DARIAN – evaluare & consultanţă

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

Now, as the first quarter of the year has passed and the crisis has begun to be visible in all the sectors of the economy, we can make a few observations.

The transactions decrease rapidly; those which are realized do not have the support from the financing entities – it is more and more obvious that the critical elements are not the lack of financing or the price, rather than the lack of investors accomplishing the actual conditions for crediting.

The apparently positive news from the banks and the timid attempts are but a palliative, with no real and visible effects. I still believe that the return to normal on the real estate market needs a few years interval and a positive evolution can only occur after passing through a “purgatory” which the longer is as the financers’ and investors’ “sins” are bigger. In all this business, the collateral victims are those in a stringent need to purchase a property.

Once with the deepening of the crisis, the decrease of the number of corporations or investors with a financial situation allowing them to attract credits, respectively the recession would accelerate the decrease of the GDP and the budget incomes.

I would develop an idea in connection with the governmental decision adopted in terms of fiscal policy. Even if there is a strong need to increase the budget incomes, in a free fall because of the crisis, the good sense arguments shall count first. If, the government cancelled the deductibility of the expenses related to the vehicles for companies using vehicles in their activity, in order to increase the budget incomes, a deep shortage of ideas is supposed, and I do not see how the budget would comply with the parameters imposed in the agreement with the IMF.

Measures such as the fixed tax, or the cancellation of the deductibility of the expenses with the company vehicles, show the precariousness of the measures adopted by the Government, and the lack of strategic vision regarding the needs of the Romanian economy. If these are the measures which shall get Romania out of the crisis, to re-launch the economy or the credits, we should say farewell and prepare for the worst.

I remember a phrase of an enlightened president from a super developed Asian country, which seems to confirm the realities of Romania: underdevelopment is not result of the lack of resources, rather than a defective management.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Real Estate Market financial crisis, real estate

If in the third quarter of 2008, the GDP growth rate was 9% compared to 2007, and in the fourth quarter of 3%, the trend will be most likely negative in the first quarter of 2009. I reckon that the decreasing trend of GDP in the last two quarters shall be of 10-12 percents, which shows that the Romanian economy has constrainedly landed, in two quarters, from an unsustainable high level to an intolerably lowered level.

I think that, unfortunately, we shall face a significant decrease in the second quarter of 2009, too. Romania will enter a deep crisis, whose effects we all feel in the coming months. The economic situation worsening and falling demand cause less companies to have financial situations allowing them access funding, without mentioning the high cost of it.

After the agreement with the IMF, which will help to improve the financial situation, respectively increasing confidence and reducing the costs associated to funding, and after balancing the budget with EU funds, there will be created, in the last period of this year, the possibility of halting the increased decline we are witnessing today.

In 2010, within an optimistic scenario, we shall assist to the re-launch of the Romanian economy, and this taking into consideration the developments in terms of a favourable global economy.

A good chance for a quick revival of the economy is attracting EU funds. It depends exclusively on the competence of the authorities and the transparency of the process, providing the potential to boost strategic areas and economy, in general.

In this period of economic and financial difficulties, to attract these funds and those of other financial organizations (World Bank, EBRD, EIB) may represent two major advantages:
- there are cheaper sources that can boost big infrastructure projects and major branches of the economy;
- these create jobs, that is sources of budgetary income.

If the pronounced decrease in GDP was due mainly to decrease in real-estate and the retail, Romania’s exit the crisis may take place only with the reopening of investments (both public and private) in the real economy, not in consumption.

There shall be supported by funding and fiscal policies the companies that surpassing the crisis, will contribute directly to improving the employment situation, which is of the budgetary employees and the pensioners.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Real Estate Market banks, financial crisis, funding, real estate, real estate industry

Appraisal is a profession that is passing through a stressful period once again. If in the past the credit officers brought pressure to raise the value level, thus leading to customer satisfaction and raising the market share of bank, currently, the risk departments bring pressure to lower the appraised value, with the aim of protecting the bank and not granting risky loans under the current shortage of liquidity. Not many appraisers may face this stressful situation. The small appraisal companies created solely on this kind of services dependent on the partners in the banking area are most affected. Even the large companies feel the pressure to provide made to order appraisals for important investors greedy of funding.

The solution should appear from among the profession, by choosing the appropriate methods in accordance with the standards. To use the market comparison method, very useful for the active markets, might be an error when the transactions are quasi-blocked. Instead, it may become useful again the cost method, particularly for the new developments. Taking into consideration the substitution, an important appraisal principle, and also the new consistent information, through this method there can be obtained values more appropriate for the time being which should satisfy both customers and banks.

As regards the income based methods, it should be considered the pronounced decrease in rents and prices of trading, the two variables – the rate of capitalization and the transaction price – being currently very volatile and largely influencing value. In this situation, the most appropriate would be to work with updated rates of rents, where the update rate (the risk) may, more reasonably, take into account the situation, noted that the forecasts are, also in this case, difficult to estimate. However, with appropriate instruments they may become more reliable.

