DARIAN – evaluare & consultanţă

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 english, financial crisis, lands, valuation

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

Financial Crisis, Valuation english, financial crisis, lands, valuation

The land, the most important capital of a nation, object of wars between countries and countless litigations between people, represents an important subject in consideration of the value and its estimation.

If, prior to 1989, the land could not enter in the civil and economic circuit, due to the impossibility to transfer the right of property, once we entered in the market economy, it became a more and more valuable merchandise, the object of a very active market, with a very speculative character, especially in the last 4-5 years.

In the first years of the last decade, the market was in an incipient phase, due mainly to the problems related to the right of property. This represented the main reason for the real estate underdevelopment and the economic crisis which characterized the period between 1990-2000. The lands and big part of the assets under the State property were removed from the economic circuit, suffering physical moral, and economic decays, which lead to important decreases of the values of the Romanian companies in the process of privatization.

After the year 2000, the relative improvement of the legislation and the economic growth lead to an increase of the offer of lands. On the other hand, the sustained growth of the direct foreign investments, the beginning of the big developments for the retail networks, as well as the residential developments on the grounds of the constant improvement of financing in the latter years lead to a constant increase of the solvable demand for lands. Therefore, a consistent, active marked was created, sending positive signals to the investors.

Along with the developers, another particular category of investors responded to these signals, the so-called “speculative investors”. These ones had an important role in introducing lands (valuable assets) in the commercial circuit. By merges, solutions to litigations, passing agricultural lands into the circuit of construction, a substantial contribution to the increase of the competitive offer was recorded.

At the beginning of the present decade, the square meter of land had one figure values. After changing two or three owners, the value already had two figures, and in the late two years it exceed three or even four figures, an exaggerated level, considering the economic and social development the infrastructure, and the position of Romania, in general, in terms of standard of quality of life. This abrupt increase was equally caused by the speculators and the banks, who, in the rush for profits and market share, financed all the categories of lands for development, regardless the quality of the locations, design, or investors.

One of the internal causes which lead to the crisis on the real estate market was this increase of the prices of the lands, and the consequence was that the value of the residential real estate developments became inaccessible for the Romanians with average incomes, and for value of the mortgage of the banks which conceded real estate credits became exaggerated.

As a conclusion, one of the most important effects of the abnormally high value of the lands for constructions is, at present, the very high level of debts of those who accessed credits.

To be continued.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Valuation english, financial crisis, land, valuation

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 english, financial crisis, valuation

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 english, financial crisis, real estate, valuation

Since the spectacular increase of real estate market has tempered, the valuer’s role became significant. On a continuous increasing market the value was a “perishable” thing, now the first signs of stagnation became visible and the valuer’s role in making a decision (the investor’s decision or bank’s decision) is striking.

The financial institutions are making a greater account of the “risk zone”, in concordance with BNR’s new regulations and also a greater pressure is set on the quality of the valuation reports.

An important problem regarding the developing of the valuer’s profession in Romania was the lack of pressure that the investor or the client should have set on the quality of the valuation reports. Unfortunately this pressure was set only on the value of the property.

From a deontological point of view, the valuer should explain some issues regarding especially the fact that the value of a property is not negotiable. The risk departments within financial institutions are attentively supervising this particular aspect, the establishment of the value.

The obvious signs of temper on the real estate market and of the decrease in the speculative aspect, will lead to the maturation of the market and also to a more significant role for the valuer. In Romania, after more than 15 years of valuation, in Romania the time for the consolidation of the real estate market has come. This thing has guided to the appearance of true professional valuators; just as an instrumentalist within a symphonic orchestra is playing through score, that’s how a valuer should always work, in concordance with the professional and ethical standards.

Adrian Crivii, FRICS, MAA

Real Estate Market, Valuation english, real estate, valuation