About Land and its Value in Romania – part II
The severe decreasing trend of the Romanian economy (we could speak about a tough landing, if we consider the statistic results) shall have a strong influence on the values of all the real estate properties, especially the lands, as their value was influenced by the speculation tendencies in the recent years.
The market of the lands shall continue to contract in volume (number of transactions) and value, suffering dramatic corrections, especially in its most speculative area. At least, in the years 2009-2010 the values of the lands shall continue the decreasing level, except for a few very good locations, which have a reasonable proportion quality/price for their projects, and implicitly a market. The most severe correction shall be for the lands purchased for speculation purpose, without viable projects, or in incipient phase, which are charged with bank loans, as there transactions at liquidation prices could appear. The values can reach in this case 10-15% from the highest level recorded at the beginning of 2008.
A strong influence in the era „cash is king” is given by the fact that the land, as the less liquid asset, needs important investments and a long time to generate incomes from the future developments. Although there are signs that the National Bank or Romania would decrease the level of the interests and the financing restrictions, the banks would not start to credit the real estate industry until the values of the properties reach a level to involve a low enough risk degree, and I make reference especially to the residential projects.
The contribution of the land in the property value cannot exceed a reasonable percentage (depending on the location, Percentage of occupation of the land, Coefficient of use of the land); if the value of the construction materials, transport, and even labor are decreasing, there is no reason for the land to follow the same trend.
Within the following 6-9 months I consider that, although low performing assets with toxic potential would continue to be the credits with the identity card, another set of problems would be created by the credits granted for real estate developments, especially for the developers in the project phase, and those who do not have any chance to continue with the management of the present investors. The law enforcements in this area would determine a new decrease of the speculation value of the lands, creating the premises to calm down the market at a more comfortable level for the financers and possible purchasers. I support these allegations starting from the premise that Romania has entered a deep crisis in the three last months, and there are few possibilities to stop this trend for one or two quarters. The real estate market, with a conservative character, follows the trends of the economy, with some delay.
The land market shall recover within six month – one year after the economy re-launch, however, the values shall be different, and the growth rate shall be slower. We like it or not, I think that many lands hide treasures and they wouldn’t see the light too soon. Practically, the crisis removed these lands from the economic circuit, and they generate costs for the investors, especially for the financers, who would be forced to recover their money even if they record some losses.
To be continued.
Dr. ec. Adrian Crivii, MAA, FRICS