Supply of the residential segment has seen the strengthening of sales versus leasing, fact motivated not only by the increasing input of mortgage loans but also by a stronger purchasing power of local individuals. Supply has remained constant from a quantitative point of view, while the overall quality of offerings is still very low, thus providing excellent opportunities to developers of high quality constructions with elegant designs and modern concepts.
Middle-class Developments
The fundamental driving force behind the success of past residential development projects has largely been due to the extremely high demand in family housing which has presently far exceeded the supply available in Bucharest. Potential buyers are no longer entirely into acquiring an apartment in an old block of flats. They want new buildings, with modern apartments, quality finishing, equipments and facilities required by today’s lifestyle. Buyers are no longer willing to pay the high prices asked for the old apartments. The buyer profile shows that middle-class development are attractive to young professionals, singles or with family, usually between 30-45 years of age that work in multinational companies or even run their own businesses. This ensures an above average income, which qualifies them for mortgage loans. Location, comfort and western lifestyle in a new building are key words when choosing their future home.
Supply
2007 was a record year for the residential market, with another 18 projects launched, taking the number of large projects launched in the last 3 years to 39 in total. Demand grew as well with 7,300 off-plan units being sold last year, doubling the previous year’s figures. Investors’ interest for this type of acquisition was very high, accounting for up to 50% of the take-up.
Prices increased an average of 20% for projects launched in the first half of the year. In the second half of the year most of the projects launched targeted lower income people, and started at around 1,100Eur/ m2. As a result of this change in focus, the average market price by the end of the year was 1,500Eur/m2.
Compared to the first half of 2007, when no new product was delivered, the second half of the year saw almost 1,400 units completed, including Quadra Place and Central Park. However, this new supply increased the 800,000 dwelling stock of Bucharest by a mere 0.2%.
The year 2007 brought 18 new projects to the market, a number similar to 2006 though with a larger potential offer. Most of these new projects are located in the northern area, while in the centre and in the south-east there were no new projects launched. The 39 large scale projects currently on the market could bring around 35,000 units in the next 7 to 10 years. Out of these, 16,900 units were put on the market for sale from 2005 until today, with only 5,800 new units offered for sale in 2007.
We estimate around 30% of the delivered units will re-enter the market, either for sale or for rent, with projects like Baneasa and Central Park having already entered the second sale phase. So far, off plan buyers have not sold their units as they try to maximize their profit margin by selling upon completion of the project. Also, developers avoid competition by not allowing their buyers to sell before the project is finished.
Selling Prices
Prices for units in projects launched in the first half of the year rose an average of 20%. This was due to the increase in total sales as well as to the increasing cost of construction materials and a more expensive labour force. For example, in 2006 the average construction price was 600Eur/m2 and in 2007 it rose to 750Eur/ m2. The market remained at an average of 1,500Eur/ m2 because most of the projects launched in the second half of the year were medium-low end projects and started with lower selling prices due to their location and concept. The lowest average price for a 2-bedroom apartment in a new project with over 200 units stands at about 133,000Eur+VAT in the western part of the city. However, if the apartment buildings built before 1990 were to be included in the calculations, the most affordable area is the south, where the average unit price for a 2-bedroom apartment is 130,200Eur+VAT. The maintenance costs vary between 0.30Eur to 1.50/m2, the latter being for high-end projects.
Payment Options
Both mortgages & housing loans are available to private individuals, while legal persons can apply only for housing loans, under specific conditions. All the important banks on the market grant mortgages and/or housing loans for the purchase of existing dwelling. Bank conditions regarding credits for residence acquisitions are relatively homogenous.
The National Bank of Romania (BNR) has three requirements:
Ø The maximum share of the monthly rate in the net monthly family income is 35%;
Ø The maximum share of amount of all annuities in the net monthly family income is 40%;
Ø The value of guarantees must be at least 133% of the loan value. The guarantees must be the property about to be bought in the case of the mortgage loan and existing property (owned or the one to be bought) in the case of the housing loan.
The advance payment is 25%, terms are up to 20-25 years and interest is under 8% for EUR lending and below 9% for RON, as of February, 2006. A major obstacle for the market’s evolution is the lack of a banking product that allows for financing a unit under planning or construction, all current loans taking into consideration only existing properties. A novelty on the market is the possibility of refinancing an existing loan; starting recently, there are banking brokers that advice on liquidation of expensive loans through contracting new ones, at lower interest.
Generally, there are a number of developers who have capitalized on the dynamics of the market, while more importantly, having the means to raise the capital to fund their prospective ventures. Despite their success in selling all of their developments, no single market leader has emerged with any distinction in quality of construction or price.
The Residential Market
The high-ended market has continued to attract small investors, being hindered last year only by the limited number of deliveries and their high prices. Yields have stabilized for now around 9%, but with older deliveries resurging on the market and short terms contracts, this investment opportunity finds less and less interested clients.
The middle income residential segment is entering its long expected boom. Despite the rich supply announced to be delivered by 2008, the potential of market is huge, a fact seized by developers and investors alike. As with office and retail, quality, but most of all, time to market will be the determining factor in the success of a venture. With more than 20 projects under planning, developers are focusing on securing land - an ever scarcer resource - that will in turn determine the whole timing of a large scale development.
All types of investors are interested and getting involved in the middle income projects. Small and medium sized investors usually buy apartments off-plan at a discount from the final price to resell after completion. Also, with lack of product on other segments, investment funds have opened up to the traditionally off - limits residential market, trying to identify and get involved in large scale developments with track record developers as early as possible.
