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

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 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 financial crisis, lands, valuation