DARIAN – evaluare & consultanţă

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 investments, investors, 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, financial crisis, investments, real estate, real estate industry, Spain, unemployment

The funding obstruction continuation by the Romanian banks and, also the unbearable level of interest in the market has a pervert influence on the health of Romanian companies.

At this time, lack of funding is not only a problem for the real estate developers, who stagnate anyhow due to cold season, but also for other industries in which investments are made.

The difference between survival and bankruptcy is now represented by funding, an essential support in the life of any company. Unfortunately, the chances of obtaining money from sources, other than banks are very low, almost zero even if we exclude private funds with strong speculative nature or the hypothetical European funds, which in addition to suffering from procedural delays, also involve local funding.

Difficulties or bankruptcy of companies due to the lack of funding, or the costs related to this, will in turn create crisis and pressure on fund providers; we should not forget that we are all part of the same economic environment. Epidemic can spread quickly and it will not forgive anyone, creating social cascade effects.

If during periods of expansion, entrepreneurs valued qualities such as aggressiveness, maximizing profits and fight for market share, I think now it emerges the need for solidarity. Solidarity does not preclude competition; however, it starts with the concept that a company can not be healthy if its partners or customers are sick.

An important role in overcoming this moment might have the authorities. These will need to make decisive gestures in terms of credit recovery; I refer here to hire foreign loans, even under these conditions not really advantageous, in order to fund the infrastructure works and, also to balance the external balance of payments once with strict reduction in the budgetary expenditure, thus facilitating pressure on the Romanian taxpayer who is already in a difficult situation.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Real Estate Market banks, crisis, funding, interest, investments

The fact that my work is concentrated on the appraisal activity, allows me to make an analysis and a parallel between what the beginning of the real estate market in the big cities in Romania 10 years ago meant and the nowadays realities.

If during the period 1990-1994 the incipient real estate market was concentrated on the transactions between the ones who were massively put in possession of condominium through the legal decrees of the year 1990 (when the acquisition of any flats was made for a few hundreds dollars), after the inflation, the economic crisis and the accelerated depreciation of the currency from the middle of the ‘90s, the value of all these transactions has changed dramatically.

In the years 1998 and 1999 the value of, let’s say, a standard flat with 2 rooms (50-60sqm) was estimated at approximately 8,000-10,000 dollars (150-200 dollars/sqm).

At that moment I estimated that the market value of these flats represented 30-40% from the depreciated replacement cost (DRC), therefore it was very unprofitable to build residential real estate proprieties; this aspect was also confirmed by the fact that at that time, the real estate development projects were inexistent.

The stability and great economical development which appeared after the year 2000, the significant inflation reduction, the constant decrease of interest and the substantial improvement of the financing conditions lead to a 10 times over increased value of these flats, to approximately 80,000-100,000 Euro at the beginning of 2008 (1500-2000 Euro/sqm).

The spectacular increase of these values did not take into consideration the technical condition and the location of these buildings, but only the financing conditions and the rise of the population incomes.

Thus, the market value of a flat has become 200-300 percent higher than the DRC and the profit of the developers has also arisen at over 200 percent.

This analysis is only informative and does not take into consideration the effect generated by inflation (Euro-Dollar) and by the value of the land. Lately, land has had a very speculative value and was also affected by the insufficiency available plots for real estate development and lack of infrastructure.

An important conclusion is the fact that the most significant mark on the evolution of the real estate residential market was put by first the financing conditions and then by the significant increase of the purchasing power and less by the edification cost.

If the DRC has doubled in the mentioned period of time, the value of the real estate property increased up to 10 times.

Nowadays, when we are at the beginning of a potential real estate crisis whose proportions are difficult to appreciate and we must expect that harder financing conditions will have the same influence on the value of the flats, but in the other sense.

Even if this correction will not be so emphasized, it will be still significant, all these aspects being in correlation with the turbulences on the loan market.

Adrian Crivii, FRICS, MAA

Real Estate Market investments, real estate

The global financial crisis is becoming persistent and will change in the next 10-15 years the perception about investments and especially about risk.

If the evolution of economy is a cyclical one and the crisis from last years seems to happen in much shorter periods, we could say that the nowadays crisis is the biggest since the early ‘30s.

Despite its proportions, one of the most important characteristics of the global crisis is the fact that not everybody is in all this together. During these last years, the revenues of the financial institutions on Wall Street were huge (about 50 billion dollars in 20070 and so are the losses of this year; we could say that some individuals privatized the profit of the companies and the US Treasury nationalized the losses.

Generally, the losses will put a mark especially on the small investors or on the pension funds.

The financial losses, with a total value of over one thousand billion dollars, and the intervention of the US Treasury will bring consequences regarding the regulation of the markets and also the structure within financial institutions.

An important consequence of this crisis will be a period of very strict regulations for the financial capital markets, for the real estate markets and also for the transparency in estimating the risk level.

The implementation of the provisions of Basel 2 in the banking system will be accelerated and probably the regulations in the real estate domain will be speeded up in order to create a safer and more transparent environment in this industry.

BNR intends to make decisions regarding a clearer tracing of responsibilities for real estate consultants and also a database with transactions in order to contribute to the increase of transparency and the quality of information.

An important role in the development of professions in the real estate field should be played by the higher education; the universities should be orientated to the market’s requests, especially to the professions in the real estate industry.

The professional associations, which are dealing with the professions of this industry would have to watch for the observance of professional and ethic standards, the improvement of procedures and also to promote the continuous professional training.

Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market financial crisis, investments, real estate, risc