I think at this point the residual method is the most difficult to apply. Since it is based on many volatile variables and future appraisals difficult to be sustained now, it may be useful only as a complementary method and it is not indicated for use in loans with real estate collaterals, particularly lands.
In connection with these clarifications, I anticipate the need for discussions between the assessors’ community (ANEVAR) and the banks (ARB) in order to harmonize the positions of donors and the experts-appraisers consultants.

However, the crisis will lead to important changes in the financial industry landscape through more severe regulations and adjustment to reality. This will also affect the field of appraisal consultancy, where the professional association’s position should have a key role.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Real Estate Market, Valuation financial crisis, valuation

The funding obstruction continuation by the Romanian banks and, also the unbearable level of interest in the market has a pervert influence on the health of Romanian companies.

At this time, lack of funding is not only a problem for the real estate developers, who stagnate anyhow due to cold season, but also for other industries in which investments are made.

The difference between survival and bankruptcy is now represented by funding, an essential support in the life of any company. Unfortunately, the chances of obtaining money from sources, other than banks are very low, almost zero even if we exclude private funds with strong speculative nature or the hypothetical European funds, which in addition to suffering from procedural delays, also involve local funding.

Difficulties or bankruptcy of companies due to the lack of funding, or the costs related to this, will in turn create crisis and pressure on fund providers; we should not forget that we are all part of the same economic environment. Epidemic can spread quickly and it will not forgive anyone, creating social cascade effects.

If during periods of expansion, entrepreneurs valued qualities such as aggressiveness, maximizing profits and fight for market share, I think now it emerges the need for solidarity. Solidarity does not preclude competition; however, it starts with the concept that a company can not be healthy if its partners or customers are sick.

An important role in overcoming this moment might have the authorities. These will need to make decisive gestures in terms of credit recovery; I refer here to hire foreign loans, even under these conditions not really advantageous, in order to fund the infrastructure works and, also to balance the external balance of payments once with strict reduction in the budgetary expenditure, thus facilitating pressure on the Romanian taxpayer who is already in a difficult situation.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Real Estate Market banks, crisis, funding, interest, investments

Valuation is an important profession during periods of economic development; however, it also plays a decisive role during a crisis, when the market is less active and companies in difficulty are in need of consultancy.

Whereas during the expansion of the real estate market, consultants rushed to advise investors to buy because real estate prices rocketed, now, with an acute lack of transactions, it is difficult to estimate the value or its level of certainty regarding property. The result of this crisis is an extra pressure on the valuators as far as approaches and even standards are concerned.

The decreasing trend of the real estate market is noticeable both in the worsening of credit/bank loans conditions and in investors’ being cautious and pessimistic. Real estate property prices soared during the period 2004-2007 since the interval had a strong speculative nature at the time; prices are now subject to a dramatic decrease.

However, what we know for sure is that there is no reason for optimism, at least not on a short-term basis, as long as the country rating does not improve, the level of interest rates does not decrease, and no positive signals come from the financial centres that triggered the crisis.

We will want to forget 2009 as a nightmare for us all, including consultants, investors, and bankers. All of us will have to go through it and learn our lessons from this first great financial crisis present-day generations are facing.

The only reason for optimism is the fact that any crisis, no matter how serious it is or how difficult to forecast in terms of length, is followed by a recovery period. I would like to believe that, due to globalisation, this resurgence will be faster at other levels of the real estate market but will not take place sooner than 2010.

In the aftermath of this crisis, our world will look different; it will have a changed philosophy, regulations/ standards will play a different role and for at least a decade, we will deal with market regulations and a very different setting and evolution of values.

I hope that with hindsight after this crisis, we will all be wiser, consultants and investors as well as regulatory authorities.

Dr. ec. Adrian Crivii, MAA, FRICS

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

Once the year and the euphoria experienced on this occasion came to an end, including also the expectations caused by the formation of the new government, we return to the real economy, respectively we will face the challenges generated by the economic crisis which shall make its presence felt every day more incisive

The Romanian National Bank’s reticence as regards the relaxation of the nominal interest and the minimum obligatory stocks represent a clear signal that in the confrontation between the financers and the real estate investors it continues the armistice which generates losses on both sides. As a consequence of this prolonged armistice, we assist to a quasi-cessation of the real estate transactions, the investors are waiting for funding commencing, the creditors for the price decreasing of the real estates to a level in accordance with the population’s purchasing power.

In this confrontation, I believe the first step shall be taken by the developers who, considering also the 30-40% prominent decrease of the prices of construction materials, have the biggest operating margin compared to the banks which take out very high interest credits and the money has a high value worldwide, at present.

