Bucharest, Romania (Classic Bucharest, CC BY-NC)
According to Business Review the market might see more deals in niche sectors like hotels, while the overall attractiveness of Romanian property will also be bolstered by higher yields than the rest of Central and Southeast Europe (CSE). The property sector will likely see a record year in 2017 in terms of investment volumes, looking at the last decade, suggested Horatiu Florescu, chairman & CEO of Knight Frank Romania, the real estate consultancy, and Valentin Lupu, associate director, capital markets, at the same firm.
“In the first three quarters of 2017 there was significantly increased activity in the Romanian real estate investment market, indicating the growing confidence in Romania’s macroeconomic environment. Also investor demand remained focused on top quality assets and some new investors have entered the market, while other already established investors continued acquisitions, thus sending positive signals to potential investors who are still reluctant to enter the market,” said the representatives of Knight Frank Romania.
The investment volume reached EUR585m, according to data from Knight Frank. The market could grow to EUR1bn by the end of 2017, driven by the retail and office sectors, and backed by a significant volume of transactions in the industrial and logistics sectors. The company points out that foreign funds accounted for more than 99 per cent of the total investment activity on the local market.
“We are starting to see a significant increase in demand for hotels in Romania, which we have not seen before, even pre-crisis,” said Andrei Vacaru, associate director, capital markets at JLL Romania. In terms of market trends, he said that liquidity in secondary cities is improving, while demand is still focused on prime properties, with secondary properties starting to grow as well.
“However, we see a significant gap between sellers and buyers in terms of pricing expectations. While demand is clearly increasing, it is mainly coming from investors trying to benefit from the yield delta between Romania and other CEE markets such as the Czech Republic or Poland,” said Vacaru. In 2017, prime yields in Romania stood at 7.5 per cent for office, 7.25 per cent for retail and 8.5 per cent for industrial, according to data provided by Knight Frank.
Meanwhile, experts forecast an expansion of the office segment throughout 2018, which also translates into bigger surfaces delivered for each project. Mihai Patrulescu, senior associate, investment services at Colliers International, said that typical office projects had a surface of more than 70,000 square meters (sqm) in recent years, compared to an average of 20,000 sqm after 2009.
“Additionally, we believe there is increasing scope for liquidity from assets that are being traded for the second time. Overall, we expect liquidity on the office investment market to increase from approximately EUR250m in 2017 to over EUR500m in 2018,” Patrulescu told BR.
Furthermore, the market is set to record large transactions due to the recent consolidation of portfolios, with the growth rate hovering at around 10-15 per cent, adds Codrin Matei, managing partner, head of the office agency, capital markets and business development at Crosspoint. In the Bucharest office market, the area comprising Politehnica/Grozavesti will be targeted primarily by tenants in the IT and BPO sectors, said experts.
Simona Urse, associate director of Crosspoint, suggested that the vacancy rate in the office segment will hover at around 8 per cent, as the new deliveries that will follow in 2018-2019 will balance the demand. “In their need for expansion, large companies will likely shift their focus towards regional cities like Timisoara and Cluj-Napoca, cities where currently, even with new projects announced, supply and demand are roughly at the same levels,” said Urse. She added that there is a growing interest from companies in green and plaza type buildings (mixed function projects with access to food courts and retail areas).
Demand for office space reached 412,000 sqm in 2017. In the retail market the increasing demand is fueled by the growth of domestic consumption, says Robert Paulson, head of investment properties at CBRE. He says the strong economic growth will also have a positive impact in the industrial and logistics segments.
The Knight Frank experts say that relocations and new demand on the market are expected to be the main drivers of office take-up, as tenants will be looking to move their headquarters/back offices or consolidate their operations into new premises and new players will be coming onto the market. Most of the office deals in the first nine months of 2017 were for spaces of over 5,000 sqm, holding a 46 per cent share of the take-up. “Headline rents are expected to remain stable over the next year,” said Florescu and Lupu of Knight Frank.
Posting the biggest result in the European Union, the Romanian economy expanded by 7 per cent in the first nine months of 2017, with economists saying the expansion was driven mainly by the increase of domestic consumption. This also generated more business for players in the industrial and logistics segments.
“Having in mind the strong GDP growth in Romania, which is primarily based on two factors: industrial production and retail consumption, demand for industrial properties such as logistics and production will continue to rise. We expect leasing activity to remain strong in the short and medium term,” said Paulson.
With high consumption, the retail segment is set to continue to attract investments going forward. In 2016 alone, the Bucharest market recorded deliveries of more than 100,000 sqm of gross leasable area. Cosmin Grecu, head of valuation and research at Crosspoint, suggested that developers will focus on retail investments in secondary locations, while the expansion of eCommerce will further decrease the need for retail space.
“Demand will come mainly from new players entering the market. Retailers will have to merge their online and offline presence in order to keep up with the changes in the consumer’s needs. The more and more dynamic lifestyle of the consumer will create the demand for all-in-one spaces, where work, shopping and entertainment combine,” said Grecu.
In the industrial sector, meanwhile, CBRE estimates that demand will exceed 500,000 sqm by the end of 2017. The industrial sector fared very well this year, with a current vacancy rate of under 5 per cent in Bucharest and 2 per cent at national level, according to Crosspoint. “Most of the newly built space is preleased, a fact that encourages developers to extend their portfolios,” said Emilian Podaru, head of industrial and logistics at Crosspoint.
The growth stories from the retail, industrial and logistics sectors look different if we take into account the residential segment, which is far more sensitive to financial decisions. “As long as mortgage interest rates remain at current levels, demand will not be affected by the slight increase in prices and the trend seems to be just that, at least in the short to medium term,” said Bogdan Iliescu, associate residential at Crosspoint. According to him Romanians are gaining more interest in quality of residential projects, but demand will largely remain stable for all kinds of buildings.
Real estate experts largely agree that Romania is in a good position to attract fresh investors on the market next year, but the stability in the political arena also plays an important role. “The year to date shows an increase in the number and variety of investors from Belgium to Israel and beyond, particularly for value-add and speculative real estate. Given the parties presently in due diligence, we should expect several further new entrants. Enquiries from the Middle East and South African funds have been gaining pace over 2017 and we might expect further action from those quarters. Additionally, there are a number of Western European funds whose CEE focus is shifting further eastwards as supply tightens in more core markets,” said Paulson of CBRE. Matei of Crosspoint adds that we might see more investment funds from the US and UK that are already looking for real estate opportunities, alongside players from South Africa. “In order for the market to steadily grow, we need to see new investors, the feeling of loneliness being still present among the ‘usual suspects’,” concluded Matei.
