Battle for home-owners sees discount frenzy

As the real estate bubble bursts, liquidity dries up and investors flee, developers with apartments to sell are finding inventive ways to woo new homeowners, finds Corina Ilie

March 2009 - From the Print Edition

Prices on the real estate market have plummeted and many key projects have been cancelled or put on hold. Few bargain hunters are looking to buy cheap apartments in the city and many investors still remain cautious. Prices could drop further and no one is sure of the elusive factor in the equation – the real price of an apartment.
Therefore developers are using every trick possible to sell new or off-plan apartments: gifts, discounts, half-built flats and leasing with an option to buy. Developers are even offering to rent apartments from a potential purchaser.
New apartment prices fell by 30 per cent between the last quarter of 2008 and the beginning of 2009, according to real estate agency CBRE Eurisko. This was because developers, buyers and investment funds suddenly lost their access to cash.
Developers who had asked for 1,500 Euro per sqm last autumn for an apartment in Bucharest have dropped the prices to 1,000 Euro per sqm, states real estate agency EuroMetropola. Many developers have shed their profit expectations to raise cash to pay back bank loans.
Meanwhile pre-1989 apartments’ average price in Bucharest dropped by 25 per cent during 2008, to 1,400 Euro per sqm, according to real estate agency Colliers. Sector 1 in Bucharest’s supposedly luxurious north witnessed the steepest drop - from 2,297 to 1,400 Euro per sqm.
These cheaper prices are still out of the reach of the significant majority of Romanians. Almost zero speculators and few local buyers are now purchasing property. According to EuroMetropola, customers are even apprehensive to buy a new, heavily-discounted apartment with a price tag of 820 Euro per sqm.
Last year buyers could not afford property because it was too expensive, but this year the same buyers cannot afford the discounted property because access to a competitive mortgage is too hard and their own job security is in jeopardy.
There is also an expectation that the prices may drop even further. “There are customers with money, but they are waiting for the prices to further drop,” says head of the residential department of CBRE Eurisko Ionut Bordei. “But those who have money usually want certain dwellings in certain areas and if they wait much longer they may not be able to find what they were looking for.”
There is still a huge demand for housing in Romania – somewhere in the region of 0.4 million, according to some estimates. “I think the customers are influenced now by the negative articles in the media describing a declining residential market,” says general manager of American developer Adama, David Flusberg. “Their decisions are also influenced by the current state of the economy. Before committing to a housing loan, buyers need to make sure their jobs are stable.”
But prices fluctuate and many developers, understandably, are concerned that the market is not more active. Property has historically been a solid investment. “I am surprised people are not taking this opportunity to invest in properties, because in two years’ time they will no longer have access to such low prices,” says Ibrahim Paksoy, general manager of Turkish developer Anchor Grup.
Developers state they will not drop the prices of new housing even further because, due to the high land costs, this will no longer make such an investment viable. “Now it is very difficult to reduce the prices, especially for developers who bought land plots between 2004 and 2007 at very high prices,” says Paksoy.
However there is a hope that the luxury market will not be affected, as there is always someone with a suitcase full of cash looking to invest in property. High-class dwelling owners are sticking to their initial prices. Although the owners find it difficult to sell, they prefer to rent than to cut the prices. 2009 will bring the largest offer of luxury dwellings for rent, according to real estate agency DTZ Echinox. “The constant offer in the past year included properties rented by people who already owned at least one dwelling and regarded the second property as a supplementary income,” says Oana Lungu, residential consultant at DTZ Echinox.

