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Nicolae Ghibu, Certsign
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Halfway house

A new state-backed loan scheme to first-time buyers is a welcome boost to the real estate market, but not enough joy to developers facing a sales collapse

September 2009 - From the Print Edition

Romania’s new plan to help first-time buyers onto the property ladder has seen sales of 1,000 dwellings in its first month.
The ‘First Home’ [Prima Casa] scheme, launched by the Government last July, also aims to lubricate the flailing real estate and construction market and boost bank crediting.
The scheme targets individuals and families, who have never taken out a mortgage, with low interest rates for a 60,000 Euro loan to buy a home. The private banks oversee the loan and the state acts as the guarantor.
But many players are sceptical about its effect on new residential developments, many of which lie empty and have failed to make more than a few sales this year.
Most developers say the programme does not help them, because land and construction materials are too expensive to build dwellings priced at around 60,000 Euro. Meanwhile others have decided to compromise their profit targets and adapt their plans to join the programme.

Developers: adapting to the deal

Some developers who already had a land plot and can afford to build cheaply are taking up the opportunity of starting new projects targeting Prima Casa customers.
Australian developer South Pacific has launched a project including one and two room apartments with a garden for prices starting from 58,000 Euro. The complex consists of 36 units, is located on Sos Pipera-Tunari and is a green building concept.
“We will build zero-carbon homes using eco panels, mechanical ventilation and heat recovery systems, so the monthly utility costs will be cut by 60 per cent,” says South Pacific’s managing director Andrew Prelea. “The apartments have a 51 sqm area, plus terrace and a 16 sqm garden. The two-room apartments have two levels and two bathrooms. We decided to develop this small project to test the market and the technology in the low cost area.” Most of the materials are recyclable and there are bamboo floors and interior lighting systems powered by LEDs. South Pacific is also planning to build a factory in Romania to produce energy-saving materials.
Another developer who will build apartments for the programme is Spanish group Ibiza House. The company bought a land plot in Bucharest city centre, in the vicinity of the Parliament Palace, and plans to build 43 one, two and three room apartments for prices starting from 63,000 Euro. The project is due for delivery by December 2010. Ibiza House has already delivered high-class projects located in the north of Bucharest, in Pipera Tunari. “We need to be active and develop even if the project will not generate a high profit,” says Ana Ghidu, general manager of Ibiza House.
Andrew Prelea is also sceptical about whether developers will make money in the ‘First Home’ project. “Those who will get involved will be those who have land, cannot sell it and need to develop it,” he says. “This will be more like an exit strategy for developers who are distressed and who cannot get financing.”
Meanwhile real estate agency Neocasa’s general manager Ruxandra Cleciu says there are developers who planned to build big apartments and have split these in half so they can adjust to the 60,000 Euro price tag. But this creative planning is only possible at the structural stage and cannot be a solution for apartments already built. However projects launched on land plots bought after the fall of the real estate market could be really successful, according to Alina Busuioc, general manager of real estate agency West Invest.

Benefit: pre-1989 apartment sales

However many developers believe the programme will only encourage the acquisition of pre-1989 units that fit the 60,000 Euro threshold, instead of boosting the new residential and construction market, which was its initial purpose.
“The program is a good initiative of the Government, but needs to be improved,” says Reuven Havar, general manager of AFI Europe. “The value of the guaranteed loan is too low. It should be at least 90,000 Euro for developers to become interested in getting involved in this programme.”
The impact of the phenomenon is still low, because not many people have wages high enough to qualify for this programme. An individual or couple must have a combined monthly income of 700 Euro, as required by the banks. The average income in Romania is around 300 Euro per month.
“Most of those earning 700 Euro per month would want to buy a new dwelling, or a dwelling located in a better area,” says Havar.

Price culture: risks distortion

Another fear of developers is that the scheme will distort the pricing structures of small apartments.
South Pacific’s Andrew Prelea believes this may have an ‘irrational effect’ on the differences between the studio flats and the two-room apartments.
Taking into account the fact that a 60,000 Euro loan only allows for the acquisition of a studio flat or a small two room apartment in the capital, Prelea believes studio owners will try to increase the prices as much as possible, while owners of two-room apartments will try to cut the prices to fit below the 60,000 Euro boundary. “We will end up having an oversupply of small apartments on the market,” he argues, “with two or three generations of one family living in two rooms – the same as it was before 1989.”
Nevertheless the effect is unpredictable. “We might witness a typically Romanian sales policy, which means that the old apartment prices might go up without reason,” argues Alina Busuioc.
On the other hand many buyers might rush into purchasing a pre-1989 apartment and realise later that new residential projects are available at prices similar to those of the Communist-era apartments. “This is the most dangerous trap,” adds Busuoic.
But the customers are shopping for a newly-made home. Bucharest developer River Invest has received so far around 100 requests from people interested to find a dwelling which they can acquire through the First Home programme. The customers are either families with children for which space is the most important, single or newly-weds for whom the location matters most. There are also families looking for houses located around Bucharest.

What can 60,000 Euro buy?

