Bogdan Preda in Bucharest -

There's a somewhat of a cooler wind blowing through the Romanian real estate market these days since the US housing slump. There is talk of prices stagnating and, in some cases, even falling. This begs the question, is the Romanian real estate boom over? The honest answer is that it isn't, but the days of 10-fold profits or 1,000% yields are.

The fact is Romania's real estate market is somewhat more mature these days. In this case, the meaning of the word "mature" relates decisions being made in a wiser manner, principally because the price of property has reached its upper limits after a sustained push by owners and speculators alike, on expectation of accession in the EU and very strong demand.

Here's a real example of what happened in Romania in the past five years: in May 2003, a plot of land of between 500 to 1,000 square meters (sqm) in the capital city's now exquisite northern area was selling for about $50/sqm. Now, if there's still land for sale in that area, it sells for €1,200-1,700/sqm, up to 30 times more than it used to be exactly five years ago. Meanwhile, the cost of building a house has doubled in line with more expensive labour, increasing demand and more expensive building materials, while the per-sqm price for new constructions has tripled or even quadrupled in Bucharest. For example, it would cost a developer up to €1,000 per newly-built sqm, while the final sale price varies from €1,700 to €3,000. Great business, if you can get it.

Take Gigi Becali, for example, owner of the Steaua Bucharest football club and a maverick politician. The man is currently one of Romania's richest, with a fortune of almost €2.2bn, four times more than four years ago, according to a ranking last year by Capital magazine. And he achieved that fortune without working too hard. How is that possible? He simply sat on the property he bought in and around Bucharest after a series of speculative moves more than a decade ago and waited for the price of land to grow. So his fortune grew in line with the market. Becali's family owned agricultural land around Bucharest and raised sheep on part of it more than two decades ago. Or so the story goes. Today, some of Bucharest most expensive residential areas and shopping malls have been built on precisely those areas.

Or take Ion Tiriac, the famous Romanian tennis player and Boris Becker's former coach, a tennis man turned businessman, who is now owner of the country's largest insurer as well as a dozen car dealerships of makers such as Daimler Benz. He too, has grown his fortune by hundreds of millions of euros just from land speculation or development.

The truth is that someone who had $10,000 about 10 years ago in Romania to invest in land in the right areas could easily be a multi-millionaire today. Whereas today €10,000 isn't enough to even buy a house in the countryside in a 100-kilometre radius around the capital Bucharest. That was great business too, if you got it.

So what happened between then and now? Why isn't it as easy to make money out of real estate in Romania as it used to be? Not only is land more expensive due to hysterical land speculation, but also because qualified labour is more expensive and scarce since hundreds of thousands of Romanian construction workers emigrated to other countries in Western Europe, mainly Italy and Spain, in search of higher wages.

And yet, the reason why the real estate fever hasn't stopped altogether is not so much a continuation of the rampant speculation, but more to do with the huge demand for new homes as well as new infrastructure projects. That demand is not driven by Romanians buying a second home to rent or sell at a higher price, but by the simple need to provide new homes for families and places to run businesses for companies and retailers, especially in large cities like Bucharest. Put simple, the real estate speculation frenzy is more or less over - now the time has come to build. And that's precisely what's happening.

Communist chic

The value of Romania's real estate market is forecast to grow to €23bn this year from €18bn in 2007, based on calculations by the country's Public Notaries Union, which gathers taxes on real estate transactions. In 2007 alone, the average asking price of old apartments in Bucharest leapt 50% from the previous year, according to the business daily Ziarul Financiar, mainly on raging demand triggered by cheaper loans. And, strange as it may seem, these are prices for apartments of poorer quality built in the last decade of communist rule, between 1980 and 1990. For example, the price for a 70-sqm, two-bedroom apartment in Bucharest's Dorobanti area, lately packed with cafes near the two parks in the neighbourhood, surged from around €50,000 in 2004 to an unbelievable €200,000 this year. Even in the more blue-collar neighbourhoods such as Mihai Bravu, the 80-sqm apartments that used to sell for around €35,000 in 2004 are now going for €150,000. That's a huge price, and clearly overpriced in a country where the net monthly average wage doesn't exceed €350, and is still expensive even for Romania's richest employees, those in the banking and finance sector, who make about €1,000 euros a month net, on average. Simple math shows that a lifetime isn't enough to pay off the mortgage of such an apartment.

Another important reason for the rise last year and in the first two months of this year had to do with false expectations by owners, who bet on the idea that accession to the EU at the start of last year would result in huge amounts of money pouring into the market.

There is also a suspicion amongst officials that prices on the real estate market are being artificially inflated by developers to keep the market hot. National Bank of Romania Governor Mugur Isarescu claims that the prices asked for by owners and developers are often exaggerated. "If they were real, we should get scared," he said. Isarescu said the central bank is already working with public notaries in order to get more realistic quotations for prices, which it needs for its economic modeling. The country's National Statistics Institute also plans to develop a real estate index for the first time in the third quarter.

Regardless of real estate markets in the West and speculators here, one thing is clear about Romania's property market: demand for new homes will continue to be high, because a lot of people want to move into large cities, where wages are higher, while those who already live in the cities want to buy their own houses rather than pay exorbitant rents. Different studies by realtors and statisticians alike put demand for new homes in the country of almost 22m inhabitants anywhere between 700,000 and 1m apartments over the next 30 years in order to reach the EU's average standard of living.

So, the good news for developers and construction companies alike is that at least for the next 10 years, they can bet on having a lot of clients, especially if they lure them with more realistic prices rather than the speculative ones often asked for nowadays. The less good news for developers and constructors is that they will have to accept giving up on their annual yields of as much as 300% and move closer to more realistic, yet still great yield levels of 50-75%. Going higher than that would result in potential buyers simply not being able to afford the prices.

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