DARIAN – evaluare & consultanţă

My opinion is that,  after two years of significant declines in GDP, we’ll be approaching the end of the economic crisis late this year, mainly due to global economic recovery (I hope we are right this time, because we had the same expectation in early 2010).

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

Financial Crisis english

Now, as this year is about to end, retrospectives are made and also predictions about what will happen in the industry and also inside the real estate market in general. After a difficult 2010 which,  unfortunately, did not bring the expected economic revival,  because of  reasons which were not related to the industry, I expect the year 2011 to be at least as difficult, especially during its first half.  I can estimate we will face an explosion of underperforming real estate loans, that will create tension and negative effects upon the banking and the real estate sector. The prolonged financial crisis and the consuming of all normal means at the disposal of financiers or real estate developers lead to a pursuit of other solutions.

Financial Crisis, Real Estate Market english

These days DARIAN celebrates 20 years of formal record made of hopes and ideals at the beginning of private property which occurred at the first part of the last decade in the last century.

After these two tumultuous decades of life, in the midst of the Romanian economy in eternal transition, in addition to goals, strategies and targets to achieve, I traveled with distinguished people next to me on a road full of obstacles but also accomplishments and I can proudly say as a founder that I realized something meant to last during these years.

By honest, qualitative labor and sacrifices, DARIAN has become by its team not only a valuable consulting company if we judge it from the economic point of view, but primarily a school of really professional people, which in reality is the greatest achievement and pride having, I think – even a positive contribution to the development of the valuation profession and of the Romanian economic environment. In these 20 years we have successfully managed to cope with rapid changes in society, our clients’ requests, enriching our knowledge and gaining experience with a young team, in constant renewal.

Ourselves, those working in DARIAN, could not get here without input from our customers, investors of all sizes, financial institutions or either private companies or Romanian or foreign persons who trusted our advisory services to be offered promptly, thing on which were based important decisions in many situations.

Dr. ec. Adrian Crivii, FRICS, MAA

Real Estate Market, Valuation english

There is a simplistic but very actual classification of countries in terms of attitudes towards saving and investment, as it follows: companies with debt which consume and which includes U.S. and most developed countries in the EU, and companies that save and invest – category to which belongs China and other Asian countries with a strong economic development. Unfortunately in the last decade, with emphasis on the recent years, once it entered the EU economic area, Romania is increasingly evident in the first category, so that his public and private debt now exceeds 85 billion euros with increasing tendency of growth.

The profile that Romania has now, without material resources or valuable assets to sell, will lead to the necessity to pay the duty engaged in the most part in labor taxation – which unfortunately is not showing a high productivity. Many Romanian people who have abilities and labor force are living outside the country, where in many cases they are working below their level of qualification and earn only from excessive work. Another category of people is formed by the highly educated and young people who graduate prestigious universities in the west and do not return because here they don’t have a matching job offer – therefore the country can not take advantage of this category’s motivating potential. The latter could constitute the frame of highly skilled labor force with high productivity on which debt burden can be laid.

Unfortunately, as the Romanian society appears today, in a society in which entire communities – several million people – are socially assisted, have a low education or poor or insufficient “work longing”, a very bright future cannot appear. Now, the whole tax effort for the state support lays on less Romanians, entrepreneurs or employees in private firms who thus are not only drained of power but also ended up their hope.

Sacrifices which will have to be made in order to overcome the crisis must be shared equitably among all social classes. Those who produce added value and pensioners who have contributed honestly and have low pensions and the few public employees who consciously pay their debt on increasingly smaller wages. We cannot overcome the current situation without social solidarity and motivation for a better future.

Related to real estate property value, it is still on a downward trend until the moment of exceeding the critical point of growth in nonperforming loans. Prices will stabilize at a sustainable level in line with revenues, labor productivity and saving capacity. I consider the latter being limited, at least in the medium term, due to reasons stated above.

Dr. ec. Adrian Crivii, FRICS, MAA

Real Estate Market, Uncategorized, Valuation english

Romania’s economic situation becomes increasingly dramatic, and in the next 6-12 months, the damages will be hurricane sized for both living standards of the population and company balance sheets.

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

Financial Crisis, Real Estate Market duties, english, taxes

They showed up again and won’t leave us soon: contradictory debates between analysts, developers, investors and even journalists, regarding the real estate market status and especially the properties trading price.

