Distressed real estate in need of reality check

Romania’s property crash sees distressed sellers, bad quality projects and big money heading west – but while many developers stay greedy, some creative new investors are starting out small

December 2009 - From the Print Edition

Romania’s dramatic decline in its real estate market has forced many investors who entered Romania in 2008 with serious cash-making plans to postpone their investments, take a step back and wait to see how the market will evolve.
A large number of other investors have not left eastern Europe, but focused on more attractive markets such as Poland and the Czech Republic, where assets are cheap and the country is more stable.
This was the subject of “The Real State of Romania’s Real Estate” event organised by ‘The Diplomat - Bucharest’ magazine together with law firm Noerr Stiefenhofer Lutz at Residence Hotel, with a PR partner in local start-up Verbio.
Romania’s political instability, due to the fall of the Government last October, has dissuaded some foreign investment funds to look to this country.
Spanish equity fund Azora Europe, which entered Romania in 2008, had planned to invest around 500 million Euro by 2013, in real estate projects in Bucharest, Brasov, Oradea, Cluj and Timisoara. But the firm has pulled its investments from Romania for at least one year and is looking for opportunities in Poland and the Czech Republic. The firm could not find any distressed assets in Romania.
A major problem is developers’ self-delusion - sellers are still asking too much money for their properties. Radu Lucianu, managing director at real estate firm CBRE Eurisko, argues that developers in financial difficulties are too greedy and will not lower the prices on properties for sale. Moreover, these assets are risky, because many are not in great locations or have design faults, which means the projects may require further investments and may not bring to the buyer the expected return. These are not distressed assets, but distressed projects.
Meanwhile Cristian Ustinescu, capital markets director at DTZ Echinox, thinks that investors are not looking for distressed assets, but distressed sellers, who need to sell off a decent asset quickly to make some cash.
In the mean time, developers with financing continue their projects, although the sales on the residential market have seriously declined.
However new micro-investment funds, worth only a few million Euro, are starting up in Romania. Many of these are run by Romanians themselves, who are familiar with the political and business scene, and who can raise small amounts for one-off real estate projects which are on sale at an attractive price. These funds could then grow in the future.
Below is a summary of the key discussion points of the event.

Corneliu Popa, attorney at law, Norr Stiefenhofer Lutz
“Few events happened in the real estate sector this year. However the new civil code was adopted, which is more comprehensive than the old civil code and will probably come into force next July. There are certain ownership rights which are finally getting a clear status.”

Norbert HoeCkl, vice president strategy, Coldwell Banker Commercial
“The office market has been seriously affected this year. The main issue is that vacancies in office buildings are high. The residential segment was hit very hard this year, especially in new apartment projects. There has been a 30 per cent drop in [west Bucharest neighbourhood] Militari – a three-room apartment can now be bought for 70,000 Euro. Due to the opening in Bucharest of [malls] AFI Palace this year and Sun Plaza in 2010, there is not much mores space for malls, although Galati and Brasov have potential.
“In sales, owners know that the prices have dropped, but they do not want to sell their assets for low prices. Buyers are still looking for offers at low prices, so there is still a gap between the buyers and the sellers, this is why we do not see any important transactions on the market for the moment and there will be a few more months before we see some transactions closed.”

Cristian Ustinescu, capital markets director, DTZ Echinox
“Our activity has increased in the commercial sector and income reducing assets. The positive side is that both the buyer and the seller are accepting that the market is no longer the same as it was, but maybe it can get back to [the level of the boom period of 2007] in a few years. I do not think that we will see direct investments, take-overs, asset acquisitions at yields of nine or ten, we will only see opportunistic acquisitions or distressed sales for double digit yields – so-called fire sales. We will not see acquisitions of top office buildings in the first half of next year.”

Valentin Cudric, investment director, NBGI Private Equity
“We have recently narrowed our interest in real estate and we are looking at office buildings and logistic projects. The feeling in our general headquarters is that Poland and the Czech Republic are more interesting for investments right now.”

Siep Hoeksma, managing director, Real Solutions
“A major problem in Romania is the lack of transparency, including the price of deals, this is holding back investors.”

Simona Gheorghe, executive director, Azora Europe
“We are not interested to invest in Romania right now, because the quality of the contracts, the level of the prices and the quality of the assets are not sustainable. Azora partners have decided to focus on Poland and the Czech Republic this year, but Romania still looks profitable to them. We will not make any investments for at least one year, we will step back and see what happens.”

Cristian Ustinescu, DTZ Echinox
“We are setting up our own domestic fund with Romanian investors, raising the money here in Romania, with a 15 per cent target return. In December I think we will close the first fund raising and the next one will be in January.”

Alex Pintea, managing director, Anglo-Romanian Fund
“We are looking for distressed sellers. We are not finding any - we also see a lack of transparency, with people refusing to talk about prices. In the long-run we see a lack of quality products on the market. Next year our fund is open to all sectors and worth about 20 million Euro.”

