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, english, financial crisis, First House, lands, Prima Casă, real estate, real estate industry

Romania crosses the financial and economic global crisis in an atypical way. Recovery and prevention measures of the Romanian economy have been taken or too late, or unfairly, preferring to protect revenues of the budgetary sector clearly against the private one, the burden being thus placed on this sector and its employees. As almost always in Romania, government measures have focused on short-term resolution of problems without long-term vision. As a result, the private sector suffered a serious blow (the number of firms closed in 2009 was with 1.500% higher than in 2008), the unemployment rate having climbed dramatically and maintaining its growth rate, the investments in infrastructure, the solution to crisis have been sporadic and mostly insignificant. Firms face a lack of funding. The cost of credit and reducing consumption, especially non-food.

Romania’s public debt exploded during 2009, the state budget being unable to cover the current expenditures, so that it is expected to increase in 2010 to 33% of GDP. The programs taken to minimize the effects of the crisis (see the “First house” program on the property sector) managed by the chaotic manner in which they were announced and implemented, to leave a picture of a state unable to properly manage its resources to meet the crisis, unstable and dignified little effect on confidence in future developments. National opportunities remain still not valued properly.

Real estate industry, which enjoyed the bubble’s effects (income for companies and employees) was strongly affected by the financial crisis, this sector felt it most strongly.

Economic recovery will be long (3-5 years), with high costs in terms of the duties and taxes on profitable companies and in particular on employee income, see micro-enterprise tax and other taxes are about to come.

The entry into insolvency of the major real estate developers and network retailers has made market fluctuations, blocking the flow of money in the banking and suppliers’ circuit. In the same time, more companies resort to voluntary insolvency as a mean of protection from the creditors.

Romania went from 6-7% growth over the past three years to a brutal loss of over 7% in 2009. At the beginning of the year, the Government still bet on an unrealistic growth of 2%, which did not materialize.

Unemployment during his 2009 race and growth will continue in 2010. Over 750,000 people who have entered or will enter the next period in unemployment will spend less, and may experience difficulties in paying rates. Unemployment will occur inevitably also in the budgetary sector with high salaries and appropriate rates will strongly influence the exposure of banks and their results. Even at the end of 2009 the level of bad loans reached to over 14% of the total, at a level of around 2 billion euros, predominantly in the companies, a trend that will continue in 2010 with repercussions on crediting.

Following the loan from the IMF and European Bank, Romania became a net debtor country, with long-term effects on population income, and also on living standards. The effects will be seen by the boom in all categories of taxes, on work, income and property – the effect on the value of the latter will decrease the price of competitiveness of Romania’s workforce, but assets will be cheaper.

Banks will not exceed the financial crisis in 2010 because of bad loans and the continuing high cost of external financing due to low country rating. It should be noted that the difficulties of Greece and Austria’s exposure to Eastern Europe in crisis (Ukraine) whose banks dominate the Romanian banking landscape. Despite interest rate reductions in the second half, the credit markets remained frozen. 70-80% of the number of banks have registered losses in 2009.

Property losses caused by price decreases (the apartments are around 30-40% of the peak value achieved in 2008) shows virtually blocked investments.

It will follow a slow recovery together with the market’s maturing in line with the real growth of productivity and income of the population. The real estate sector, will be completed some projects started in 2008 and fewer good quality projects in favourable areas that will be started in 2010. For constructions from the residential area, the price will start from other levels of land prices, higher quality, reasonable profit margin of the developers and real consumer-driven, consistent with funding bids and prices by 5-10% lower.

We value growth at around 0% (± 1.5%) in 2010 and approx. 2-3% in 2011, in an optimistic scenario, following that in 2012 it will return to rates of over 4-5%. Also in an optimistic scenario, the end of 2010 will be the beginning of stability, appearing the first signs of crisis overcoming, and 2011 will most likely be the first year of a stronger recovery.

Real estate industry, important part of the economy will get back with 6-12 months after the basic industries of the economy, unlike the stock market, which has an anticipatory nature, being already in a positive development.

Dr. ec. Adrian Crivii, FRICS, MAA

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

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 english, financial crisis, First House, valuation