We are now facing one of the most critical moments of the financial crisis and the major decisions that are taken on a global level can make the difference between exiting the economic deadlock or continuing the decline. All these can have unpredictable and unwanted consequences.

The perspective in the context of globalization, from which only few emerging countries (mainly the BRICS Group) can sustain high growth rates will lead to a long term repositioning of the global economic spectrum, with unpredictable long term effects.

Although the American and the European economies are somehow independent and have been in the last century the engine of the global economy, their approach to this crisis in particular is totally different. USA encourages the consumption through small taxes and money pumping in the financial system in order to recover its economy. On the other hand, Europe has chosen to adjust its spendings and consumption by controlling deficits with significant risks over economic growth. The future will tell us which of these two policies will help the world out of crisis or maybe another path coming from another continent will prove better.

The European austerity policy is strongly influenced by the totally different attitude in front of the crisis, especially the attitude of the Mediterranean countries which are common with a casual lifestyle in contrast with the Nordic countries, especially Germany, on whose shoulders stand most of the problems generated by the European deficits.

European citizens will have to understand and accept the decisions taken by the European leaders, because in the last instance, they will be those who will have to cope with the crisis difficulties.

Unfortunately, Romania has lost the chance to revive its economy in 2010. This has happened because of the steep and simultaneous adjustment of incomes and tax increases. The country is dependent of the exports revival in the countries which have been good partners during the last years. Also the absence of foreign investments and the low percentage of EU Funds attracted contribute to the current situation

Dr. ec. Adrian Crivii, MAA, REV, FRICS

It is quite probable that in 2011 Romania will come out of recesion with an increase of about 1.5%. If this optimistic scenario will be confirmed, in 2012 the GDP could go up with about 3% which will prove to be a big consolidation. The GDP increase will have benefits on the incomes of the population, the unemploymenent will be reduced and other good aspects will appear after the inflation will decrease, influencing the financing area. All this will lead to an increase of the solvable request on the residential market especially in the big cities.

Considering that the amount of housings available for sale is quite consistent, although it’s probably 50% lower that in 2008,  there are still no significant developing projects that seem to appear. This will put some pressure over the competitive offer in the middle of the next year, which could be reduced only by selling the mortgages behind the nonperforming loans. If these assumptions will turn it will significantly influence the real estate market. It could be possible for the market to reach a limit in the last six months of 2012, which will represent the inflection point in returning to the real estate market growth.

In my opinion the recovery will be slow and it will probably take a decade until we will have some non inflated prices in the real estate market, comparable with those before the economical crisis. What determines me to make these assumptions is the fact that the market will mature, the incomes growth will not exceed productivity, and another wave of cheap money is very unlikely to hit.

Dr. ec. Adrian Crivii, MAA, REV, FRICS

Although all industry (investors, financiers, developers) is looking forward towards the real estate market recovery later this year, it certainly will not happen in the next six months, although there are some positive signals about a positive economic change. Other positive aspects is that the downward trend has got weaker and thereby leads to a soft landing, to the lowest point. A decrease in under-performing loans wills also appear soon and it will represent a decisive signal of market recovery.

If we do a brief analysis of some aspects of food prices, energy prices, interest rates inside the euro area, BNR interest rate, reference rate of inflation, changes in income, etc., all that suggest that we can not have a strengthening of the solvable demand during the near future. The signals coming from developers are no more encouraging either, as long as there are no large projects scheduled for the near future, which shows that they also look with some restraining the real estate market development. If we speak of a recovery in the housing market perspective, it will initially produce for the industrial, office, retail, then for the residential segments (the residential  one presents the highest risk factor). The clearest sign to sustain this statement can be found in the demand for funding, rather advantageous through PRIMA CASA programme, which is also the last and the only stimulant of this segment. In connection with the signal that the number of transactions would have increased in the first quarter, in my opinion this is mainly due to decisions taken by several property owners to harmonize the tax charge level related to the aberrant taxation.

Speaking of real estate industry recovery, I think the time is coming, but it is hardly predictable, given circumstances and external factors. About the trend by the time the recovery will happen, we can safely assume that it will be much reduced, in close correlation with the GDP growth and we will not go through another real estate bubble soon, like the one we faced in the past decade.