While customers in Bucharest may only be able to afford studio flats or two-room apartments under the 60,000 Euro threshhold, it is possible for some customers to buy three-room apartments or small houses in the suburbs or the country at large, but not in the best locations.
In Bucharest the prices of new or old one room apartments range between 31,000 Euro in the western Militari neighbourhood to 71,000 Euro in the central Piata Alba-Iulia and Amzei area, according to Anuntulimobiliar. The cheapest two-room apartments are located in areas such as Colentina in the northeast and Piata Iancului in the east, which cost 55,000 Euro, while a two-room apartment can cost up to 120,000 Euro in Piata Alba-Iulia or in the north on Blvd Aviatiei.
There are also Communist-era three-room apartments, on the outskirts of Bucharest, in locations such as 1 Decembrie and Sos. Alexandriei, difficult to reach from the city centre, because there is no metro, where prices are between 60,000 and 70,000 Euro.
Inhabitants of second tier cities like Cluj-Napoca, Brasov, Timisoara and Iasi and those of towns such as Ploiesti (Prahova county) or Pitesti (Arges county) have more chances to purchase larger apartments because the prices are smaller than in Bucharest. The cheapest two and three room apartments in Brasov cost between 36,000 and 54,000 Euro. Three-room apartments in Cluj-Napoca and Pitesti can be bought for prices between 43,000 and 100,000 Euro.
But the increase in the number of transactions on the pre-1989 built residential market will also have a positive effect on new residential market sales and will balance the prices on both markets, according to Ruxandra Cleciu. “If the pre-1989 residential market reaches a balance, the new market will stabilise as well, because all the segments evolve together,” she says. “If people start thinking seriously about buying, the owners will become more confident that they can sell and the offer will go up. Many of the pre-1989 dwelling owners will sell and will buy apartments in new projects, even if they are smaller and even if they have to add some extra money.”
There are also affordable new house projects developed in villages around Bucharest. An 120 sqm house with an 180 sqm yard in Domnesti residential complex, located northwest of Bucharest in Domnesti, llfov, ten kilometres away from the Militari neighbourhood, can be bought for 65,000 Euro. The complex will be delivered in autumn and includes 32 houses.
New duplex villas in the northwest of Bucharest, in Bragadiru village, with areas between 110 and 150 sqm, are available for prices between 70,000 and 80,000 Euro. The biggest problem with these villages is the undeveloped road infrastructure, which makes the transport difficult and exhausting. The quality of schools and health services in these villages is also much lower than in Bucharest.
The programme also allows financing for the construction of houses if the applicants already own the land. But building a house could lead to higher costs, because many land plots around Bucharest do not have the necessary utilities and the future owners have to pay extra money to attract their installation. “There are people who buy land plots to build after a few years, so they are not interested in investing in the utilities in the near future,” says Cleciu. “This means that the other owners in the area, who want to start the construction immediately, will have to pay more to get the utilities. Buying a house in a residential project is much easier, because all these operations are managed by the developer.”

Report by Corina Ilie

First Home: the political price


Prime Minister Emil Boc has already called the Prima Casa programme successful because it has managed to restart real estate transactions.
The scheme saw 1,000 sales in its first month of operation as many people, who could not afford to get a real estate loan without the help of the Government, applied for a loan immediately.
However the details of the scheme, which is pioneered by the Democratic Liberal Party (PD-L) and Boc, have been greeted by grumblings of discontent from the opposition and the Social-Democrat (PSD) coalition party.
They argued that the project should be improved, otherwise the Government is blocking one billion Euro from the state budget as the guarantee fund, which will not be used eventually, because too few people qualify for the loan.
The National Liberal Party (PNL) provided the Government with data showing that only 1.7 per cent of the people under 35 and one per cent of those between 35 and 40 could qualify for the programme. The PSD thinks that the programme would have been more efficient if it focused on the development of dwellings, owned by the state, which could be leased by young people at low rents.

First Home: how it adds up

Families with a total income of over 714 Euro per month can take out a loan from a bank with small interest rates under the Prima Casa scheme to purchase up to 60,000 Euro of a property. The purpose is both egalitarian - to encourage affordable housing - and capitalist - to kick-start the moribund real estate sector. This is a classic piece of centrist policy-making which indicates Romania can adopt the structure of a continental European mixed economy based on free market principles, but with social-focused intervention to iron out the inequalities.
So far 20 local banks have joined the programme and are making a combined offer of 1.45 billion Euro. These banks are not allowed to offer interest rates higher than 5.2 per cent for the loans in Euro and higher than 13.3 per cent for the loans in RON.
The value of the installments is calculated upon the EURIBOR and ROBOR indicators and varies in accordance with the evolution of these two indicators. In October 2008, EURIBOR reached its maximum height during the past 14 years of 5.345 per cent. Meanwhile last June it registered a minimum record value: 1.108 per cent.
If the indicators rise, the interest can rise and vice versa. This means the terms of the loan are not well-defined. This is one reason why many people will be cautious about taking out loans and the effects of the programme on the credit market might not be as positive as expected.
“If the banks want to encourage the loan system, they should grant a certain number of loans at lower interest rates than the competition,” says Neocasa’s Ruxandra Cleciu. “This is the only way to unblock crediting.”
This is beginning to happen. Raiffeisen Bank will grant housing loans worth 50,000 Euro in total with a 5.12 per cent interest rate for Euro loans and a 12.83 per cent interest rate for RON loans, just below the maximum threshold.
Alice Mihai, a spokeswoman for Raiffeisen Bank, says the size of the loan depends on the customer’s reimbursement ability. It can stretch between three to 30 years and the client must deposit a five per cent down payment for a loan under or equal to 60,000 Euro. However if the dwelling is more expensive that 60,000 Euro, the customers has to deposit the five per cent down payment (3,000 Euro) plus the difference. So if a customer wants to buy an 80,000 Euro dwelling, he or she will have to deposit a total of 23,000 Euro. This means that customers looking for affordable housing will be targeting dwellings that cost exactly 60,000, only a fraction more, or any amount below this figure.



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