DARIAN – evaluare & consultanţă

The end of the acute economic and financial crisis will come as early as the second semester of year 2010. Until then the economy will pass through a purgatory in which a lot of companies of all dimensions, specially SME’s and many entrepreneurships will disappear from the economic landscape. It is a normal aspect due to the competition of multinationals, once Romania entered EU, and the overlapping of this crisis of unforeseen precedent in the last decades.

A consequence will be the slow revival of the values from the real-estate industry, the sharp decline of its speculative character, as well as decent values for the companies from the other industries. The only companies which will significantly gain will be the ones in sectors like renewable energy, bio-technology, pharmaceuticals, or ecology.

The financial industry will be strongly impacted by both the loan deflation, with the supplementary risks imposed by the crisis, and the quick increase in the bad credits, which will determine a consolidation of the market, through mergers and acquisitions or the closing of banks’ subsidiaries. Either way the recovery of lending will be of long standing and will never be the same as in the period 2006-2008, not so much because of the losses that will occur in the system but because of regulation. This period of settlements that are more and more severe and done to prevent this kind of crisis, will be a long one.

I believe that Romania in general and Romanians in particular will end up with their feet on the ground, and will have to follow a long and difficult recovery with sacrifices, step by step, during at least one decade.

A beneficial succession of the crisis will be the dramatic change of mentalities, the correct appreciation of work and money at their true value and proper placement of each participant in the labor market, both in the private and public sectors. It will be a long a painful process but imminent and beneficial in the long run.

If in the previous years there were pressures on employers and the wages substantially outran the productivity level, this will not be possible anymore due to the crisis. Also, we will face the following years with high taxation levels for the payment of public debt, the high costs of the budgetary bureaucratic system, the spending related to the large number of unemployed and retirements, and also due to the investments in infrastructure without which Romania will remain an underdeveloped region of Europe, an unacceptable hypothesis for Europeans and for Romanians.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis crisis, financial crisis

Unfortunately, even if Romania is an emergent country with a significant market and a good potential, the lack of infrastructure, the chaotic urbanism, the pollution, the low quality of life and last but not least the real-estate bubble that created the level of unsustainable values in the past years, will all contribute to a slow and long standing comeback of the real-estate market. The investments that will probably revive starting next year will gradually come back at the last years’ level but they will meet a market with another level of prices. Also, the expected profit will be lower with the exception of high-tech industries and will not come from speculative real-estate any more. Anyhow, real-estate will not be considered the “queen industry” any longer, even if it constitutes a considerable part of the states’ wealth. I believe that in the years to come the global economy and implicitly the Romanian one will have other bases, in which the attitude towards regenerating energy, bio-technologies and limited resources will form new challenges for investors and will determine new directions in business and therefore in rising the fortunes. The evolution of fortunes also depends on the economic capacity to absorb the European funds, funds that can represent an impulse for the revival from the crisis.

Businessmen that proved they have the necessary qualities and the chance to create and administer spectacular fortunes in this last decade will continue to prosper, even if the cumulative fortunes of the rich will not reach the 2007-2008 level, only in the medium term. One of the categories of individuals that we will continue to see in this top is the investors in agriculture, who I believe they will significantly raise their wealth, if they will take advantage of the conditions and they will benefit from a favourable agricultural policy.

The ones that will get rich further on, or they will consolidate their fortunes will be the ones who today have cash and who will know how to take advantage of the crisis and of the difficulties that other investors face. The acquisition of valuable assets from companies that have difficulties, at insignificant prices represents one of the significant sources of growth for some of the businessmen that are on the list.