Tricks and gimmicks

In an attempt to boost sales, developers have found new strategies to seduce customers. Many cannot reduce the asking price for the apartments because this was the figure the developer agreed with their bank in order to secure long-term financing. Therefore they have to give an indirect discount. Throwing in a free car, another apartment or even a free helicopter have been some methods in Romania. Giving away furnishings or a fitted kitchen is another. But with developers lacking the cash to afford chucking in these toys, more inventive solutions are necessary.
A common strategy is to rent apartments in new residential projects to a client for up to two years and then give him or her an option to buy the property. The amount collected from the rent can be used as a downpayment for the purchase of the apartment, when the rental contract expires. This allows the developer to maintain the same selling price and brings in a steady cash flow.
Anchor Grup is considering renting, in the short or medium term, some apartments in the InCity Residence project on Calea Dudesti, which is close to shopping centre Bucuresti Mall. The developer has cut the selling prices by 100 Euro to 1,850 Euro per sqm. “Our project can be quite attractive for those who want to rent an apartment in a new building,” says Paksoy.
Australian real estate developer South Pacific lends apartments to potential buyers in its three residential projects in Pipera-Tunari, northeast of Bucharest. In its Sydney complex, people can rent an apartment with a garden and parking space for two years with an option to buy.
“By the time the rental contract ends they have saved enough money from rent to pay the deposit for the acquisition of the apartment,” says Andrew Prelea, general manager of South Pacific. “Our prices are fixed and this is an advantage for buyers as selling prices might go up in two years. If residential prices on the market go down, they may decide to buy another dwelling, in another project, as they are not obliged to buy the apartment they rented.”
In this complex, a two-room apartment with a 20 sqm garden can be acquired for 167,000 Euro and can be rented for 350 Euro per month.
The road and transport system between Pipera and north and central Bucharest is not highly developed, but Prelea is confident about selling all the flats in his Adelaide, Sydney and Melbourne complexes. This is due to the fact that 50,000 people are now working in Pipera and most of them come from not only central areas of the capital, but also from Pantelimon and Militari in the east and west. These people can spend approximately four hours on the road daily.
The Romanian Confort Grup is now developing the Confort Residence project in the city’s southeast Vitan-Barzesti area, including 1,700 apartments, from which 600 units have been sold. The project is due for delivery by the end of 2009. “We have not reduced the prices,” says Ionut Negoita, general manager of Romanian developer Confort Grup. “But we have promotional prices on one of the five types of apartments in Confort Residence.”
Meanwhile American investment fund RPF Development, builder of the Vitan Residence complex near Bucuresti Mall, has decided to rent all 186 apartments in its complex from customers who have already acquired the flats, as a cash-back discount strategy. Once it is delivered in October 2009, the developer will pay a monthly rent for 12 months to its buyers. A customer who bought a two-room apartment worth 150,000 Euro can let it to RPF Development for 1,000 Euro per month.
Another strategy is for developers to sell unfinished apartments, with customers completing the construction using their own money. This can be between ten and 20 per cent cheaper than finished flats, according to EuroMetropola. The developer of Green City complex in Ilfov county is selling all 356 villas in its project in their first construction stage.
However, although this is cheaper, the block can become a permanent construction site, as each owner finishes his or her apartment when money comes available.
But CBRE Eurisko’s Ionut Bordei says there is no efficient solution to attract customers as long as people do not start buying. “If this residential crisis lasts for a long time many projects will be stopped and new developments will be cancelled,” he says. “In a few years we will realise there is no new offer on the market, because the developers will refuse to start new projects, having not sold the dwellings in the delivered ones. And we will have again a low supply, which will trigger high prices.”
Although they are not buying anything, the number of people interested in residential units increased last January compared to the last quarter of 2008. This is a sign that developers’ efforts to attract customers have been noticed. “Last January we saw a much bigger flow of people visiting our sales offices than in November and December,” says Adama’s David Flusberg. “People have started to realise that developers are offering different facilities [for buying property].”
While developers targeting end-users can still find solutions to sell the units, those who looked to attracting investors and speculators are facing problems. Some investors no longer have liquidity to pay for the rest of the flats’ costs and are willing to write off their 20 per cent down-payments. “One fifth of these investment funds will not be able to pay for the apartments and they will lose their deposits,” says Ilias Papageorgiadis, general manager of Greek real estate agency More International Invest. Under these circumstances, developers have to find new customers to buy these dwellings.
Prelea says that in South Pacific only two individuals bought in bulk a total of ten per cent of the developments. “Both investors have asked for the extension of the payment term, but they will not give up the properties,” he says.
While some people prefer to wait until they have enough money to buy new apartments, others are taking advantage of the declining prices of pre-1989 apartments, although many of these units have degraded and have inefficient heating and sewage systems. “An old apartment block has a lot of shortcomings,” says Negoita. “They do not have enough parking spaces, the elevators are old, the thermo-insulation systems are inefficient and this increases the maintenance costs.” But location is a major advantage which can put them in competition with new developments.
Pre-1989 apartment owners, who need to sell the apartments quickly, are more willing to drop the prices than new apartment owners. “Those who need to sell drop the prices,” says Bordei. “But the price decline is just as artificial as the price increase was. The prices will not go down so much anymore, because there are few who are desperate to sell.”
Prelea does not believe that the drop in pre-1989 apartment prices drop will have a significant impact on modern house and apartment sales. “We are not competing with a 17-sqm one room apartment in a building with no air conditioning, low quality insulation and other problems with gas, water and electricity,” he says.

Crashing out or seeing delay

■ Strapped for cash, many Bucharest developers have decided to stop works on their projects or cancel them entirely.
■ Hungary’s Ablon Group decided to stop works on Sunset Residences project in Drumul Taberei at the junction of Valea Cascadelor and Blvd Timisoara.
■ Indian developer Copper Beech has put on hold some of its ongoing projects, including 210 apartments in its Atrium residential complex in Voluntari, Ilfov county. The developer is continuing works on its Blue Tower project near Plumbuita Lake.
■ British real estate company European Future Group has suspended the development of 6,000 dwellings in Buftea, Ilfov county.
■ Meanwhile UK-backed Westhill Development is postponing the development of two shopping centres: Crizantema Mall in Targoviste, Dambovita county and Zenith Mall in Ploiesti, Prahova county.
■ The real estate division of Austrian group Raiffeisen Evolution has stopped the construction of the 57,000 sqm Promenada Mall shopping centre in its Floreasca City project in Bucharest, while its offices in the same location will continue. The foundation works for Floreasca City are in progress and one of its office buildings will be completed this summer. “Depending on the market situation, regarding the evolution of financing and construction prices, we will then decide whether to start construction on [another office project] SkyTower immediately or later,” Astrid Kares, Marketing & PR manager at Raiffeisen Evolution tells The Diplomat. “Promenada Mall is currently undergoing a process of re-planning due to changes on the market. We intend to come up with a revised concept for Promenada Mall by June 2009.”
■ Central Apartments project in Constanta, developed by the Westhouse Group has also been stopped.
■ Meanwhile the Confort Grup has ceased the development of a shopping mall on Soseaua Vitan- Barzesti in southeast Bucharest. But the developer plans to start a mixed use project in southern Constanta including a four-star hotel, conference centre, shopping mall and casino. “We might start the developments in 2010 if we find a four to five hectare land plot and the financing problems are solved,” Confort Grup’s Ionut Negoita tells The Diplomat.