Romania is for sale - but where are the buyers?
Land prices have dropped to pre-boom levels, but buyers are still scarce on the market. Is this the last chance to pick up a slice of Romania for a bargain?
Report by Corina Ilie
November 2010 - From the Print Edition
In five years, Romania has moved from a cheap place to buy land to a magnet for speculation and then back to a location where land prices are again at a cut-price level.
Prices of land in prime areas are falling by 30 per cent or more, in cities outside of Bucharest by half, while in remote areas by 80 per cent. Overall, the country is witnessing the same prices as in 2005.
For those few investors with access to cash who remain in Romania, the question they must ask themselves is - is this the last chance for me to pick up some big tranches of land going cheap, or am I about to get fooled again?
Many speculators who bought plots in 2006 and in 2007, when the prices were extremely high, hoped they could make a good profit from selling them at a later date. But they are now left with land they cannot sell in a declining market.
While 2009 was a year of stand-off, where sellers refused to face the reality of falling value and buyers refused to pay the prices on offer, this year the land market started to pick up, but the number and the value of transactions are still low compared to 2008.
While real estate specialists argue that prices have already reached their real values, many buyers are not coming up with the money. Instead they are waiting for the price to drop even further, because they have the luxury to wait. They do not believe that such a phenomenon as the ‘real value’ of property exists, but only what the market is willing to pay at any time. Few in the market are willing to pay anything right now – and the market does not lie.
The prime pieces of land which buyers are looking for are those which have the full works - a central city location, short and medium term development potential, connection to water, gas and electricity and fully-fitted with construction permits.
Gone are the days of purchasing a dozen hectares of mud 50 kilometres south of Bucharest in the hope that someone, someday would nearby build an airport or a motorway.
Buyers are far more strategic - a common trend is land-buying among large retail chains with deep pockets who are mostly from western Europe, including DIY retailers, discounters and hypermarkets such as Cora, Kaufland, Real, BauMax and Decathlon, who are taking advantage of the low prices and weakened local competition to expand faster than their initial plan.
Retailers’ attention is focused on Bucharest and second tier cities, although locations on the urban outskirts are now rarely taken into account.
“Everybody is waiting for prices to reach the minimum level, but I do not think we will ever realise when we reach this level,” says managing partner of the investment banking division of real estate consultancy Crosspoint Finance, Codrin Matei. “I think the market will experience the flock effect - when some important transactions happen, this will send a signal that the market might recover and everybody will start buying again.”
Prices of land plots transacted in the first semester of 2010 dropped by 20 to 30 per cent against the same period of last year, to a level similar to 2005 and 2006, according to a study by real estate consultants Colliers International.
“We do not expect a stabilisation of the prices by the end of this year or in the first part of 2011,” says Sanziana Oprea, associate at Colliers International. “Until the uncertain economic situation improves and the population recovers its trust in the economy, investors will remain reluctant regarding the absorption potential of the real estate market. But we estimate that the highest price reductions took place in 2009 and the future price adjustments will be limited.”
The argument is that now is the time to seize a chance to buy, as the prices may fall further, but they will not plummet.
The type of investors have also changed in the last five years, with one wave of speculators making cash fast, a second wave losing cash fast and a third wave still yet to materialise.
“The land prices increased dramatically between 2006 and 2008, subject to all kinds of local and international speculative transactions,” says managing director of the Belgian real estate developer Liebrecht & Wood, Johan Rogiers. “At a certain point professional developers lost interest in land acquisition, because the profit did not justify the investment. Other developers, most of whom were opportunistic, continued buying land even under these circumstances.”
In 2009 and in 2010 Liebrecht & Wood bought land in the southeast of Bucharest, close to the Bucharest-Constanta motorway, where it plans to develop two projects. One will be a mixed use development and will include residential, office and commercial spaces.
The developer has so far bought 200,000 sqm of this plot and is still working on purchasing the rest of the land.
The rate was competitive, but not desperate. “We did not buy any distressed property,” says Rogiers. “I do not know what was the initial price asked by the land owner before the crisis, because we started the negotiations last year, but we managed to obtain a price 30 to 40 per cent lower.”
The Belgian developer owns 1.6 million sqm of land in Romania, close to Bucharest and does not plan to develop projects in other cities of Romania for the moment.
Small still popular
Land plots centrally located with areas between 200 and 4,000 sqm, both in Bucharest and nationwide, are the most attractive for transactions right now, according to the general manager of Romanian consultancy Euroest, Dragos Dragoteanu.
“The provincial cities were more dynamic in terms of transactions than Bucharest,” says Dragoteanu.