The end of the crisis will find some businessmen with more wealth than the precedent year and some with no fortune at all. The last ones are particularly the ones that have a high leverage level, who invested borrowed money in projects and developments in incipient phases, thus paying for investing in a period close to the beginning of the crisis.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market financial crisis, fortunes, real estate

The year 2008 was the end of the era of spectacular real-estate developments, of huge profits, of loan expansion and also of solvent demand that could accept everything that was offered on the market, regardless of price or quality. This period of 5 to 6 years in which the economy boomed, brought a fabulous gain to the ones that risked, had the courage and invested intelligently by grasping opportunities, managing to significantly raise their wealth and creating prosperity to employees and their business partners. This unforeseen progress was possible because of the country’s entrance in the EU followed by a significant flow of foreign investments as well as the result of “cheap money” that came from Western financial world. I think we can compare the period that ended last year with the conquest of the West in the XIX century in USA. The engine of this growth was the introduction in the economic circuit of an important asset – the land – which was at the basis of all real-estate developments and of all fortunes, mostly due to the speculative character.

The inflation in the financing area, the cheap loans, in conjunction with low prices and relatively little assets, mostly real-estate – lands- made the value of them to reach exceptional levels in the last years. Unfortunately, this evolution in expansion is not going to repeat soon, as this was followed in the past 12 month by declines which contributed to the significant diminish of fortunes, specifically because of the collapse of real-estate and capital markets. The real-estate investors and the holders of consistent properties will confront themselves with major difficulties and difficult access of financing, being already obvious the lack of appetite for risk from investors. The entrance in the era of “expensive and rare money” will significantly influence the values of businesses and of real-estate. I believe that the period “cash is king” will continue in the following years, and the diminishing of the values of fortunes based on real-estate or personal wealth will continue until they will be adapted for the socio-economic realities. Our GDP per capita – one of the lowest in Europe – will recover probably in the following decades based on the increase of medium income of the majority of the population.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market financial crisis, fortunes, real estate

If we discuss further on the two most important pylons that generated the crisis (the financial crisis and real estate industry), we should follow also the necessity of their restructuration under the human resource aspect.

In the last 5-6 years the explosive growth of the number of loans and the fight of the financial system for market shares lead to a sustained growth of the number of employees. Unfortunately, the Romanian learning system, whose quality dramatically declined in the last decades, could not supply enough specialists for this area. As many efforts and spending made the financial system; its employees were not at the required level for these moments. This fact is due to the fierce competition between banks when it comes to personnel hunting, conditions in which the wages offered to employees have been in some cases above the market level without any connection with the professional performance.

The crisis will make also in this area things to go back on the right track together with the inevitable process of consolidation of the financial system.

If we talk about the real estate industry, we should make a difference between the construction industry and the real-estate consultancy. As we know, many Romanians emigrated after the opening of the Shengen doors and many of them work or qualified in this field. Unfortunately, in Romania, with little exceptions, the companies did not have access to qualified personnel and hired individuals with unemployed profile. Nevertheless, I believe that a great deal of companies operating in this field will disappear because of this crisis and the number of unemployed will significantly rise in this sector.

Regarding the real-estate consultants, in this field were hired persons with communication and sales skills, and persons with a “high appetite” for fast gains, without the obedience of specific ethical standards or continuous efforts of improving the professional level being necessary. Currently, their number was drastically reduced and probably the quality of consultancy will rise, remaining in this field only the ones that are or who they could become truly professionals.

An important aspect about the valuation consultants (their number raised spectacularly in the last years, primarily as an answer at the demand of the banking system): I believe that a large number did not understand that valuation is a consultancy activity, it assumes continuous preparations, professional and ethical standards, and not just selling a regular product (merchandise), serial and made to order valuation. The ones that are part of this category will have difficulties concerning their activity in this area. I believe that for the valuation-consultants the role of professional association ANEVAR will be important in the creation of a barrier at the entrance in this profession, because of the requirements and the quality needed by the new regulations that will inherently appear in the financial industry in the aftermath of crisis.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market, Valuation anevar, financial crisis, real estate, valuation

Romania is in the economic crisis, the first and the most affected fields being the financial and real estate industries, this being due to the fact that in the last 3 to 4 years they had a spectacular evolution, caused firstly by the explosion of foreign investments in Romania along with the integration process in the EU.

