DARIAN – evaluare & consultanţă

If we discuss further on the two most important pylons that generated the crisis (the financial crisis and real estate industry), we should follow also the necessity of their restructuration under the human resource aspect.

In the last 5-6 years the explosive growth of the number of loans and the fight of the financial system for market shares lead to a sustained growth of the number of employees. Unfortunately, the Romanian learning system, whose quality dramatically declined in the last decades, could not supply enough specialists for this area. As many efforts and spending made the financial system; its employees were not at the required level for these moments. This fact is due to the fierce competition between banks when it comes to personnel hunting, conditions in which the wages offered to employees have been in some cases above the market level without any connection with the professional performance.

The crisis will make also in this area things to go back on the right track together with the inevitable process of consolidation of the financial system.

If we talk about the real estate industry, we should make a difference between the construction industry and the real-estate consultancy. As we know, many Romanians emigrated after the opening of the Shengen doors and many of them work or qualified in this field. Unfortunately, in Romania, with little exceptions, the companies did not have access to qualified personnel and hired individuals with unemployed profile. Nevertheless, I believe that a great deal of companies operating in this field will disappear because of this crisis and the number of unemployed will significantly rise in this sector.

Regarding the real-estate consultants, in this field were hired persons with communication and sales skills, and persons with a “high appetite” for fast gains, without the obedience of specific ethical standards or continuous efforts of improving the professional level being necessary. Currently, their number was drastically reduced and probably the quality of consultancy will rise, remaining in this field only the ones that are or who they could become truly professionals.

An important aspect about the valuation consultants (their number raised spectacularly in the last years, primarily as an answer at the demand of the banking system): I believe that a large number did not understand that valuation is a consultancy activity, it assumes continuous preparations, professional and ethical standards, and not just selling a regular product (merchandise), serial and made to order valuation. The ones that are part of this category will have difficulties concerning their activity in this area. I believe that for the valuation-consultants the role of professional association ANEVAR will be important in the creation of a barrier at the entrance in this profession, because of the requirements and the quality needed by the new regulations that will inherently appear in the financial industry in the aftermath of crisis.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market, Valuation anevar, financial crisis, real estate, valuation

Romania is in the economic crisis, the first and the most affected fields being the financial and real estate industries, this being due to the fact that in the last 3 to 4 years they had a spectacular evolution, caused firstly by the explosion of foreign investments in Romania along with the integration process in the EU.

The financial crisis and the contraction of the global economy influenced meaningfully the Romanian industry as a whole starting with the end of 2009, generating problems like high unemployment and bankruptcy, another burden for the financial system, which in turn influenced the consumption as well.

Through the relaunch of the global economy, I think that the first positive signs will show up next year starting with the last affected field – the industry, especially the restructured one and in the possession of multinationals, which are going to be developed after the new post-crisis models.

When I talk about post-crisis model, I mean the relaunch of some top areas like the renewable energy, eco-automobiles, IT, agriculture and bio – food industry, which will access financing and will evolve after environmental-friendly models. Same patterns require a change in the perspective of value and money accessibility, even if they will be influenced be inflationist aspects, and also by a change in the perspective of energetic consumption. It is obviously that the energetic and environmental problems will generate the next big crisis globally.

As effects of the present crisis, I consider that most of the misfit industries and the entrepreneurs without a managerial vision will disappear, making space to an industry mainly unpopulated, with reduced energetic consumption, forward looking and lead by competent managers.

The last massive restructuration that Romania did not finish it before the entrance in the EU will be finalized be this crisis. The financial system and the real estate industry are going to be the last sectors which will overcome the crisis, because the first field did not managed to quickly eliminate the bad loans and establish a new start , and the second one is conservatory and past oriented.

The financial system will pass the next 6 to 12 month through a beneficial purgatory, preparing itself for a period of consolidation – Romania does not need more the 40 banks. The real estate sector will be confronted with amputations and resounding bankruptcies until it will start developing on a new base in which the localization, quality urbanism, low energy consumption, ecological houses will arise as a natural response, with accessible prices at the demand of pretentious clients.

Unfortunately, the recovery of the Romanian economy is not going to be fast, due to the authorities’ lack of vision, to a heavy and expensive bureaucratic system, and also because of inefficient budgets.

The only chance will arise when the IMF will get more involved in the economic policies and in the administration of the restructuration of the government spending.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis crisis, financial crisis

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 financial crisis, First House, valuation

The government decision to encourage the purchase of a first house is a good one, likely to activate the real estate market and save some of the developers who will feel this opportunity and will treat it appropriately. Unfortunately, if you take into account the proportion and the relatively narrow segment to whom it is addressed, the program will have a low economic effect, although it will boost a little the residential market.

Given that the economic situation continues to regress, we cannot consider that this measure will have as an effect an increase in the residential property value. The shy demand encouragement will not have the same effects as those of previous years (the decrease of interest rates, the increase of the term loan), because in the past the encouragement of demand was complemented by an upward economic trend, and accelerated revenue growth. Now, because of the economic situation with stagnant wages and explosive growth in unemployment the solvent demand is reduced and fragile.