There are a few real estate websites (with significant traffic) that present many properties offers, market analysis and also a real estate index for Bucharest – but most of the times all these contradict one another.

It usually comes to this because of the unverified information these websites build their articles on; almost every single article is centered around real estate offers. And those offers are, of course, sustained by the interest and wishes of the owner, therefore they are strongly influenced (during this economic crisis) by the positive information the authorities presented in the first quarter of 2010, and not by the real trading prices of the market, as it would have been advisable. These real prices I’m referring to accurately reflect the supply-demand relation at this present time. This whole situation therefore created is caused by the lack of transparency in the real estate industry and also by the limited number of independent and professional analysts.

As the recent information regarding the number of transactions, the default loans situation and also the whole economic situation is quite dark, coming up with sayings like “the properties price in that city increased by 5%” shows lack of professionalism, and those involved prove ethical deficiencies.

The real estate market is not very efficient, having a significant gap between supply and demand and the properties are characterized by unique features, hence the lack of accuracy and relevance in calculating overall medium prices. Using only the real estate offers for market analysis is also a mistake that can lead to important errors and to public misinformation, consequently. The Romanian National Bank considered creating a real estate index, in partnership with the public notaries and INSSE, and this represents an important first step towards the market transparency, but this single act can not become a remedy by itself. The real solution is to follow the standard used in the well-developed countries so that all the involved institutions could transparently provide the necessary information, while the real estate consultants base their analysis on clear, accurate and objective data, resulted from properties transactions only.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market english, investments, investors, real estate, real estate industry

This is a taboo subject that has been repeatedly approached by me during the last 2-3 years, but it did not raise the interest it would have deserved, perhaps due to the fact talking about taxes is not such a pleasant activity.
The budgetary difficulties we face these days, which lead to aberrant decisions like the dramatic and without discernment pensions decrease, could find solutions in some other area, not in that of an unavoidable increase of the flat tax and VAT, namely setting taxes based on realistic and rational principles of property.
There is no such thing as a well developed society, with solid market principles and respect towards private property, which does not set real estate taxes that match the market value of those very properties.
There are 2 major discrepancies in Romania when it comes to setting taxes on properties, besides the low level of those taxes themselves:

• a tax base set on empirical and egalitarian methods, which leads to inequity
• an exaggerate difference in taxes of the same property, regardless its owner (individual or company)

A reasonable solution to this problem could be the decision taken by the Ministry of Finance to change the whole tax system (and the tax base respectively), beginning with the market value of the property. Although this is going to be a very complex process, which is going to consume will power, time, effort and money, it would definitely resolve many of the budgetary issues and it would also create solid premises for the correct real estate market alignment when it comes to the tax value of properties, depending on objective criteria such as location and intrinsic quality of the property.
With this change in approach, the properties tax values could double or even triple, making the budget revenues therefore obtained grow significantly.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis english, properties, taxes, VAT

During these troubled times of uncertainty regarding the overall economy and the real estate market specifically, it is advisable to review new visions and more optimistic sides of the future, which is inevitably going to produce some positive effects out of the crisis we are all passing through at the moment.
Although an increase of taxes (hard to handle by the private economy) was avoided in the last minute, it is certain the decisions taken now will not meet the desired effect. The curve of sacrifice was preferred today and it will mainly affect the budgetary employees and the pensioners, but an increase of taxes can not be postponed in the near future. They try to make this measure a pro-cyclic one, applied when the first signs of economic revival will show up.
Therefore, not only 2010 is a compromised year if we refer to a revival, but 2011 seems also threatened from the point of view of the real estate industry.
The prices re-establishment, so that they could meet the deeply fallen solvent demand, will continue in the next period of time.
Going back to a more optimistic tone, let us see which could be the positive effects the crisis could generate for the real estate industry:

• Higher expectations from the buyers and a better understanding of what we define a good quality property
• A good understanding of financing (terms, costs and information transparency)
• Pressure applied on increasing the quality of the services and the standards used by the real estate and financial consultants
• Increasing the real estate market transparency, mostly regarding the real value of the sold properties, which is going to lower the speculative side of the market we have noticed in the previous years
• Increasing the quality of the real estate products and a new price-quality relation which will reflect those market segments
• A significant decrease of land prices, with a major influence in the final unit price (per square meter)
• The competition between the well-known developers and also between important construction companies, which will lead to a market free of amateurs and speculative players
• A significant decrease of the profit margin of all real estate industry participants