Investors also buy land put on sale by owners who need to sell fast to fund their other businesses or pay back credits to the banks, which are usually at very low prices.
Also transacted are plots where it is necessary for a company to expand, which businesses buy in the vicinity of their office location with a showroom, a warehouse or more office space.
State guarantee sparks new builds
Investors are also interested in land plots for the development of residential projects, which could meet the conditions of the state-backed First Home (Prima Casa) scheme, according to Colliers.
This is a Government-sponsored guarantee scheme where first time buyers can take out a loan from a bank at an attractive interest rate on a new property worth up to 75,000 Euro. Almost 28,000 individuals or couples have taken out this scheme in Romania in the last 16 months, which aims to keep the housing market afloat.
The size of the land plots for such schemes are usually between 1,500 sqm and 10,000 sqm, suitable for the development of low scale projects, especially single apartment buildings.
“There are few developers interested in building large size projects, which require investments worth tens of millions of Euro,” says Matei. “Plus it is much easier to sell 50 apartments than 500 apartments. The price of the construction materials has declined significantly and this is the best moment for developers to start building, especially since there are many areas where the residential developments stopped and the demand for dwellings is high again.”
However Dragoteanu says this year few developers have been interested in land purchase as they already bought land before the crisis. “The medium and large size developers already have in their portfolio a lot of plots bought before the crisis, at high prices, which they can use anytime for residential, office or other type of projects,” he argues.
But one of the major obstacles holding back developers from continuing their projects is that they are already indebted to banks for buying the land in the first place, and cannot gain further financing to start building.
Sitting on the land
There is also some argument over whether land banking is a good option in the current climate.
“Right now investors buy land with the clear purpose to develop residential, office or industrial projects,” says Matei. “The simple ownership of a land plot does not bring profit, on the contrary, the owners also have to pay taxes on their land.”
Meanwhile there are some plots which do not sell, no matter how much their prices have dropped, because no buyers can see any development potential.
“There is no market for uninteresting land plots,” says Dragoteanu. “People have learned during the crisis how important location is.”
A land plot in a location such as Bucharest’s Pantelimon, in the east of the city, which used to cost 800 Euro, costs now 100 Euro per sqm. “But nobody wants to buy it, because they cannot rent it or develop anything on it in the next three years at least,” says Dragoteanu.
However for those with long-term perspectives - very, very long term perspectives - now could be a good time in Romania to land bank.
Big box buying bonanza
One of the few sectors undertaking ‘real buying’, according to Codrin Matei, are the large retail chains, such as Kaufland, Lidl, Cora and Decathlon.
“Even if they pay lower prices than the owners initially ask, they pay more than opportunistic buyers,” he says.
However the conclusion of a transaction with a retailer can take between three months and a year, as the management board has to analyse carefully the details of the transaction before the purchase, while a deal in which the buyer is a private investor can be closed in two weeks. Overall, this makes private investors preferable to retailers, because the land owners can access money faster.
“Cities with more than 45,000 inhabitants were targeted by foreign retailers for their network expansion,” says Dragoteanu. “These lands were not accessible before the crisis as the prices were much too high and it made no sense for retailers that have low prices and who make a profit from volume sales to invest in expensive land.”
This year the French retailer Cora, part of the Louis Delhaize group, bought the industrial platform Hidromecanica in Brasov, covering 3.9 hectares, where it plans to develop a hypermarket.
Romanian DIY retailer Dedeman purchased 3.7 hectares of the 11.2 hectare industrial platform Tehnofrig, located in Cluj-Napoca. Dedeman plans to open here its first store in the city. French sports retailer Decathlon bought a 2.2 hectare land plot in Iasi, inside Era Shopping Center Iasi, where it plans to open a store. German DIY retailer Billa, owned by the Rewe Group, also bought land in Brasov, where it opened its first store in the city, covering 500 sqm.
“Big box retailers have been the most active land buyers in the cities outside Bucharest,” says Oprea. “The retailers targeted the cities where the competition is low. They gave up the land plots in cities like Oradea (Bihor county) and Suceava, where the competition is high. The attractive locations for retailers are areas that are densely populated, with high visibility.”
Services and roads are also a must for such a deal. “Retailers are probably more looking for brownfield sites over greenfield sites, where there is better infrastructure, they are more accessible by road, they have sewage and water connections and, also electricity,” says real estate lawyer and managing partner at Schoenherr Romania Sebastian Gutiu.
Meanwhile the real estate division of the Swedish furniture retailer Ikea Group, Interprime Properties, bought the industrial platform Timpuri Noi, located near Bucharest’s Unirii area. The land plot covers 51,000 sqm and Interprime Properties plans to develop an A-class mixed use project including residential, office and commercial spaces.
