DARIAN – evaluare & consultanţă

Although the capital market has a main role in attracting financial resources at reasonable costs for capitalizing companies, it is not felt in Romania in its fully benefic effect, today, in which conditions the financing cost through loans became prohibitive for many Romanian companies.

Yet, financing capital market should be one of the economic recovery solutions for the listed Romanian companies, and maybe even for the re-industrialization.

Why is it not so?

• one of the objective reasons is the investors’ perceived risk, especially regarding the predictability of excessive taxation laws, which make the possibilities to avoid this situations to be inconsistent with the transparency required by the regulated market;
• the companies’ lack of confidence in the capital market, which has no depth and did not attract significant investments from pension funds and insurances, being still in early stages of development in Romania;
• lack of investors’ confidence in the transparency and adherence to a code of corporate governance of the listed companies;
• the lack of a clear legislation, adapted to international requirements regarding the protection of minority shareholders.

Then, if we talk about de-listing, there are generally two categories of companies that waive the “advantages” to access capital market funding:

• the multinationals – who are provided with funding in good conditions from the parent companies or the more advanced capital markets;
• the local ones, sponsored by capitalists, investors, Romanian entrepreneurs who see in the current crisis conditions with weak financial results, the possibility to close the company on favourable terms, and to decide on their own on its future, thus having also a more realistic connection between the investment risk assumed and the correspondent expected profit.

Romanian capital market is still composed mainly of speculators and not investors. Speculators have a very important role: they ensure market liquidity, but those who should dominate the market are the investors – those who inject significant amounts of capital, thus contributing decisively in financing the economy.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis financial crisis

The desperate chase of funds the Minister of Finance undertakes, will certainly have perverse effects of big proportions and will manage to satisfy the hunger for financing of the starving mouths of the budgetary bureaucracy to a limited extent.

Beyond the flagrant errors of vision, the shortcomings and ignorance in the organization and management of the taxation system, which characterizes the past two decades, there will remain unresolved issues that will finally impose a radical reform and modernization of all the taxation systems. This inevitable reform will be reflected upon the taxation on labour, on real-estate and other goods, the taxation on trade or capital gains.

I would like to present in the following section, one of the errors and its repercussions on the long-term, with an example from history. I was reading, not so long ago, a book written by Mr Paleologu, about the boyar families, that presents a situation from the XV- XVI centuries from Wallachia. The free peasants were obliged by the state’s enslaving fiscal system from that time, to sell their real-estate properties and their land to the boyars, becoming thus bound to them. The phenomenon was the result of the fact that the last category benefited from an advantageous fiscal system, acquiring in this way important property fortunes – whole villages.

This concentration of land fortunes in boyars’ possession had as an effect not only the impoverishment of villagers in the first instance, but a reduction in the unity of military and political forces of the state from that time. I believe this edifying example of fiscal harmonization will replicate nowadays as well – the rich ones with significant real-estate properties will have the possibility and the means necessary to further enrich themselves, to fiscally optimize their taxation level, as they should. And the other ones, with reduced financial possibilities, especially the youngest will pay the incompetence bill and will use the fundamental right of people to live in a country which is well managed and has respect for their rights, and that especially now, in the middle era of globalization.

As a result, Romania will be weaker, with a lower social unity and it will comfortably install, without competition, on the last position among the countries from EU, in terms of quality of life and civilization.

The only chance in my vision, and which should happen soon, is for the European fiscal systems to be harmonized – as an effect of the financial crisis, so that we will arrive at a sustainable level of taxation, transparent and equitable, on the territory of the Union and we would also be able to profit from its effects.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis crisis, financial crisis, taxes

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

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

The years 2006, 2007 and the first part of 2008 were a period of strong expansion of the assessment market due in particular to credit growth and the assessment demand for financial reporting. Darian, after a period in which expansion has strengthened to national presence, has increased with significant annual percentages, for example 70% by 2007 and 15% by 2008 at least at market level having a share of approximately 15-20%.

2008 was the year of ending a peak period when the market was around 30-32 million euros, followed by the effects of the current financial crisis. In 2008, Darian covered approximately 15% of the market, having a turnover of 3.75 million euros. The achievement of this income consisted in approximately 30-35% of the financial consultancy sector and 65-70% of the assessment for the banking sector with significantly different returns between the 2 sectors.

In 2009 the crisis has been accentuated and led to a decrease of at least 20% of the assessment market to the value of 24-25 million euros. The crisis will be stabilized in the last part of 2010, when the assessment market will be about 25-26 million (a significant contribution will have the assessments for liquidation), so that in 2011-2012 coming to reach its prior level and even exceeding 30 — 32 million euros.