Once the first signs of economic revival show up, which we hope it will happen as soon as possible (perhaps in 2011), the market and the real estate developments will start on a new path, from others levels of construction, land and labour force costs, with a brand-new quality and proving the real estate industry in Romania has finally grown up.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market crisis, english, financial crisis, real estate, real estate industry

I would like to say a few things about the price evolution of apartments which are 30 or 40 years old. Built during the communist era, this kind of buildings still represents the main type of residential properties in the major cities of our country.
Most of these apartments were built between 1965-1980, during the so-called flourishing period of socialism. They had to face the demographic expansion and forced industrialization, which defined that era. The flats were bought at cheap prices in the nineties, by their tenants who later on avoided investing in modernization. Some of them even re-sold their apartments, making a huge profit.
From the point of view of their structural strength (except Bucharest, see a big earthquake prospect), these apartments are still in a good shape. But if we refer to the insulation systems, installations and finishings , we can say their quality is very poor and they need important investments in rehabilitation, which are unlikely to occur given the financing cost these days.
In the last 20 years, Romania has not seen any important investment in improving the yield of the district heating plants (co-generation) and neither in the insulation of homes field. The much simpler solution (but not economically efficient) was always preferred: random subsidies made without taking into account the beneficiaries income.
The deep economic crisis will inevitably result in the abandon of these subsidies and we will have to face serious problems regarding the flats maintaining costs, considering the large amount of elderly inhabitants, who live on pensions and have limited financial means. Given this situation, it is very unlikely to witness investments in restoration.
I expect a large number of families who live in these apartments to have a very difficult winter and also outstanding payments of their bills.
The significant depreciations, physical (wear, lack of current and major repairs) or functional (lack of thermal comfort and high maintenance prices), will  strongly decrease the value of these apartments in the next period of time. Another thing causing this phenomenon will be the pronounced decrease of people’s purchasing capacity.
Unfortunately, many apartments coming from the old districts, the ones from the suburbs or from the working-class neighbourhoods, having this stigma, are about to considerably degrade themselves, considering the reasons mentioned.
During the following year, as the crisis will increase, it is possible the value of these apartments will significantly drop (around 20-25%), leading to a price of 500-700 euro per square meter, which will fairly equal the price of the new flats, built in the cities suburbs.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market apartments, english, financial crisis, real estate, real estate industry

At the beginning of this year we were increasing emphasis on the possibility of economic revival and, consequently, real estate market growth. Nevertheless, the economic results of the first quarter, combined with the IMF inspection, project dark perspectives upon Romania. Furthermore, the signs offered by the real estate market in April showed a price decrease, which is likely to continue during the following period of time, mainly if we consider the possible decision of VAT and flat tax increase.

The administration’s failure to limit the spending, respectively meeting the forecast economic deficit, will considerably cost us, both individuals and companies. This pro-cyclical measure is about to push down the already fragile economy – therefore we definitely won’t experience economic growth in 2010 either.

The increasing of taxes, which ultimately leads to a decrease of the personal income, will reduce people’s saving capacity, and also the possibility to access loans – this will immediately result in the heavy decrease of the solvent demand. More than that, the construction companies (which are already in a poor condition) will experience increased costs of production and, as a consequence, the real estate offer will be less and less price competitive.

The discrepancy between the solvent demand and the competitive offer will generate a blocking of transactions, emphasising the real estate crisis respectively. In this new market environment, the equilibrium between offer and demand will be achieved at a low level and as far as only the old properties are concerned. The new apartment buildings will likely become even more unavailable, especially if present prices are involved, and the perspective of new residential developments will be close to zero. I may definitely point out this decision of both VAT and flat tax increase will kill the real estate industry and not only in the next period of time.

The worsening of economic environment, implied by this decision regarding the flat tax, will generate more unemployment and also the delay of loan revival, due to increased risks.

If this economic measure is adopted (and this is very probably to happen), 2010 will be just another crisis year. We shall be able to debate economic growth again only in a few years time.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis crisis, english, financial crisis, real estate, real estate industry, VAT