Real Estate Market Forecast

#Real EstateRead the full article

Browse by categories



#Capital Markets

#Real Estate


Articles in #Real Estate
One thing everyone seems to agree on regarding the real estate market this year is that the amount of transactions has shrunk. Still, in spite of that, there are a lot of opportunities. Let’s review the different segments:

Market Segments

  • Land: According to Colliers International, in some cases, the prices are half of what they were in 2007-2008, at the height of the real estate bubble in Romania. These circumstances are favorable to those who envisage complex development projects. Strictly speculatively, the liquidity in this segment is, however, very low.
  • Houses/apartments: Sales are 40% lower compared to some of the most active years, also according to Colliers International. The “First House” state-guaranteed mortgage program did not work well. The banks have extended the terms for submissions, to no avail. As opposed to the period before the financial crisis, the residential sector is now a medium-long term business.
  • Offices: They continue to be the star of the market. This was my reaso for going ahead with a recent successful transaction. Whatever office space was built during the recession has been occupied and the market has the ability to absorb the newly created spaces in the following years. According to Cushman & Wakefield Echinox, this will continue to be a market-growth engine. Of course, it is also worth noting that this segment has been very dynamic in big cities, such as Cluj-Napoca or Iași, where economic growth requires space for businesses.
  • Commercial spaces have increased by 4.6 times compared to the level before the crisis, whereas street retail has dropped drastically, except for the space of traditional fairs. Experts forecast the development of large commercial areas for the real estate global players. Proof of that is one of the record deals this year - the purchase of the Militari Shopping retail park in Bucharest, for EUR 95 million by Prime Kapital and MAS Real Estate.

Developments over the Next Few Years

All experts I have been speaking to agree on the fact that the real estate market in Romania has entered a phase of maturity. The potential upcoming recession that everyone has been fearing will affect the real estate market in a nuanced way. It is hard to believe that we will witness another bubble followed by another crash the way it happened some ten years ago. On the contrary, the long-term development of the local economy will turn real estate into a growingly important (in volume) and lucrative market. The change of essence refers to what I have already written about before, namely that the market is changing from a speculative one, to one in which specialization and smart development strategies, based on high-quality market insights, give you the competitive advantage. For the information in this analysis, I have used the following sources:
US News published an interesting article on the mental and financial preparation you would need in order to be called a real estate investor. I have carefully read it and, as I have a good track record of real estate deals, I will try to tell you how to apply global principles to the Romanian market. The text below is useful especially for investors who are just getting started in the market.

A Global Perspective

According to the publication mentioned above, you need to take four steps in order to be successful in real estate.
  1. Get your personal finances in order. The guideline is the 50-30-20 rule, which says that you should spend 50% of your personal income on your needs, 30% on your desires and save the remaining 20%. Real estate acquisitions are made from surplus, i.e. savings.
  2. Prepare to learn new things. Learn about contracts, notary fees, letting contracts, a tenant’s rights, etc.
  3. Have you studied the market? It is not enough to keep an eye on apartment prices and the average rent in a certain area. You may also invest in real estate indirectly, by investing in a construction, an interior decoration company, or a real estate investment fund.
  4. Consider maintenance and renovation costs. If you have ever leased out an apartment, you will know that tenants ask for money for certain repairs and they are entitled to do that. Also, when a tenant leaves, you should be prepared to have to do some work on the house, even if the tenant has kept it in good condition.