Dr. ec. Adrian Crivii, MAA, REV, FRICS

Unfortunately, external developments provide grounds for concern and this, at least in terms of mentality (already on the edge) can attenuate the very fragile optimism.
A prohibitive price of oil, as a result of the North African conflict, which could easily exceed 150 $ per barrel, is the most dangerous enemy of the global economic revival. The situation existing inside the European community is not very secure either, in connection with sovereign debt problems that dangerously spread; Germany’s attitude will be decisive in solving this case. Japan needs significant resources, yet difficult to quantify, in order to escape the very difficult situation it is in. An important part of the global financial resources will be channeled to the reconstruction area.

In such circumstances we can not expect low prices for financing (see the recent increase of EURIBOR) or a rapid return of foreign capital on the local market, which would be one of the incentives for recovery. Unfortunately, the only policy that can support the borrowing, the “central banks printing press”, will result in an inevitable increase in inflation, therefore asset values ​​will increase accordingly, but only their nominal value, not the real one.

If you look at it this way, the Romanian economy, heavily influenced by Europe’s, as far as exports are concerned, will be sensitive to the level and pace at which our foreign markets function.

In conclusion: we must be ever more clear that we will have to rely increasingly on our  own resources, even if they are called pondering, economy, productivity, and last but not least, valuing human resources, which we own plenty of.

Dr. ec. Adrian Crivii, MAA, REV, FRICS

Two were the internal factors that made this possible:

* the strong restructuring of the private sector  during 2009-2010, which had as a negative effect the disappearance from the market of a large number of SMEs, a phenomenon that will continue in 2011. The restructuring also meant cost and price readjustment and sometimes the collapse and disappearance of unprofitable companies, but also an adjustment to more sustainable business models, all of these being positive connotations.

* restructuring the budget system, although made late and a bit shyly, it is going to finally show its benefits. Positive effects can be  also sustained with a severe budgetary discipline, accompanied by the release of significant amounts for infrastructure investment and financing projects with EU funds.

We should not expect to feel a drop in pressure on companies during the second half of this year, especially if we take into consideration the fact that in the foreseeable future we are about to witness two negative effects, both of which can be exacerbated by possible shortfalls of the sovereign debt crisis in the euro area:

* increasing taxation due to the pressure put by the payment of external debt which has dramatically increased during the last two years;

* the expected increase in EURIBOR benchmark interest due to overcoming the financial crisis in the European economy.

The expected economic growth in Romania, over 1%, is way too optimistic mainly due to the dramatic decrease of  consumption, which will increase with difficulty, being the main cause of a slow and sustained recovery of the Romanian economy.

The loan process will start to rise with the strengthening economy, the decrease of unemployment rate and the inevitable liquidation of underperforming loans that will be primarily made by smaller banks with bad portfolios. However, the Romanian banking system consolidation is inevitable.

The real estate industry will recover gradually, although constructions, except those in infrastructure, will continue to suffer from the lack of projects. The positive effects will be noticeable starting from 2012.

I consider  the real estate market will experience further declines during the next six months, before reaching its lowest point, particularly for those economically and functionally impaired assets, of lower quality respectively. With this statement I want to temper the ultra-optimistic opinions sustained by some analysts, who have already seen an increase in real estate prices earlier this year.

The reviving of the real estate market will be felt in 2012 but growth levels comparable to those in 2006-2008 I do not think will be achieved again soon, within a predictable horizon of time.

Dr. ec. Adrian Crivii, MAA, REV, FRICS

Yet, financing capital market should be one of the economic recovery solutions for the listed Romanian companies, and maybe even for the re-industrialization.

Why is it not so?

• one of the objective reasons is the investors’ perceived risk, especially regarding the predictability of excessive taxation laws, which make the possibilities to avoid this situations to be inconsistent with the transparency required by the regulated market;
• the companies’ lack of confidence in the capital market, which has no depth and did not attract significant investments from pension funds and insurances, being still in early stages of development in Romania;
• lack of investors’ confidence in the transparency and adherence to a code of corporate governance of the listed companies;
• the lack of a clear legislation, adapted to international requirements regarding the protection of minority shareholders.

