT operations from west to east across Central and Eastern Europe,” Viorel Opait, business development director at Jones Lang LaSalle (JLL) Romania, tells bne IntelliNews. “Many companies initially moved to low cost, high unemployment locations, where they can pay the minimum wage for basic operations, but added value operations tend to follow.”
Among Romania’s second-tier hubs, three – Cluj, Iasi and Timisoara – have emerged as the most important.
Companies in the automotive sector, which has established itself throughout Central and Southeast Europe over the last two decades, were among the first to move into regional cities in Romania, in particular those close to the Hungarian border where they could take advantage of better transport links to Central Europe. This established Timisoara, and to a lesser extent nearby Arad, as important industrial centres for Romania. The region is also strong in logistics and agriculture.
Romania’s IT and services sector has been another contributor to growth in the regions, as those kinds of companies continued to expand almost uninterrupted through the recent crisis. This has been an important source of growth for Cluj, the main IT industry hub outside Bucharest, helped by both the presence of a major university and because of the support it has given to investors. Iasi is another hub for IT and business process outsourcing (BPO), where costs are arguably more of an incentive than in Cluj. “Cluj is very quickly developing as a hub for offshore and near-shore,” says Laurentiu Popescu, country manager for IDC Romania, in a recent interview with bne IntelliNews. “Bucharest has become overheated, so firms are looking for other options. There is no big difference in cost between Bucharest and regional centres such as Cluj and Timisoara, as salaries are quite closely aligned, but there are a significant number of graduates outside the capital.”
Andrei Botis, managing partner of NAI Romania, which is active across the country, agrees. “The primary reason why IT companies have moved to Cluj and Iasi is because they are university towns with large supplies of skilled people. Both are regional centres, drawing students from across Translyvania and Moldavia respectively. In addition, wages are somewhat lower than in Bucharest,” he says.
Following these is a larger third tier of cities that are currently lagging behind Romania’s four main hubs, but which have lost of potential to grow – among them Arad, Constanta, Ploiesti and Sibiu. “All of these will catch up, but it will take time. As prices in Cluj, Iasi and Timisoara move closer to those in Bucharest, companies will start moving to cheaper places,” says Botis.
Those in the real estate industry report that the office and industrial sectors are rallying as the Romanian economy continues to grow. Vacancy rates in Bucharest office developments are already falling, which is expected to benefit secondary cities. However, major companies looking to set up offices outside Bucharest can face difficulties finding suitable office space.
In general, office developments outside Bucharest are smaller than those in the capital, with very few of the existing operations outside Bucharest exceeding 1,500 or 2,000 square metres, “although currently there are a number of requirements for space to accommodate between 700 and 3,000 work stations,” according to a 2014 report from JLL.
Meanwhile, Botis reports that Iasi is currently one of the most active cities for new office developments because of the high demand and lack of supply, with most international firms targeting the city signing pre-lease agreements.
Quality is as much of an issue as size. “Usually, either expensive trophy projects or lower end B or C class offices are available in the secondary cities. There is a gap in the market for high quality but reasonably priced office space – a project of this type would be very successful and capture tenants from the trophy projects,” says Silviana Badea, JLL’s head of capital markets in Romania. “However, we are now seeing a second wave of developments and the projects look better.”
Despite the growth in real estate investments in other cities, due to its sheer size alone, Bucharest remains the country’s primary real estate market, at least for office space, and as yet the only one of real interest to international investors, although other cities have seen inroads by investors focused on industrial space. “Developers are now requirement-driven, so if they are thinking of investing into Romania’s smaller cities for a particular tenant now they need to consider whether this is sustainable and if they can maintain yields and rents over a 20-year period,” says Badea. “As we have seen, leasing can shift quickly to cheaper locations. Investing into a city of 300,000 people is a very different prospect from investing in Bucharest in terms of market liquidity and leasing demand.”
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