Where are we standing?
Four years after the global credit crisis, the Romanian market in general struggles to stabilize before starting to grow dynamically in all sectors again.
While Romania still remains an attractive market in terms of real estate transactions, the severe restrictions put in bank financing, as well as the Euro crisis have raised the investment risk and quelled investment appetite.
The continuous crisis in the Eurozone, which accounts for the vast majority of investments in the Romanian economy, is clearly an obstacle in attracting further investments from countries in this region (but not only). FDI is down by 30% in the current year. Unless the environment regarding the survival of the Euro does not become clear, this instability will continue to affect the Romanian economy and consequently the Real Estate market.
Banking finance is still deteriorating and the costs and terms imposed are not affordable for many players. Finance is very limited, very expensive and directed to very few heavily scrutinized investors. Furthermore, the political environment in Romania is another factor which could withhold the prospects of the country.
Under these circumstances, not surprisingly, funds invested in the European Real Estate are directed to the markets with national economic performance and stability. Around 75% of total transaction volume was completed in prime property in just five countries.
Looking two years back
Taking for granted the specific global, European and local political and economical environment, 2011 and first half of 2012 overall could not have been great years for the Real Estate market. Yields in Romania are stabilized to 8% for offices, 8.75% for commercial centres and 10.25% for storehouses.
Despite this however, there were a number of facts and transactions indicating that some of the most solid and dynamic players in the market position themselves in Real Estate investments. This suggests they believe that the worse is gone or at least is approaching to its end and now it is the right time to invest.
One of the most dynamic investors, AIM and Johannesburg listed property investor New Europe Property Investments (NEPI) concluded in 2011 and 2012 a number of big deals:
In early 2011, they acquired the office project Floreasca Business Park, in a deal of over EUR 100 million (remaining the biggest deal in Romanian Real Estate after crisis).
Following this, by December 2011, NEPI completed its capital increase through rights issue of approximately 14.3 million new shares to raise about EUR 40 million in fresh equity. It is said, the issue was oversubscribed by 48%.
In January 2012, NEPI acquired the City Business Centre project in Timisoara, from businessman Ovidiu Sandor and partners. Beyond this, in December 2011, NEPI started works on its 50,000 sqm shopping centre in Ploiesti. On another project, NEPI bought and undertook the renovation of a 4,500 sqm historical building at a 12,000 sqm class business centre in the Romanian capital.
Another company, Portuguese shopping centre specialist Sonae Sierra, started in July 2011 the construction of its EUR 110 million Adora mall in Craiova. The mall will have 190 shops on a leasable area of 59,000 sq m and has signed contracts for 40% of this surface. Starting work on Adora, confirms Sonae Sierra’s commitment to Romania, said the local Managing Director, Ingo Nissen. The largest Chinatown complex in South Eastern Europe opened in summer 2011, 16 km from Bucharest, following an investment by 19 Chinese businessmen of around EUR 150 million. The China Town complex covers 40 hectares and hosts 3,275 commercial areas, 1,380 logistic warehouses, cafes, restaurants, casinos, banks and kindergartens.
Property investor and developer Iannis Papalekas has completed a couple of remarkable transactions in 2011 and 2012. In November 2011, he got what was characterized by the market “the golden deal” from the most famous bankruptcy of a Romanian mall. Papalekas sold the City Mall for EUR 103 million in 2005 and bought it back in 2011 for just EUR 17 million.
In addition, in 2012, Iannis Papalekas and Dragos Bilteanu acquired Tower Center International – the developer of Victoria Square office tower, in a transaction whose value amounts to approximately EUR 50 million. The company in (one of Bucharest landmark buildings) had failed to rent it because of a litigation process, which is now settled.
The housing market in Romania is also seeing important developments. Austria’s listed property group Immofinanz completed at the end of 2011 the acquisition of the additional 69.2% stake in South-Eastern Europe residential developer Adama Holding. It sees Adama as the ideal platform for expansion in the region, especially in Romania. Adama completed 1,500 apartments since its founding in 2005, with 10 projects under way. It has a development portfolio of 1.36 million sqm in 40 further projects. Immofinanz Romanian portfolio includes undeveloped sites in Bucharest And the mid-term objective is to create entire city quarters.