It should be also noted that the negative evolution of the economy can not lead to price increases and who expects something like this must consider this scenario only desirable, in an uncertain future, after the economic recovery and very unlikely at the level before.

I’d like to make some assessments regarding the values which will be anchored in this specific context. The return of residential property market with “the feet on the ground”, because of the crisis, will make the prices of apartments to reach 500-1.000 euro / sqm, depending on location, prices accessible and consistent with the market segment represented by most Romanians. If you take into account that in Romania the number of owners is very high (about 80% of Romanians have at least one property), I think the price above is realistic.

From now on, developers’ offer (most are in financial difficulty) will press on those who sell old apartments as well, forcing them to adapt to the solvent demand of the moment.

Other issues should be also taken into consideration – one is the total collateral of the state with the guarantee fund, which makes banks obtain an easy profit with minimum risk of this new product. Another aspect is the difference between the First House clients and other customers in the system who, meeting the criteria of First Home Mortgage, took recent mortgage loans at a significant higher cost.

Soon I will treat the subject of valuation at “First House” Program.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Valuation financial crisis, real estate, valuation

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

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

The land, the most important capital of a nation, object of wars between countries and countless litigations between people, represents an important subject in consideration of the value and its estimation.

If, prior to 1989, the land could not enter in the civil and economic circuit, due to the impossibility to transfer the right of property, once we entered in the market economy, it became a more and more valuable merchandise, the object of a very active market, with a very speculative character, especially in the last 4-5 years.

In the first years of the last decade, the market was in an incipient phase, due mainly to the problems related to the right of property. This represented the main reason for the real estate underdevelopment and the economic crisis which characterized the period between 1990-2000. The lands and big part of the assets under the State property were removed from the economic circuit, suffering physical moral, and economic decays, which lead to important decreases of the values of the Romanian companies in the process of privatization.

After the year 2000, the relative improvement of the legislation and the economic growth lead to an increase of the offer of lands. On the other hand, the sustained growth of the direct foreign investments, the beginning of the big developments for the retail networks, as well as the residential developments on the grounds of the constant improvement of financing in the latter years lead to a constant increase of the solvable demand for lands. Therefore, a consistent, active marked was created, sending positive signals to the investors.

Along with the developers, another particular category of investors responded to these signals, the so-called “speculative investors”. These ones had an important role in introducing lands (valuable assets) in the commercial circuit. By merges, solutions to litigations, passing agricultural lands into the circuit of construction, a substantial contribution to the increase of the competitive offer was recorded.

At the beginning of the present decade, the square meter of land had one figure values. After changing two or three owners, the value already had two figures, and in the late two years it exceed three or even four figures, an exaggerated level, considering the economic and social development the infrastructure, and the position of Romania, in general, in terms of standard of quality of life. This abrupt increase was equally caused by the speculators and the banks, who, in the rush for profits and market share, financed all the categories of lands for development, regardless the quality of the locations, design, or investors.

One of the internal causes which lead to the crisis on the real estate market was this increase of the prices of the lands, and the consequence was that the value of the residential real estate developments became inaccessible for the Romanians with average incomes, and for value of the mortgage of the banks which conceded real estate credits became exaggerated.

As a conclusion, one of the most important effects of the abnormally high value of the lands for constructions is, at present, the very high level of debts of those who accessed credits.

To be continued.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Valuation financial crisis, land, valuation

Now, as the first quarter of the year has passed and the crisis has begun to be visible in all the sectors of the economy, we can make a few observations.

The transactions decrease rapidly; those which are realized do not have the support from the financing entities – it is more and more obvious that the critical elements are not the lack of financing or the price, rather than the lack of investors accomplishing the actual conditions for crediting.

The apparently positive news from the banks and the timid attempts are but a palliative, with no real and visible effects. I still believe that the return to normal on the real estate market needs a few years interval and a positive evolution can only occur after passing through a “purgatory” which the longer is as the financers’ and investors’ “sins” are bigger. In all this business, the collateral victims are those in a stringent need to purchase a property.

Once with the deepening of the crisis, the decrease of the number of corporations or investors with a financial situation allowing them to attract credits, respectively the recession would accelerate the decrease of the GDP and the budget incomes.

I would develop an idea in connection with the governmental decision adopted in terms of fiscal policy. Even if there is a strong need to increase the budget incomes, in a free fall because of the crisis, the good sense arguments shall count first. If, the government cancelled the deductibility of the expenses related to the vehicles for companies using vehicles in their activity, in order to increase the budget incomes, a deep shortage of ideas is supposed, and I do not see how the budget would comply with the parameters imposed in the agreement with the IMF.

Measures such as the fixed tax, or the cancellation of the deductibility of the expenses with the company vehicles, show the precariousness of the measures adopted by the Government, and the lack of strategic vision regarding the needs of the Romanian economy. If these are the measures which shall get Romania out of the crisis, to re-launch the economy or the credits, we should say farewell and prepare for the worst.

I remember a phrase of an enlightened president from a super developed Asian country, which seems to confirm the realities of Romania: underdevelopment is not result of the lack of resources, rather than a defective management.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Real Estate Market financial crisis, real estate