DARIAN – evaluare & consultanţă

There are numerous talks and analysts and investors spread the rumor of the imminent revival of the real-estate market. Despite the expectations of the latter category, the situation of the economy and of the real-estate industry has to be regarded with realism.

Romania had the most important gradient of economic decrease – of more than 14% in the last two years and the signs from the start of this year are not the best. A growth of approximate 1% is something normal and expected in 2010.

In this year the banks will continue to register loses on the bad loans and I do not anticipate a consistent growth of the real lending, even if the interest rates gave signs of significant decrease in the last months. Here it can be seen the effects of the spectacular growth of unemployment and the dramatic decrease of the purchasing power, phenomenon that induce a sentiment of scepticism and prudence among potential buyers. The program “Prima Casa 2” (“First House 2”) is not doing anything else than stopping a more abrupt downturn./span>

Not even the situation of the SME-s (which were the most hit by the crisis) is good, taking in consideration the voluntary or forced bankruptcy wave that they confront with – an effect of the market contraction and lending expensiveness.

Going back to the situation of the real-estate market and construction industry in particular, the sectors are almost entirely blocked, the number of projects and developments decreased dramatically, and taking in consideration the fact that from project to realization the term is minimum 1,5 to 2 years, we can expect that between the years 2010 and 2011 the supply side to suffer a significant contraction.

Having in mind that the stock from the residential market are relatively high for the current times, we will see in 2010 price decreases (approximately 10-15% for old houses), following a 2011 which is expected to be – due to the aspects mentioned in the above paragraph, the year of revival. The growth will be sustained by the decrease of unsold homes and by the lack of new finalized projects.

About the price levels which now are strongly influenced by the acquisition cost of the land and the constructions costs from previous years, I estimate that they won’t suffer significant growth in the next 2-3 years. The arguments are the following:

• The procedure for forced execution for the bad-paying mortgages will be accentuated this year, driving the supply up;
• The land market that is practically almost entirely blocked will be traded at prices significantly lower (50-60% or maybe more) for the developers that find themselves in difficulty;
• The significant drop in the purchasing power determined by the living costs and the low saving possibility of the population.

The moment of the comeback of Romanian economy, followed in some months by the real-estate market, will be determined by the global and EU economic comeback, through exports of the Romanian companies, which will give an impulse to the market’s recovery.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market banks, crisis, financial crisis, First House, lands, Prima Casă, real estate, real estate industry

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

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

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