Sub-prime waves not yet crashing on Romania

James Stewart, vice-president, Treasury and Capital Markets Division,Raiffeisen Bank Romania, analyses the impact of the US sub-prime crisis on international investments in Romanian real estate

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The US sub-prime crisis that began last summer resulted in important disruptions in the international credit and capital markets. This did not have a direct impact on the Romanian economy as there are no important linkages with the US economy in the commercial or financial sectors.
However the US sub-prime crisis saw an increase in risk aversion on the international markets and this was reflected in a reduction in the appetite of international investors for Romanian assets.
The large domestic macroeconomic disequilibria - especially Romania’s large current account deficit which reached 14 per cent of GDP in 2007 - received more importance in foreign investors’ decisions regarding investments in the Romanian economy.
This was reflected primarily in the financial markets, where the leu depreciated rapidly in the last half of 2007 and stock exchange indices plunged. Up to date, the real estate sector has not been affected too greatly by turbulence from the international markets. I don’t exclude some negative impact in the next quarters as the Euro Area economy, the main trading partner of Romania, is expected to slow down by the end of the year. But I think that the impact will only be marginal.
In the last few years, Romanian real estate has received much attention from foreign investors. High yields and rapid increases in housing prices offered huge profit opportunities. Demand for houses and flats remained strong, especially in economically active cities like Bucharest, Cluj-Napoca and Timisoara. Many people wanted to improve their living standards, as dwelling stock per capita is low in Romania and their revenues have increased. The rise in housing prices was largely a facet of the real convergence of the economy and the readily available mortgage money from banks. High demand in the market also triggered an increase in the supply, resulting in a booming construction sector.
During this period, the financing of the activities in Romanian real estate was dependent on funds from abroad. This is because funds that invest in the real estate market usually have their money in Euros or USD, developers obtain part of their funding from foreign banks and banks which support the retail mortgage lending received a lot of their financial resources from abroad.
The US sub prime crisis had a strong impact on international credit markets and this was reflected not only in an increase in interest rates and borrowing costs, but also in an increasing difficulty in obtaining funds. This also happened to Romania. For instance, this time last year the credit default spreads of Romania, which reflect the country risk premium of lending to a nation, were below 20 basis points. Currently this spread is approximately 65 basis points, roughly a three-fold increase. The banks that rely on the funding that they receive from abroad had to pay more for funds they received from their mother banks and other financial institutions. This resulted in many banks increasing their lending rates.
There was also an increase in borrowing costs in domestic currency after Romania’s central bank started to increase the monetary policy rate to fight against inflation and encourage savings by the population. This increase in the borrowing costs and the leu depreciation decreased the ability of households to borrow and will most likely result in the slowdown in housing loans - although this has not happened up to date.
Also there were some international investors that reportedly scaled down their expectations regarding the revenues from the real estate projects and postponed some projects.
Unfortunately there is no official information about the prices of transactions on the Romanian real estate market and this reduces the transparency of the market.
But different sources suggest that the growth of prices has slowed down in the first quarter of this year. Although these developments may not be directly related to the crisis on the international market, they might suggest that the rapid growth in prices seen in the last several years will slow in the interim.