Then, if we talk about de-listing, there are generally two categories of companies that waive the “advantages” to access capital market funding:

• the multinationals – who are provided with funding in good conditions from the parent companies or the more advanced capital markets;
• the local ones, sponsored by capitalists, investors, Romanian entrepreneurs who see in the current crisis conditions with weak financial results, the possibility to close the company on favourable terms, and to decide on their own on its future, thus having also a more realistic connection between the investment risk assumed and the correspondent expected profit.

Romanian capital market is still composed mainly of speculators and not investors. Speculators have a very important role: they ensure market liquidity, but those who should dominate the market are the investors – those who inject significant amounts of capital, thus contributing decisively in financing the economy.

Dr. ec. Adrian Crivii, FRICS, MAA

Beyond the flagrant errors of vision, the shortcomings and ignorance in the organization and management of the taxation system, which characterizes the past two decades, there will remain unresolved issues that will finally impose a radical reform and modernization of all the taxation systems. This inevitable reform will be reflected upon the taxation on labour, on real-estate and other goods, the taxation on trade or capital gains.

I would like to present in the following section, one of the errors and its repercussions on the long-term, with an example from history. I was reading, not so long ago, a book written by Mr Paleologu, about the boyar families, that presents a situation from the XV- XVI centuries from Wallachia. The free peasants were obliged by the state’s enslaving fiscal system from that time, to sell their real-estate properties and their land to the boyars, becoming thus bound to them. The phenomenon was the result of the fact that the last category benefited from an advantageous fiscal system, acquiring in this way important property fortunes – whole villages.

This concentration of land fortunes in boyars’ possession had as an effect not only the impoverishment of villagers in the first instance, but a reduction in the unity of military and political forces of the state from that time. I believe this edifying example of fiscal harmonization will replicate nowadays as well – the rich ones with significant real-estate properties will have the possibility and the means necessary to further enrich themselves, to fiscally optimize their taxation level, as they should. And the other ones, with reduced financial possibilities, especially the youngest will pay the incompetence bill and will use the fundamental right of people to live in a country which is well managed and has respect for their rights, and that especially now, in the middle era of globalization.

As a result, Romania will be weaker, with a lower social unity and it will comfortably install, without competition, on the last position among the countries from EU, in terms of quality of life and civilization.

The only chance in my vision, and which should happen soon, is for the European fiscal systems to be harmonized – as an effect of the financial crisis, so that we will arrive at a sustainable level of taxation, transparent and equitable, on the territory of the Union and we would also be able to profit from its effects.

Dr. ec. Adrian Crivii, FRICS, MAA

Failure to balance the budget deficit by decent expenditure restraining measures, makes the government to take crisis decisions with unpredictable negative effects on the future. One of these decisions is higher taxation, practically taxing multiple real estate property owners. The real estate property tax system in Romania is clearly deficient, and has an empirical ground, so it must be modernized and brought into line with its market value, which is one of the issues we have raised several times since a few years ago. But from this to discourage with duties the owners of several properties, or real estate investors who saved or borrowed and invested, for their own comfort and economic security, is a long way. How can we speak of supporting or encouraging the real estate industry, then to take such pro-cyclic actions with devastating long-term effects?

By these fiscal policies there are promoted again the immediate consumption and personal loan credit and not the long-term investments that should represent the normal evolution in the development of a modern society. Obviously, investors are taking note of this situation and will take appropriate decisions so that the intention of boosting budget revenues will not be successful. Rental market should be encouraged in terms of increased population mobility imposed by market economy law and which can not grow without real estate investors. Rental taxes should represent an important support for the local communities’ budget and an investment source for land urbanization, creating conditions for future real estate property development.

Let’s see now some specifications regarding the evolution of the crisis we face: if the economic difficulties from the 90’s overtook people at a low level of debt, now it will wreak havoc in families in Romania who were heavily indebted, and if the banking system has been successful compared to the year before, and delayed, taking the shock of bad loans, we can not say the same thing about 2010 and 2011, which will be the real endurance test.

Dr. ec. Adrian Crivii, FRICS, MAA