The financial crisis and the contraction of the global economy influenced meaningfully the Romanian industry as a whole starting with the end of 2009, generating problems like high unemployment and bankruptcy, another burden for the financial system, which in turn influenced the consumption as well.

Through the relaunch of the global economy, I think that the first positive signs will show up next year starting with the last affected field – the industry, especially the restructured one and in the possession of multinationals, which are going to be developed after the new post-crisis models.

When I talk about post-crisis model, I mean the relaunch of some top areas like the renewable energy, eco-automobiles, IT, agriculture and bio – food industry, which will access financing and will evolve after environmental-friendly models. Same patterns require a change in the perspective of value and money accessibility, even if they will be influenced be inflationist aspects, and also by a change in the perspective of energetic consumption. It is obviously that the energetic and environmental problems will generate the next big crisis globally.

As effects of the present crisis, I consider that most of the misfit industries and the entrepreneurs without a managerial vision will disappear, making space to an industry mainly unpopulated, with reduced energetic consumption, forward looking and lead by competent managers.

The last massive restructuration that Romania did not finish it before the entrance in the EU will be finalized be this crisis. The financial system and the real estate industry are going to be the last sectors which will overcome the crisis, because the first field did not managed to quickly eliminate the bad loans and establish a new start , and the second one is conservatory and past oriented.

The financial system will pass the next 6 to 12 month through a beneficial purgatory, preparing itself for a period of consolidation – Romania does not need more the 40 banks. The real estate sector will be confronted with amputations and resounding bankruptcies until it will start developing on a new base in which the localization, quality urbanism, low energy consumption, ecological houses will arise as a natural response, with accessible prices at the demand of pretentious clients.

Unfortunately, the recovery of the Romanian economy is not going to be fast, due to the authorities’ lack of vision, to a heavy and expensive bureaucratic system, and also because of inefficient budgets.

The only chance will arise when the IMF will get more involved in the economic policies and in the administration of the restructuration of the government spending.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis crisis, financial crisis

In these difficult moments for the real-estate industry, the valuation prefession confronts a new challenge generated by the program „First House”.

In our opinion, the governmental program, with a strong social character, will have an insignificant economic impact mainly due to its dimension and the narrow segment of eligible persons to which is addressed. Taking in consideration the type of residential properties that are going to be valued, it should take into account all the three approaches.

If properties in development are acquired, the cost approach should take into consideration the descending prices of the land, construction materials and labour. Another element that should not be neglected is the significant adjustment of the developer’s profit, which got at a level in concordance with the new market conjuncture.

The income approach has to take into consideration the strong descending evolution of rent from the last period and the fact that outside the well developed cities and the university centres there is no sustainable rent market. The pronounced demographic decrease, the emigration and the large percentage of Romanian house owners are direct causes of this phenomenon.

With respect to the selling comparison approach which is the most suitable for the valuation of finalized and ready to use properties when the market is active, both the valuator and the financing consultant will have to take into consideration the following:

• The market segment accessible for the “First House” was influenced by this program, bringing a 15% increase on the selling prices, because for now, the program implies low financial costs (Euribor will not remain at this level in the long run).
• The location and the intrinsic quality of the property can retain the value in the long term; therefore these have to be carefully analysed.
• Even if the loan is guaranteed by the state, it shouldn’t be neglected the nature of bank guarantee, with all the inherent risks.

One solution to this problem could be for the real-estate consultants and banks to promote the mortgage landing value (MLV) as it is provided by the 2006/48/EC Directive of the European Parliament and agreed by the European Federation of Mortgage Banks (EMF).

In essence, this approach is based on a prudent estimation of future selling of the property which takes into account the sustainability aspects on the long term, the normal and local market conditions, adequate current or alternative exploitation, without taking into consideration speculative aspects.

A conclusion that should be drawn from this real-estate crisis and this program is that in the future the market (the consumer) will prioritize the quality of the property and not the financing conditions (almost standardized in the “First House” program). In the long run, the standardization of the financing conditions is going to increase due to the consolidation and development of the local financial institutions, the increased regulation and the improvement and the application of the European legislation concerning consumer safety.

