Market overview
The consolidation of market fundamentals corroborated with the improvement of the economic environment provide reasons for investors to consider the Romanian real estate market as a destination for potential investments. 2013 was dominated by retail transactions, five of the seven deals closed being focused on the retail segment. As the real estate sector is benefitting from a strong economic recovery with GDP growth of 3.5% in 2013, year 2014 came with an optimistic perspective in terms of potential deals on the commercial and office segment.
The volume of transactions doubled in size in 2013 as compared to the previous year, reaching EUR 300 million. The investment fund NEPI continued to dominate the market, investing in half of the transactions closed.
Private equity funds were not attracted to invest in Romanian real estate market, being mostly dormant in the last 2 years due to lack of substance on the market. However, the Emerging Trends Europe’s survey shows a significant upturn in expectations in 2014. More than 50% of respondents say availability of debt for refinancing or new instruments will be moderately or substantially greater. For equity, they state an even more bullish note with nearly three quarters expecting greater availability. Also, the new turbulent context could make Romania even more attractive, as investors still believe in the potential of the region in their search for value and yield.
Alongside the economic recovery and an increased prospective activity, the Romanian real estate market holds an advantage over more mature markets from CEE countries in terms of premium yields of 100-250 bsp. In spite of a strong competition from mature markets such as Poland and Czech Republic, Romania presents a more attractive risk-return profile mainly due to excellent growth in 2013 (GDP of 3.5%) and an expected growth rate of 2% in 2014.
Bucharest office market - looking more attractive
The office market stock increased by 116,000 sqm in 2013 from approximately 1.5 million sqm delivered last year. Almost 70% of this increase in stock was generated by the completion of Sky Tower and Floreasca Park. The current tendency among developers is to obtain pre-lease transactions given the high absorption rates and the exigencies of tenants. In Q1 2014, the pre-lease transactions include Vodafone with 16,000 sqm in Bucharest One, Endava with 4,500 sqm in Afi Park 3 and Schneider Electric with 3,100 sqm in Green Court.
Future prospects are focused on the completion of Green Court and Hermes Business Park due to a scarce offer of central office spaces and the decision of tenants to reduce costs concomitantly with an improvement of quality of occupied spaces. In 2014, 3 projects kicked off, namely: Afi Park 4, 5 and Bucharest One.
The current dynamic activity on the office segment included renegotiations or relocations from Class A offices. On the top options for large tenants is the renewal of their contracts due to lack of large office alternatives and the most significant renewals concluded in 2013 were done by HP (26,000 sqm), Honeywell (11,000 sqm), Garanti Bank (7,200 sqm), WNS (2,500 sqm) and Webhelp (1,500 sqm). Nevertheless, relocation is another solution adopted by tenants in 2013, for optimizing the space and having all activities in one building.
The going green trend as part of the consolidation of quality will see occupiers relocate to these areas, a movement that should support growth in rents and values. Sustainability remains one increasingly important business opportunity for the industry.
High street market - a new rising segment
Bucharest high street market became more attractive for brands such as H&M or Kotton. Due to an intense pedestrian traffic, it seems that the Old City Center (Lipscani Street) gains remarkable advantage over Calea Victoriei or Dorobanti. The Old City Center is more affordable, targeting fashion retailers addressing to medium income owners. However, Calea Victoriei and Dorobanti are targeting luxury brands and therefore having higher vacancy rates as rental income is price sensitive. However, in 2013, Bonpoint, Tartine &Chocolate, Antony Murto and Porsche Design have opened their stores in these areas.
Overall, the transactions closed during 2013 sum up approximately EUR 26 million, presenting high street segment as one of the most attractive / performing as compared to last year`s results.
Residential market - the future unfolds
The financial crisis in the autumn of 2008 put an abrupt end to the steady growth of the Romanian residential segment. Even in 2013, the office or commercial segments still lagged behind due to the large number of completed and / or abandoned residential projects during the boom period (2007- 2008) that are still available on the market. Demand is still limited and to a large extent dependent on the economic growth and overall positive market climate.
The First House programme for growing middle class remained the market driver in an effort of the Government to stimulate the economic sector. Almost 50% accelerated sales compared to Q4 2012 were registered. Financing alternatives like joint venture partnerships between banks as core players and real estate financing experts and lower cost capital providers are expected to result in a fruitful and ideal combination for the development of the sector.
As the regional real estate industry expects more and better, the Romanian market creates the context for future growth through sustainable economic growth, sustained leasing activity and slight recovery of the development activity.
Strong market players already present, combined with a relative competitive advantage are solid proof of confidence in the potential of the market towards the trend dictated by the more mature markets.
