Much has been said about a market recovery, mainly in the aftermath of certain development projects being completed in the past year, in both retail (such as Maritimo Shopping Center in Constanta, Galleria Arad, Phase 1 of Colosseum in the outskirts of Bucharest or Electroputere Park in Craiova) and office sectors (including Swan Office Park or Willbrook Platinum Center in Bucharest). On the same line, Palas Centre in Iasi, Sky Tower and Phase 1 of AFI Business Park are likely to reach completion during 2012 or early 2013 at the latest, given their advanced stage of construction development.
At a closer look however, one may easily see that in most of the cases such projects have been planned, permitted or even launched before 2007 or 2008 and have been discontinued or suspended mainly due to uncertainties brought by the financial turmoil. In part, they have been resumed on new prospect basis around the year 2010 and completed in the current market conditions.
Reconfiguration and conversion
Nonetheless, there is a massive amount of land bank assets initially secured for residential or retail or office development that would definitely change destination to industrial development ventures (for the former concepts of edge-of-town projects) or to renewable energy projects, mainly photovoltaic ones, or agribusinesses (to replace planned new-urbanizations that proved unsustainable), such as Resident Business Park or Cartierul Tineretului Project in Cluj (from a residential complex to a photovoltaic farm) or Confort City in Bucharest (from residential and retail to health facilities or hospitality projects). Other projects – flagged by the media as mergers or acquisitions or investment ones have proved to be rather restructurings, resolution or regrouping of assets within diversified intra-group risk-sharing schemes or between market players with aligned interests.
While reconfiguration or conversion or simply abandonment of certain wrong or unsustainable developments is in fact positive for the market, marking its maturity and predictability, a real concern is that the Romanian real estate market does not seem able to attract significant fresh capital and new institutional investors. One may claim here NEPI investment fund as a notable exception, but at a closer look it gets apparent that NEPI has entered the Romanian market at its peak and its recent acquisitions involves mainly projects courted since the time of its market entry.
This is starkly evident in the residential sector, where in the absence of Government projects such as Prima Casa (supporting youngsters to secure mortgage loans by sharing the default risk) the sector would have shut down. However, mainly due to technicalities of the programs (low threshold for share liability to approximately 30,000 Euro) the program fueled with cash the “secondary” residential market, of home-owner to home-owner, to the detriment of the newly developed units. In these conditions, investment (and financing) in residential development was merely inexistent, with the exception of Immofinanz, as the largest investor in the market, acquiring the Adama group in the region.
Time to face the truth
It is only in 2011 and the first quarter of this year that filing for bankruptcy starts to account for an option to developers or investors. Insolvency gets nosier in relation to residential projects (such as Laguna Residence or Alia Apartments or the large Asmita Gardens towers). The late aggressive discount selling policies launched by many owners of new flats does not seem to help. That is bare-knuckled bankruptcy is just a glimpse away for many other residential projects.
In the retail sector, though better, similar catalysts are coming into the play. One illustrative example involves the City Mall project in Bucharest, as one of the first retail developments of early 200s sold with profit in a series of 4-5 transactions between developer and successive investors and bought back recently by the initial investor, within bankruptcy proceedings, for almost six times less the amount it has sold it at the outset.
Indeed, it took some 3 years for the lenders to accept that liquidation of the distressed portfolios will in fact contribute to unfreezing the market, as one who postpones hitting the crisis postpones getting out of it. Rolling-over and debt restructuring room to maneuver got so tight for banks so that we might see certain major foreclosures to hit the market in 2012.
Prospects
Prospects are not very encouraging in any of the sectors, for manifold reasons. First, the retail market in major cities became highly competitive, which would put even more pressure on certain less adapted profiles (there are already two shopping centers in Bucharest that are striving to survive through or to the prospect of insolvency, same for other secondary cities, and the clear causation is in the strong competition of better projects operated within the same catchment area).
Secondly, the vacancy level in the office projects increased dramatically (including in Bucharest, affecting Class A top location projects) and the situation will definitely get worse given certain 200,000 sq.m of office space within ongoing developments to be soon delivered to the market. (These prominently include the Raiffeisen Evolution 37-floor office development in Bucharest).
Finally, without banks and financial institutions effectively backing up residential projects there is no hope for the sector to revive.
System improvement needed
In these conditions, unless a national strategy for development and economic growth is credibly promoted, the local market is unable to attract significant, non-regional investors. Be that the case, the domination of the existing key players, which are likely to improve and expand their portfolios by acquiring locally (to be) developed distressed assets or by restructurings, would rather consolidate.