Even if today the ones that qualify for this program benefit in comparison with the ones that took loans in previous years, the credit risk is significantly high, even though in this case the deficiency of the guarantee are taken by the state.

To draw a conclusion on this, although this is how the program First House should be lead, in reality the evaluation brings up the same value found in the pre-contract signed by both parties. So no standards or professionalism are really required (sic!).

Adrian Crivii, FRICS, MAA

Financial Crisis, Valuation financial crisis, First House, valuation

The government decision to encourage the purchase of a first house is a good one, likely to activate the real estate market and save some of the developers who will feel this opportunity and will treat it appropriately. Unfortunately, if you take into account the proportion and the relatively narrow segment to whom it is addressed, the program will have a low economic effect, although it will boost a little the residential market.

Given that the economic situation continues to regress, we cannot consider that this measure will have as an effect an increase in the residential property value. The shy demand encouragement will not have the same effects as those of previous years (the decrease of interest rates, the increase of the term loan), because in the past the encouragement of demand was complemented by an upward economic trend, and accelerated revenue growth. Now, because of the economic situation with stagnant wages and explosive growth in unemployment the solvent demand is reduced and fragile.

It should be also noted that the negative evolution of the economy can not lead to price increases and who expects something like this must consider this scenario only desirable, in an uncertain future, after the economic recovery and very unlikely at the level before.

I’d like to make some assessments regarding the values which will be anchored in this specific context. The return of residential property market with “the feet on the ground”, because of the crisis, will make the prices of apartments to reach 500-1.000 euro / sqm, depending on location, prices accessible and consistent with the market segment represented by most Romanians. If you take into account that in Romania the number of owners is very high (about 80% of Romanians have at least one property), I think the price above is realistic.

From now on, developers’ offer (most are in financial difficulty) will press on those who sell old apartments as well, forcing them to adapt to the solvent demand of the moment.

Other issues should be also taken into consideration – one is the total collateral of the state with the guarantee fund, which makes banks obtain an easy profit with minimum risk of this new product. Another aspect is the difference between the First House clients and other customers in the system who, meeting the criteria of First Home Mortgage, took recent mortgage loans at a significant higher cost.

Soon I will treat the subject of valuation at “First House” Program.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Valuation financial crisis, real estate, valuation

The latest signals regarding the economic evolution are totally unfavourable, and if the economic decrease will be below 10% in 2009, this will be due to the poor results from the last trimester of year 2008 (as a comparison base), than due to the economic turnover.

Given that the government does not have the tools needed to produce significant adjustments, the devastating effects of the crisis are going to appear in all economic sectors, having a major impact on the population also. Programs like „First House” or „First Silo” are favourable but they resemble to a glass of water on a arid land: they do not generate notable changes. Before is too late, the authorities should drastically reduce the unproductive budget spending. From the amounts collected by the state budget, which are already less and less, not too many return in the economy to create employment opportunities, consumption and economic relaunch. Unfortunately, I think these gestures are the ones difficult to make given the political context. This aspect is extremely serious and leads us, in my opinion, towards the abyss.

If in the first semester the financial system (with the exception of the automobile leasing companies) managed to mask the effects of the crisis, this will no longer be possible until the end of the year. What’s to be feared is that, during 2009, Romania became the leader when it comes to inflation among the European Union countries and came into second place in regards to the economic decline, which shows the magnitude and the aggravation of the crisis.

Although very disagreeable per se, the bankruptcies of companies significant in size will clean the economy of players with bad performance that create obstructions. The banking system will be aided in this way to get rid of the bad loans that are rolled from some months now. Anyway, the economic outbreak will be generated by the evolution of the advanced economies, where so far the signals are not convincing. The only signal truly positive that has to be taken in consideration is the evolution of China, which already meets a launching that will enable the country to become the engine of the world economic revival.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis banks, crisis, financial crisis

The abrupt economic downfall prolonging for another two terms will bring a large number of companies close to bankruptcy and quite a few of them will actually go into liquidation. While in the last six months we have discussed aspects related to the duration and magnitude of the crisis, during the following period we shall attend to the devastating effects on companies that have lost their resources and, implicitly, the chance to recover from the crises.

