Amelia Turp-Balazs in Bucharest -

Given that the editor-in-chief of a popular guide book to Bucharest once described the city as "a cross between the worst of drab, socialist-era Warsaw and the utter chaos of Cairo," it's somewhat amazing that Romania’s capital has since become home to one of the most lucrative real estate markets in all of New Europe.

Even during the late 1990s, when the smart set cashed out of Spain and Portugal and began heading east for Prague, Warsaw, Budapest and Bratislava, it was a brave soul who considered going that bit further to Bucharest. Yet it was this group of the bold and brazen who made the biggest money of all. Any comparison of property prices in Bucharest from 1999 to today shows annual growth rates well into the three figures. In some years (notably 2003-4, when the local mortgage market first exploded), annual returns of 300% were commonplace. Fortunes were made and nobody lost a penny. Bucharest was the biggest no-brainer in European property. And while those days are now long gone, Bucharest - for all its ugliness, faults and problems - remains a place of great opportunity. You just have to be a little more careful now.

Losing heads and shirts

As with any gold rush there are plenty who have already lost their heads, and with it their shirts. Back in April a puff piece for a number of overpriced real estate projects in and around Bucharest appeared in the UK’s hallowed Daily Telegraph. Aimed at Brits desperate to get on the "second home abroad ladder," it described Bucharest as a city of "wide boulevards, elegant historic buildings and vast squares, which are distinctly Parisian." If you stretch the imagination a little, the description could perhaps be applied to a small part of the city centre. Other claims - from a journalist who had clearly never visited the city - like, "in trendy clubs, of which there are many, you can pay [€290] just to get a table" and "an average salary here is [€1,450] per month, which is higher than Spain," were just plain nonsense. Most comical of all was the suggestion that "Bucharest is well placed for the soon-to-be-completed Budapest-Moscow motorway."

Now, besides the fact that the information was inaccurate (going to even the trendiest Bucharest club is affordable for virtually anybody, an average salary is closer to €350, and there is no Budapest-Moscow motorway and if there ever is, Bucharest will be about a thousand kilometres south of it), it underlines the idea that Bucharest remains to most Western Europeans a mysterious, little known place near Russia where you can make loads in real estate. And some developers are cashing in on this ignorance: those who buy into the projects puffed in the Telegraph piece (one is a development of houses south of Bucharest, sold in its brochure as an idyllic village minutes from the city, popular with Bucharest’s middle class; in reality a Godforsaken place an hour from the city, and popular only with shepherds and their sheep) will almost certainly not see the promised investment returns. Real property investors who bother to visit, shop around and place their money carefully can still do well.

'Tis the way of things in these parts

What might look like a bubble from afar - hundreds of thousands of euros for apartments in communist-era blocks? - is in fact a healthy market where demand from local buyers, let alone foreign and strategic investors, still outstrips supply by as much as 7:1 in some parts of Bucharest. Prices will, therefore, continue to go up, especially for smaller, more affordable apartments.

Yet high demand is not the only reason prices will continue to rise: the country has lost one-third of its construction workers to migration over the past few years, driving up labour costs. A major increase in the cost of building materials has also forced property prices up. Greedy agents too are having their effect: in a country where agents take a whopping 2-3% of the sale price from both seller and buyer it is not unusual for local agents to add up to €10,000 to the price of an average apartment.

The selling price for new-build houses anywhere in Bucharest has now exceeded €2,000 per square metre (sqm), while for apartments in communist blocks erected after the Bucharest earthquake of 1977 (and, therefore, said to be quakeproof), buyers are expected to pay over €1,400/sqm. It is now impossible to buy a two-bedroom apartment in Bucharest, old or new, for less than €100,000. Three bedrooms will cost you upwards of €130,000. Sure prices are inflated, but given the demand it is highly unlikely they will go down.

Bucharest is also uniquely shielded from mortgage-rate hikes. Because until very recently it was impossible to borrow more than two-thirds of a property’s value (it is still very difficult), negative equity is virtually unheard of. With the city’s population growing at an alarming rate, the value of communist-era apartments is expected to rise at least a further 10-15% this year, as the number of new developments (even though there are no less than 35 projects currently under construction) is simply not enough to meet demand. Maria-Luiza Ostaficiuc, a consultant at Eurisko, one of the city’s biggest estate agencies, estimates the price of newly built apartments will increase even more, "by as much as 20%."

A recent study by consultants at Colliers, an estate agency, found that investors were increasingly diving into this residential market. Take for instance an off-plan acquisition of an apartment that sells for €200,000. The developer takes a 25% advance and the rest of the money when the building is delivered. By applying the 20% annual price increase for new buildings, when the apartment is finally ready - which is on average two years after building begins - the apartment will sell for €288,000. So far this year, the residential arm of Colliers has sold more than 1,000 such off-plan apartments in five of the projects it promotes, with many investors buying up whole floors, even whole blocks. The one thing investors are not buying are houses that are an hour’s drive south of the capital. Make sure you don’t either.

Send comments to The Editor