Surinder Seth, managing director, Investkredit Romania
“We stopped financing real estate projects in Romania, but we are still open to financing projects in Poland and the Czech Republic. We are waiting to see the evolution of the real estate market. I have not really seen any buyers of distressed assets here.”

Radu Lucianu, managing director, CBRE Eurisko
“The major crisis in the real estate Romania was caused by greed. We have been talking to a lot of sellers willing to sell their assets which are not in good state, unfortunately the investors have not been here for the past ten months now. What the investors do not understand is the fact that Romania is not Poland or the Czech Republic and if they make some profit or some money out of the investment or sale or transfer the shares to somebody who can refresh the project, they cannot do it at last year’s prices, because the assets are not worth that much.”

Corneliu Popa, attorney at law, Noerr Stiefenhofer Lutz
“As a law firm, we try in Romania to solve litigation between the creditors and the developers or the insolvency cases – but outside of the court.”
Alexandru Ene, partner, head of litigation and dispute resolution, Noerr Stiefenhofer Lutz
“In the last year the demand for legal advice has increased, especially for consultancy and pre-consultancy procedures. It is very important today to ask for legal advice, to check the transactions to keep insolvency risks under control. The distressed assets sector requires much more attention before completing the transaction. It is very important to check the transactions with the partners, especially with those who are in financial difficulties. There is a tendency for [buyers] to sign contracts with developers who have financial problems, and due to these economic difficulties, the projects are cancelled. The risks are higher now because a lot of players on the market, especially developers, are facing a lot of financial problems.”

Mike Hapoianu, sales manager, South Pacific
“We are trying to restore the construction process this year. Our projects are in different development stages and we have also noticed that the banks are trying to help developers sell the apartments. Among those who bought apartments in our projects, only four who paid in advance for the apartments do not have the necessary funds to pay the rest of the amount.”

Andre Hoffer, executive director, Eyemaxx
“Now the demand for logistic spaces is not very high. We sold 50 per cent of the stakes in two logistic projects in Timisoara and Ploiesti, as well as two other plots to our Austrian partner, the investment fund Immoeast. There is still a question mark over whether Eyemaxx will continue its plans before the crisis, to invest 500 million Euro in ten logistic projects.”
Dael Schnider, VP business development, Carmel Investments Group
“I agree that the projects are going slowly. The biggest issue the buyers are facing is financing. A lot of buyers are trying to purchase apartments through the ‘First Home’ [Prima Casa] programme [a Government programme that helps banks loan money to first-time buyers], but the amount is limited to 60,000 Euro. We have one project under construction right now. We believe that in the end Romania will recover, the only question is when will this happen. We saw the same situation in Israel a few years ago and, since the beginning of this year, is maybe the only booming market in the world. Prices went up 30 per cent, because people realised that the stock on the market is limited and started buying. The same thing will happen in Romania.”

Cristian Ustinescu, DTZ Echinox
“The prices have started to decline on the residential market. I know developers that are selling at 800 Euro per sqm [a drop of at least 20 per cent on 2008]. The apartments and the villas in [Bucharest’s rich north] Sos Nordului or in Primaverii regions no longer cost as much as they used to.”

Norbert Hoeckl, Coldwell Banker Commercial
“We had 3,000 properties on our website. People think twice before buying now, because the maintenance costs are very high as well. The prices are going down and there is big pressure on residential developers.”

Open door to distressed sellers

Simona Gheorghe, executive director at Azora Europe
“When Azora Europe came to Romania in 2008 the initial plan was to co-invest with developers first of all in housing projects. But we dropped this plan because it was risky and we switched to acquiring income reducing assets because they seemed much more stable. It depends very much on how one defines distressed assets. I really did not see income reducing properties that were distressed assets. A distressed asset is not good for acquisition and those who buy it can improve the property, but then they have to sell it. I could not find a high quality distressed asset in Romania for acquisition.”

Cristian Ustinescu, DTZ Echinox
“I think there must be made a difference between distressed assets and distressed sellers and investors are now looking for distressed sellers. A distressed asset requires investments. A good asset is in fact a distressed sale. The value of a distressed asset should not be the cost in 2007 or in 2008, but today’s costs – and with construction costs labour costs lower - this means that the replication costs are 20 to 30 per cent lower. Today the value of a distressed asset is very low, which means that, when an investor replicates the asset he or she does not derive income, but he or she has costs.”

Simona Gheorghe, Azora Europe
“Investors are looking for distressed sellers, not assets, but such things are impossible to find. There was something wrong about all the assets I found: either the location, or the product. I think Romania is not adjusted to what is happening in western Europe. Funds that were set up in Romania have more advantages this year, because they are so used to the political and economic environment, they are not so afraid to make investments and they somehow control the environment. They can also find smaller land plots and smaller projects to acquire.”