The most affected companies will be those in the real estate industry – the construction industry, and real estate developers – plus those in banking and finance. Given the unfavourable international situation and the pro-crisis measures taken by our government, who expect hasty decisions to bring about miraculous results, it is most likely that the companies, then their employees, will be the most affected. In the next stage, other categories such as state employees, who have been immune to the crisis so far, will also become exposed to this crisis.

Financial institutions, namely banks, will also register losses in the following period because the reserves released by the National Bank of Romania have been used to set provisions for bad loans.

Recently, I have avoided speaking about the sub-prime credits, but this does not mean that the Romanian banking system is exempt from the effects of this global phenomenon. We are going to make out its magnitude, determined mostly by the duration of the crisis. Until we know the value of the damages, the crediting process, respectively the increasing trend of interest rates, is unlikely to be re-launched.

Another cause that obstructs the restart of crediting is the disloyal competition on the part of the Romanian government. The loans with massive interest rates aimed at budgetary expenses that, unfortunately, do not show but to a minor extent in public investments, aggravate the precarious economic situation. We must remember that taxpayers who are already crushed under taxes will also pay the costs of these interest rates and thus will be prevented from recovering by their own means.

Government decisions did not affect the evolution of society during the four or five years of economic boom and Romania was like a car in cruise control on a highway and the driver’s skills were not relevant. Now we seem to be in the situation of a car with back wheel drive in bad weather, driven by a beginner on a black ice coated serpentine road. We are all going to suffer the consequences but most of all those that have less possibilities to protect themselves.

To be continued.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis banks, financial crisis

As I said in the previous episodes, the values of the lands for development in Romania reached unsustainable levels, if we consider the real situation, at this moment of crisis. I shall mention that this level is not recorded in the case of the lands with an exclusive agricultural purpose, and this is due to the problems related to the crumbling, especially the lack of efficient financing and a fee corresponding to the quality of the soil. The only exception with significant increases is in Dobrudja for lands with perspective of wind energy development.

In connection with the assessment of the lands, I would make a few references from the point of view of a professional assessor who followed the evolution in the assessing of the value for these assets. This activity was treated in many cases superficially by the real estate assessor, although it is a very complex and sensitive domain of assessment.

At the beginning of the decade, the assessment used an empirical method, used by the Body of the Technical experts, which was a false statistical method of recurrence, which is still used, unfortunately, by certain assessors today, generating many controversies. After the apparition of the international standards of assessment in 2003, promoted by ANEVAR and recognized by most of the institutions, the assessors had adequate instruments at their disposal (6 methods) of approach, however, aspects that had a negative influence on the correct assessing of the value appeared.

I shall mention three of the most important aspects. One of the most frequent errors of the financer and the assessor is that they accepted mortgages and assessments of the lands under development, without a complete legal description, cadastral documentation, or certificate of urbanism or the project with the license of construction, although in most of the cases they noted these lacks as limitative conditions.

The use of the market comparison method without considering the development lands, considering that the market was in expansion, and without considering the information indicated above, they lead in the late cases to overestimations. In many cases, these overestimations were annihilated by the spectacular evolution of the market.

The use of the residual method, without well documented projects and without considering the risks of the real estate investments, the compliance with the execution term, estimated construction costs, as well as the time interval needed to sell or rent the finalized project, generated an overestimation.

In the period of expansion of the market, the cheap money, when anything was bought for the prices of tomorrow on the real estate market, the vigilance of the risk departments of the bank was low and influenced by the increase in the recent years of the prices on the real estate market by two-figure percents. Although the NBR warned many times, in time, by its spokesman, about the heating of the market, or the „real estate bubble”, it has not enough instruments to stop these behaviors, and the financers who did not avoid such traps could have some surprises.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Valuation financial crisis, lands, valuation