The Romanian Perspective

Here are some things to consider when looking at the Romanian real estate market:
  1. Do you have the amount needed to make your first investment? Think about it this way: if you rent your apartment, you will get X, out of which you will get to keep X minus taxes, maintenance costs, etc. As time goes by, you will also build equity in the property (if you have a mortgage) or flat-out own it until you decide to sell. However, the initial amount will have to be available to you, as well as the money necessary for all other associated costs.
  2. Forget about speculation. The Romanian market is difficult and the time when you could buy a plot of land to build a house for X in order to resell it for 2X is long gone. Next year, the global economy might enter a recession, and this will change the course of the real estate market. To buy and sell property is indeed good business, but only for specialized investors with significant liquidity. If you want to make money from this kind of business, find a trustworthy real estate investment fund. Being successful will allow you to have enough liquidity and a background that recommends you for a substantial participation, with decision-making rights, in a bigger business.
  3. Think in perspective. Are we going to have a recession? If yes, the value of your property might drop. Real estate is, however, a business that involves long-term investments. More than the recession, what counts, in this case, is the development prospects of the area. For example, if we are looking at residential buildings, the center of Bucharest or of other big cities will most certainly have a tendency to increase in price more than the neighborhoods built during communism. An area that has massively developed, such as Lujerului in Bucharest, has doubled or tripled the value of neighboring properties, given the malls, hypermarkets, and transport facilities that have subsequently become available.
  4. Act with caution. I’ve already mentioned the recession and also the fact that it matters less in the long run. In the medium term, however, the Romanian real estate market is still a very volatile one, after the 2008-2010 crisis.
  5. Check your potential partners or tenants. When dealing with an investor, you can sometimes find them using a simple Google, Facebook, or LinkedIn search. Do your homework. If you find any red flags, sometimes it may be wise to just walk away.
  6. Keep in touch with real estate agencies. They have great information about the movement of properties in certain areas, as well as the prices they are being bought for (compared to what owners are asking for).
But on top of everything else, make sure you really take the time to learn about the market and understand what you’re putting your money into. That simple research can make the difference between a windfall and a freefall.
My first investment in real estate dates back to 2012. I then purchased 50% of a building located on Bulevardul Buzesti in Bucharest with the intention of reselling at a higher price after two or three years. Maybe because I have entered this market after the boom and recession in Romania, to me real estate is no easy business where you can strike gold immediately. However, that is exactly why the satisfaction of making money is far greater. I shall give an example so that you may understand how the market works. I have recently sold a 3000-sq.m. asset, with a Return on Investment of 95%. How did I make that profit? It was a so called distressed asset. It carried debts and it lacked tenants. I made it work through reorganization, which include an aggressive commission for the agents who brought me tenants. The buyer is a well-known investment fund.

1. Never buy a turn-key building

It might seem cool to buy an attractive property, pay for it and resell it in a short while for good profit. However, the real estate business does not work like that. At least not after 2012, when I entered this market. My guideline is never buy a property that looks great from the start. In other words, a beautiful office building, well finished and full of tenants is not the most attractive investment, because you will pay somebody else’s profit - or the work done by that business, instead of booking earnings in your own P&L. On the contrary, if your intuition tells you that a non-renovated and unoccupied Cinderella will be an attractive princess in one or two years, then you have what it takes for real estate. However, there is something else you will need: work.

2. How to make profit

It is just work that makes business something else and not what the communists said business was: some sort of sweet idleness and exploitation. If you buy a property in a poor condition, you will have to invest in it. It took me two years to bring that 3000-sq.m. building where I wanted it to be: housing quality tenants, good internal organization and cost effectiveness. It is only then that the property becomes attractive to, for instance, an investment fund.

3. If you want to be an investor, buy with the bank

I cannot disclose the amounts, but for the property I am talking about the financing was only 35% from own sources. The rest of 65% I got from a bank. If you are worried about the interests, you should know that in such a business they are covered by the profit. Keep your eyes on the costs, as they say, and you will see that it adds up. It is true, in order to obtain loans, you need a track record of professional investor. You can’t simply walk into a bank without collateral. The amounts you need have at least six figures. Also, improving a property requires specialized teams, from builders to lawyers. That is why real estate is a self-standing business.

3. Can you buy just any wreck? No. Then, what really matters? Location, Location, Location!

This is how the real estate developers in the USA call it. Anyhow, the place where a building is located is the one that makes the difference between a wreck pure and simple and an asset with amazing prospects. Any city has so called top locations, which will remain as such, simply because you can no longer build on them. If you know how to spot them, all you need is the money to start off, which is, as I said, quite a lot in real estate.

4. Conclusion

From my point of view, real estate is a business involving a lower risk than others, but it requires time and energy. Maybe I am lucky enough to have become a businessman after the real estate boom in Romania. However, this is exactly why I like to build on long term and it seems to me I still have a lot to learn.