The current situation on the Romanian market:

• the market’s atomization, the small firms, the circumstances, related to people working in banks with many casual collaborators, the low quality, which cannot invest in technology / licenses and low levels of valuation services, the difficulty to follow the code of ethics, black charging , massive tax evasion including the labour sector. This facts influences the assessment market transparency and the information about the real players in this market;
• there are no quality services at national level, only circumstantial associations to maximize profits without investments;

The crisis apparently has fostered this situation but certainly will follow a period of consolidation. As a consequence of the effects the crisis, the market will also suffer qualitative shifts for the substantial services from the banking sector, increasing regulations being inevitable after the loss that will be recorded – bring in what will appear in the regulations as a result of the crisis in Europe.

In the business assessing and financial reporting sectors, the market increased in volume and value in the recent years and will be maintained or increased slightly in 2010 (5-8%), following an increase of 10-15% in 2011 and over 15-20% in 2012, when it will exceed the 2008 level.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market, Valuation english, financial crisis, valuation

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

Last fall I visited Spain and China and I was amazed by their authorities’ attitude regarding the crisis.

Although I had visited Madrid just a year before and I found it to be a clean and harmoniously built city, I was impressed by the high level of investments in infrastructure. At almost every turn, you could see a major boulevard, square or building getting restored or pavements, telecommunication networks or utilities being replaced. During a conversation with the authorities, I was told that this was their anti-crisis policy. They were making important investments in infrastructure in order to limit the devastating effects of unemployment.

Instead of paying an unemployment tax of 1 Euro, we pay 2 Euros for investments in infrastructure and we avoid paying 3 euros the next day, as unemployment wages. I believe that this could be a model or even one of the solutions that the Government should implement in order to stop the alarming growth of unemployment.

In China, a country that I visited 3 times in the past 5 years, I was impressed by the largeness of infrastructural development, witch comes as no surprise from a country that, during the so called crisis period, manages to register an economic growth of 6-7%.

If, during the first period of the crisis, the USA backed up it’s financial system with 2.000 billion dollars, China invested 500 billion dollars in rural infrastructure, thus encouraging internal consumership and enlarging access to civilization for a significant part of it’s population.

I was also impressed by the quality of the airports and the very modern fleet of Chinese airline operators, not to mention the grand urban renewals, districts for millions of inhabitants, in witch the construction begins only after finishing the infrastructure and the installation of utilities. At this rate, I believe that, in less than a decade, China might become an important competitor for the 1st place, occupied by USA’s economy.

Drawing a parallel between this countries and what is happening in Romania, meaning that the impressive debt related to the Romanian economy’s potential is not able to cover the holes in financing the budgetary or pension system, we can evaluate the quality of institutional management of Romanian authorities.

It is true that the crisis was not a local one, but, to quote an old saying: „If the frost was to come anyway, who stopped us from putting another coat on?” .

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market China, english, financial crisis, investments, real estate, real estate industry, Spain, unemployment

The end of the acute economic and financial crisis will come as early as the second semester of year 2010. Until then the economy will pass through a purgatory in which a lot of companies of all dimensions, specially SME’s and many entrepreneurships will disappear from the economic landscape. It is a normal aspect due to the competition of multinationals, once Romania entered EU, and the overlapping of this crisis of unforeseen precedent in the last decades.

A consequence will be the slow revival of the values from the real-estate industry, the sharp decline of its speculative character, as well as decent values for the companies from the other industries. The only companies which will significantly gain will be the ones in sectors like renewable energy, bio-technology, pharmaceuticals, or ecology.

The financial industry will be strongly impacted by both the loan deflation, with the supplementary risks imposed by the crisis, and the quick increase in the bad credits, which will determine a consolidation of the market, through mergers and acquisitions or the closing of banks’ subsidiaries. Either way the recovery of lending will be of long standing and will never be the same as in the period 2006-2008, not so much because of the losses that will occur in the system but because of regulation. This period of settlements that are more and more severe and done to prevent this kind of crisis, will be a long one.

I believe that Romania in general and Romanians in particular will end up with their feet on the ground, and will have to follow a long and difficult recovery with sacrifices, step by step, during at least one decade.

A beneficial succession of the crisis will be the dramatic change of mentalities, the correct appreciation of work and money at their true value and proper placement of each participant in the labor market, both in the private and public sectors. It will be a long a painful process but imminent and beneficial in the long run.

If in the previous years there were pressures on employers and the wages substantially outran the productivity level, this will not be possible anymore due to the crisis. Also, we will face the following years with high taxation levels for the payment of public debt, the high costs of the budgetary bureaucratic system, the spending related to the large number of unemployed and retirements, and also due to the investments in infrastructure without which Romania will remain an underdeveloped region of Europe, an unacceptable hypothesis for Europeans and for Romanians.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis crisis, english, financial crisis