Considering the decrease of prices with a 15-20% percentage noticed in the second half of 2008, and the dramatic decrease of the transactions, I reckon that, at least in the first semester of 2009, the real estate prices will keep on decreasing at least about the same percentage, this being a condition for the re-launching of the transactions and the funding recommencement.

This conflict will also generate victims, and these victims will be especially the non balanced funding developers with incipient construction projects.

There will be situations when projects of this kind will be purchased at 30-40% of their value, but only those easy of access, in good locations and with infrastructure; however, there will be also bankruptcy taking into consideration the fact that the real estate sector is the most affected by the worldwide economic crisis.

These collapses, although unpleasant, will have also a purgative effect removing the less competitive entrepreneurs from the market and bringing value to the real estate assets to a level in accordance with the economic and social development of Romania.

Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market financial crisis, real estate

The signs of the financial crisis, one of them being the slowdown of the finance, start making their sequence in the economy too. The most affected sectors are the construction industry, metallurgy, automobile, and the retail market.

The question asked most frequently by the business people is: “when is this going to be over?” Taking into consideration the fact that in Romania the crisis has a delay of 12 to 14 month since its commencement in USA, we must wait for the reanimation of the economy in the middle of the crisis, and for its effects in the European economy, to analyse its duration.

The most skeptic analysts estimate an interval of 2 years, which in my opinion will be a disastrous length for an emergent economy like Romania’s.

I believe that in our situation, the most powerful and welcome correction will suffer the real-estate sector, its price level being in concordance with the salaries and the purchasing power from Romania and implicitly with our productivity.

In my opinion, in the next 6 month, the prices of residential properties will suffer a rectification of 50% and above 50-60% the prices of land. Of course, we cannot talk about an average price because the real estate market is a market of distinct goods.

In this moment, financing is restrictive because the banks wait for the moment when the values of the real-estate properties will be more realistic. So, the loans will be launched again, after the correction mentioned above.

The positive effects of this crisis, if we can talk about the ‘positive effect’ of a crisis, is the fact that bank’s collaterals will have a more realistic value, a broader range of population with certain income will have access to quality properties, and last but not least, the speculators which induced the “bubble effect” will disappear.

The lending will start when the trust in the real estate values will increase, trust that has to be sustainable in the long-run. However, the banks cannot wait a long period of time because they cannot survive only from fee-producing activities, so they’ll start pressuring the existent clients, with declining health.

It can be concluded that there is psychological war between the financial institutions, which are cautious and wait for the opportunities given by the imprudent real-estate constructors, and the investors that try to keep the prices in the real estate market as high as possible.

Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market financial crisis, real estate

The fact that my work is concentrated on the appraisal activity, allows me to make an analysis and a parallel between what the beginning of the real estate market in the big cities in Romania 10 years ago meant and the nowadays realities.

If during the period 1990-1994 the incipient real estate market was concentrated on the transactions between the ones who were massively put in possession of condominium through the legal decrees of the year 1990 (when the acquisition of any flats was made for a few hundreds dollars), after the inflation, the economic crisis and the accelerated depreciation of the currency from the middle of the ‘90s, the value of all these transactions has changed dramatically.

In the years 1998 and 1999 the value of, let’s say, a standard flat with 2 rooms (50-60sqm) was estimated at approximately 8,000-10,000 dollars (150-200 dollars/sqm).

At that moment I estimated that the market value of these flats represented 30-40% from the depreciated replacement cost (DRC), therefore it was very unprofitable to build residential real estate proprieties; this aspect was also confirmed by the fact that at that time, the real estate development projects were inexistent.

The stability and great economical development which appeared after the year 2000, the significant inflation reduction, the constant decrease of interest and the substantial improvement of the financing conditions lead to a 10 times over increased value of these flats, to approximately 80,000-100,000 Euro at the beginning of 2008 (1500-2000 Euro/sqm).

The spectacular increase of these values did not take into consideration the technical condition and the location of these buildings, but only the financing conditions and the rise of the population incomes.

Thus, the market value of a flat has become 200-300 percent higher than the DRC and the profit of the developers has also arisen at over 200 percent.

This analysis is only informative and does not take into consideration the effect generated by inflation (Euro-Dollar) and by the value of the land. Lately, land has had a very speculative value and was also affected by the insufficiency available plots for real estate development and lack of infrastructure.

An important conclusion is the fact that the most significant mark on the evolution of the real estate residential market was put by first the financing conditions and then by the significant increase of the purchasing power and less by the edification cost.

If the DRC has doubled in the mentioned period of time, the value of the real estate property increased up to 10 times.

Nowadays, when we are at the beginning of a potential real estate crisis whose proportions are difficult to appreciate and we must expect that harder financing conditions will have the same influence on the value of the flats, but in the other sense.

Even if this correction will not be so emphasized, it will be still significant, all these aspects being in correlation with the turbulences on the loan market.

Adrian Crivii, FRICS, MAA

Real Estate Market investments, real estate