“The negotiations to acquire the Timpuri Noi land plot started before any signs of a financial crisis and it was one of the short-listed options,” says general manager of Interprime Properties, Antoniu Panait. “The design works for the urban concept have just started and will form the base for obtaining the building permit. It is far too early to announce a starting date for construction.”
Factories wise up
Manufacturers are also wising up to the land-buying game now played by retailers.
Another important transactions concluded in 2010 included the acquisition of a 33 hectare land plot by US gas and oil group Lufkin Industries, inside the industrial park Ploiesti West Park, developed by the Belgian developer Alinso Group in Aricesti Rahtivari village, Prahova county.
Lufkin plans to build by 2012 a factory on the land plot it acquired. “Lufkin Industries chose Ploiesti because it is a strategic location for their project, considering the high development of the oil industry in the area,” says the CEO of Alinso Group, Ivan Lokere. “The greatest advantages in our park are the access to utilities, such as water and electricity.”
The business park has good access to two national roads and the future motorway of Bucharest to Ploiesti - a highway project in Romania which is actually moving.
Ploiesti West Park - which is now under development - will cover 225 hectares. Alinso Group has delivered 50,000 sqm of the park - including buildings - and hosts the Anglo-Dutch fmcg giant Unilever as tenant, which has rented a 30,000 sqm building.
“Several negotiations with potential tenants are ongoing,” says Lokere.
Due to transactions in 2010, Colliers’ Sanziana Oprea believes the blockage that began in mid-2008 is now over. “But we cannot talk about a recovery of the market yet, considering the limited number of transactions and the low values of these transactions,” she adds.
Nowhere land
The more remote the land plot, it seems the steeper the fall in value. The price decline for some land, especially plots located on the outskirts with no connection to utilities and poor infrastructure, have declined dramatically.
“The value of the land plots located in the outskirts of Bucharest, for instance, is now close to the value of an agricultural land - between 1,000 and 2,000 Euro per hectare,” says Matei. “The idea of price per sqm has disappeared or is only present in the mind of the owner.”
Meanwhile land plots located in top locations are witnessing a decline of a minimum of 30 per cent. “For plots located on the outskirts, with no clear development potential, such as developed infrastructure, connection to utilities, the presence of real estate developments in the area or construction permits, the discounts start from 80 per cent and the investors are still not interested in buying,” says Dragoteanu.
In Bucharest the land plots in highest demand are in the central and semi-central areas, with a high population density.
According to Colliers buyers are looking for land plots located in semi-central areas, with prices under 100 Euro per sqm and for central land plots with prices between 200 and 250 Euro per sqm.
“For the outskirts locations most of the demand comes from individuals interested in the acquisition of land plots for the construction of houses, on prices even three times lower than before the boom,” says Oprea.
A problem even for the those in central areas is how to attract financing to develop a project - therefore cheap land in a remote location for a similar price is a pointless acquisition with so many better offers available.
“There is no interest in lands around Bucharest - real estate thrives from financing and very few put equity in real estate,” says Gutiu. “I don’t see banks financing greenfield projects now. Important and interesting projects do not get financing - so who will finance projects on the outskirts of Bucharest?”
In the cities outside of Bucharest the prices of land have dropped by at least 50 per cent, says Colliers.
“The cities where the good land plots are concentrated in the portfolios of two or three owners - who are not pressured to sell - were the most resistant to price decline,” says Oprea.
Now is a good moment for potential investors to buy land as the prices might not drop further, she argues. “There are locations where the land prices have reached levels that allow profitable developments,” says the real estate specialist. “In these cases the potential buyers have two alternatives - either buy now, satisfied with a good profit margin or wait for the prices to drop further and risk that competitors develop and deliver a project at a much more competitive rate.”
According to Dragos Dragoteanu, future transactions will include the expansion of land owners or companies who will buy the plots owned by their neighbours and the acquisition of agricultural land which can be divided into smaller parcels and either leased to farmers or cultivated by the owners.
Meanwhile the transactions of forestry land is also still common. Forests in Romania are six or seven times cheaper in Romania than in west Europe. “We see a lot of forestry sales and fewer agricultural land sales,” says Sebastian Gutiu. “International investment funds, mainly German, are buying forestry for land-banking, because it will increase in value.”
But after two years of decline, buyers are now in a stronger position than ever before to dictate their own terms. “This is a buyer’s market,” says Dragoteanu. “The price and the acquisition terms are decided 95 per cent by the buyer. In a transaction, right now, it does not matter what the land owner wants, what the real estate agent says or how a land surveyor assesses the plot. The owners have to sell and what matters is how much the buyer is willing to pay.” ■
