BRICKS AND MORTAR: Romania risks losing its moment in the property investment sun

BRICKS AND MORTAR: Romania risks losing its moment in the property investment sun
Last year's sale of the Radisson Blu in Bucharest showed there are deals to be done in niche segments of the property market.
By Clare Nuttall in Bucharest March 30, 2018

International real estate investors including major European institutional investors are actively looking for opportunities in Romania, but the lack of high quality developments on the market is proving a problem. 

Speakers at the SEE Property Forum in Bucharest on March 28 confirmed that they had been approached by “traditional” investors including German funds, and anticipated a window of 12-24 months ahead during the peak of the current growth cycle as a time when Romania would become increasingly attractive as opportunities in the more mainstream markets of Central Europe start to dry up. 

Markets like Poland, the Czech Republic and Hungary have been extremely active in recent years, but with yields now falling, and the small Hungarian market in particular rapidly running out of product, investors are looking at Romania as well as other Southeast European economies. 

Thus far, said Robert Miklo, director of investment services at Colliers International, the boom seen in CEE in recent years “stopped on the doorstep of Romania” but he believes there is reason to be optimistic that the flow of investment will materialise in Bucharest in the near future. 

Other professionals concur. They cite approaches from German funds, among others, though as Silviana Peter Badea, managing director – Romania at JLL, points out, while a lot is happening in terms of behind the scenes negotiations, “there is not a lot of hard evidence of transactions yet”. On the other hand, she anticipates that “this year we will see the right names coming here, the type of investors that put Hungary on the map. We've been waiting for this for a while, and we are now at the peak of the market. As investors are pushed out of Poland and the Czech Republic by falling yields, Romania is the next large market they can play with.”

Assets gobbled up 
The main problem that lies ahead, spanning the office, retail and logistics segments, is a lack of attractive product. This is not peculiar to Romania; Lila Pateraki, chief investment officer at Zeus Capital Management, says it is evident in all the CEE markets, where her firm is finding it increasingly difficult to identify products that fit its strategy. 

“Growth seen in Romania stopped last year. There were a lot of transactions in 2014 and 2015 that took out of the market the majority of the available product. When investors come here trying to find product—not distressed but core assets—there is a handful if any.” 

For example, Romania saw a mini-boom in logistics deals in the mid 2010s, with deals like CTP’s purchase of ProLogis’ Romanian logistic park. But those transactions gobbled up most of the available assets. “Now everybody is building because there is nothing left to be bought here, there is no acquisition pipeline,” says Ana Dumitrache, head of investment properties Romania at CBRE. 

“I think interest is finally coming this year, but if you look at what can be traded, we might see a spike in activity in office trading and there would definitely be interest in retail and industrial, but I think stock in shopping centres and industrial space is so tightly held, I don't see a lot of activity in these two sectors,” agrees Miklo. 

The Romanian market is already dominated by two major investors — Globalworth and NEPI — and given the relatively low amount of available property, others may be deterred from entering a market where two players are so strongly established.

Lucrative niches
This is not to say there aren’t opportunities. The conference took place at the Radisson Blu hotel in downtown Bucharest, which itself was the subject of a change of hands last year, in a rare transaction in the niche hotel sector. 

Badea, whose firm advised on the deal, stressed that the transaction — the largest single deal in the history of Romanian real estate with a non-typical asset class — had brought in fresh capital (the buyer of the Radisson Blu and adjacent Park Inn hotel were Revetas Capital Advisors LLP and Cerberus Capital Management) and could be followed by more nice deals. 

“We have asset classes not tapped into — residential, student housing like in Poland and Western Europe - there are classes that might become a product to answer a demand,” she says. “That’s what we can take out of the Radisson transaction: there are new kids on the block as long as you offer them what they are looking for.” 

Other panelists highlighted potential opportunities outside Bucharest, such as retail and office developments in secondary and tertiary cities across the country. 

Yet there are other obstacles. Also holding the market back are the increasingly unrealistic price expectations on the part of sellers. “I’m afraid that as interest grows we might see a mismatch in demand and supply in terms of pricing, which might cause Romania to miss the cycle. We have already started seeing sellers’ expectations a little bit ahead of what the country allows,” warns Pateraki. 

Then there is the political situation. Corruption remains a problem despite the efforts of Romania’s National Anticorruption Directorate (DNA) to clean up the country, and with no less than three governments in the last year and numerous ad hoc policy and fiscal changes, it’s perhaps not surprising that some investors are wary of committing to Romania. 

The best most speakers could say on this subject is that given the situation in Hungary and particularly Poland, whose right-wing governments have put them in direct conflict with the EU, Romania is starting to look no worse than some of its regional peers. 

No longer a black hole
Should the ongoing property investment boom come to Romania, a couple of other SEE markets, while much smaller in terms of population, are not far behind. 

Bulgaria saw a record year in 2017 in terms of the number of transactions, which added up to almost €1bn. Among them were the €253mn sale of Sofia’s biggest mall to NEPI. But the country faces some of the same problems as Romania — a small market and a high level of corruption, as highlighted by the ongoing scandal over Czech energy firm CEZ’s sale of its local assets to a small firm owned by a friend of the energy minister. 

Serbia, while not an EU member yet, is also increasingly of interest having been a “black hole” for many investors previously, and there continues to be a lot of resort development along Montenegro’s Adriatic coast.