Everybody agrees that the prospects for the Real Estate market in Romania, as well as for the overall Romanian economy are very promising; it is just a matter of when this will happen.
Current affairs regarding Eurozone crisis, instability in the Arab world and uncertainty about Iran, as well as local political environment are obviously factors that could negatively affect growth potentials.
Despite this, in the past couple of years we have seen some good signs indicating that slowly, but steadily, trust in the market is regained, following two years (2009, 2010) with virtually zero activity, which deteriorated investments and returns. The positive indications are expected to continue:
London’s AIM-listed East Balkan Properties (EBP), active in Romania, Bulgaria and Serbia, started plans to divest its stake in the so-called Glorient portfolio of retail, logistics and office properties, plus land holdings, worth approximately EUR 108 million in order to raise cash. EBP has appointed Raiffeisen Investments to market the portfolio. This carries mortgage debt of EUR 20 million, which is rapidly amortizing and could be repaid from cash-flows by late 2013, it said. EBP’s portfolio at end-June included a 40% stake in Glorient, consisting of 13 land and 35 retail assets valued at EUR 35 million in Romania.
In cooperation with Knight Frank affiliate and Prime Property Advisors, EBP is also selling its logistics warehouses, a prime asset with stable occupancy. Six land assets and two small shops valued at EUR 8 million are also up for sale in Romania, Serbia and Slovakia. EBP swung into a first-half net profit of EUR 3.5 million from a EUR 3 million loss in 2010.
Real4You, an Austrian developer and investor operating in Central Europe, announced in January 2012 that it is resuming its Mega Mall shopping centre projects in Bulgaria and Romania, which were delayed by the financial crisis. The firm has opened 10 retail centres in the Czech Republic, Slovakia, Hungary and Romania in the past three years. Financing remains difficult, but good projects in good locations are feasible, based on company executives. In the fourth quarter of 2012, Real4You will start building its 70,000 sqm Mega Mall centre in Bucharest, scheduled to open in 3Q14. Real4You also plans to develop smaller malls in other Romanian cities, anchored by a hypermarket or supermarket.
The market research company, PMR Publications, expects Romania to become the second largest shopping mall market in Central and Eastern Europe - behind Poland but ahead of Hungary and the Czech Republic. It is said that some 6sqm of new Gross Leasable Area is planned for completion by end 2013, and existing investment plans could absorb over EUR 12 billion in 2013.
Romania’s share of shopping malls in the big six countries of the East European region - Poland, Czech Republic, Hungary, Slovakia, Bulgaria and Romania - grew to 16% in 2010 from 9% in 2007, and is predicted to reach 18% by 2013. The total market grew by 50% to 12 million sqm between 2007 and 2010. Investors in Romania plan to launch new mall spaces of 1.3 million sqm by 2013 and the country is soon due to overtake the Czech Republic in terms of total shopping centre space.
Moreover, following the creation of numerous distressed assets in the Global Real Estate business, there will be a tendency for consolidation over the next years. This will be driven mainly by American hedge funds, some of which have already proceeded fund raising to this respect.
US-based private equity group, Blackstone, has raised over USD 6 billion of equity capital for a new real estate fund to acquire mainly distressed-property assets, and is aiming for final closing at committed capital of USD 10 billion. The funds will be targeted globally.
Blackstone’s fund is only one of many other funds of similar nature recently created. It is understood that should a fair part of these funds be attracted to Romanian projects, a boost in the Real Estate market will emerge.
The real estate market of the SEE region is still in its beginnings, compared with Western markets. Although the region enjoyed few years of pre-crisis boom, it did not get the chance to grow and stabilize before crushing down. But with the market contraction reaching the end, opportunities start rising once again.
With a positive resolution in the exogenous threats, the good years are ahead, probably not generating the pro-crisis returns but definitely standing on a much more sound and sustainable basis.