Continuing his tour of New Europe in search of markets to join his 200% Club, Property Secrets CEO Neil Lewis calls into the port of Constanta in Romania and discovers some secret sources of FDI...

As readers of Property Secrets know, FDI (or Foreign Direct Investment) is a key driver of property prices in emerging cities in emerging countries.

This investment is typically made by a large multi-national company - Nokia, Microsoft, Tesco or Renualt for example - and takes the form of a new factory or back office or R&D centre.

The benefit of this FDI is not just the money spent and jobs created - but the money and jobs that it draws with it.

For instance, the Nokia factory in Cluj-Napoca, Romania will create 3,500 jobs - but a further 11,500 jobs will be created by component manufacturers who will set up next door.

And, of course, even more jobs will be created building roads, houses and airports to service these new industries.

However, a lot of FDI is what I call hidden or secret.

For instance, in the manufacturing sector FDI is easy to track - as it involves building factories. However, in the more lucrative service sector (ie the sector that creates the largest number of highly paid jobs) the investments are normally to create offices of 20 or 30 people - and therefore, are much harder to detect.

However, I believe there is another secret source of FDI and that results from a massive boom in coastal land values.

In plain English, when there is a property boom on the nearby coast this generates a lot of 'Foreign Direct Investment' and the largest proportion of this money gets spent on (and in) the nearby town/ city.

Constanta is an example of a city that is just beginning to experience this 'secret' sort of FDI.

I say 'secret' because most people don't recognise it and in addition, many property investors are tricked by the apparent property rises prices on the coast to think that the money is to be made on the coast.

Whereas, I believe, the property investment money is nearly all to be made in the city. See my article "Oh, I do Like to be Beside the Seaside - but not too Near" - for more on this topic.

So, how much secret FDI might we estimate for Constanta?

Well, here is my thinking....

Currently, there is a trend amongst the (growing) wealthy Bucharest people to want a house in the mountains (ie a flat in the town of Brasov) and a house on the coast (ie a flat in the resort of Mamaia - which borders Constanta and can be reached by car in less than 10 mins from downtown Constanta).

The fast motorway - the A2 - is nearly complete all the way from Bucharest to Constanta and hence this is the nearest and quickest way to get to the coast.

My map suggests that the resort of Mamaia is about 10kms long - and perhaps half a kilometre wide - with a large lake immediately behind it on the land side. (This gives a similar geography to that of Mar Menor in Spain - but this comparison ignores the large city next door).

Now, this area is currently undergoing massive development and redevelopment.

With the boom in property prices in Bucharest and the massive economic growth of Romania (again, driven by the city of Bucharest) there is money to play with and the wealthy Bucharesti are buying second homes.

The result is that property that sold for €180,000 off-plan (160 m2) is now reselling for €220,000 just 6 months later.

So, back to my calculation...

The land area of Mamaia is 5 km2

One km2 contains 1,000,000 m2.

Therefore 5million m2 of land could be sold/ traded (or sold in bulk, then split down and re-sold, and re-sold again with a villa or apartment on it).

In addition, on the 5million m2 a further 5million m2 of built area will be constructed. (Here I am assuming an average building with 4 floors - and therefore 25% of the land has buildings on it - giving 5million m2).

Now, clearly there are costs in buying and selling and constructing all these units - but I want to calculate - very roughly - the amount of cash that will be 'invested' or more simply, spent!

Let's say that land sells for an average (once it has been sold and resold) of €300 m2. And let's say the built area (assuming newly built) sells for a conservative €1,000 m2 - how much money will be invested / spent?

• €1.5 billion for the land
• €5 billion for the constructed area

Therefore, if the strip realises its investment potential - as much as €6.5 billion may be spent in the next few years.

Now, whilst I may have overestimated some land values (ie some will be quality land and some poorer quality) and I may have overestimated the volume of building, I don't believe that I am too far away from the truth.

At least, if you took a 10 time frame, then you could easily reach these figures.

Now, in what way is this FDI - or Foreign Direct Investment?

Well, a significant part of this money will be spent by people (property investors and holiday home buyers) who live outside of Constanta.

Therefore, it is legitimate to consider a significant part of this cash as new money entering the local economy for the first time and therefore acting as a new economic stimulus.

So, what will be the effect? Well, as Brits and Irish join the rush to buy the next off plan apartment as the development expands along the coast, so the local Constanta people will reap the benefits.

And, classically, they will spend there money on (and in) their home town - Constanta.

To support the growing resort development, the local infrastructure will need upgrading. The city council will now have the revenue (via various sales and property taxes) to make the investments.

However, the newly rich in Constanta will want to spend their money too. And it will be spent on renovated villas in the downtown areas, new apartments and new cars too.

(In fact, the first new showrooms are just cropping up in Constanta, the key supermarkets are now in place and the first major new development between Constanta and Mamaia has begun construction.)

The local lawyers and notaries will also suddenly become newly wealth and will want smarter offices in traditional style buildings.

And so on and so forth...

Suddenly, the whole city will be regenerated on the back of selling the coastal area.

Of course, there are a number of fashionable resorts to the south of Constanta which are still inside Romania. I didn't have time to see these resorts, but you can easily imagine that the coastal redevelopment will quickly transfer to these places as the potential land and development profits become recognised.

Again, as the major nearby city, much of the money - whether on architects or new cars, will be spent in Constanta. And of course, this creates demand for a whole new raft of service industry jobs - from show room sales man and architects and property project marketing services.

The great thing about Constanta is that this development is on the back of a rapidly growing container port (which will continue to expand as the road network across Romania is improved and so improving connections with Europe) and its coastal development is based on a unique sustainable advantage - it is the closest seaside location to boiling hot Bucharest!

Currently, all the property sales in the area are to Romanians (mainly Bucharesti) and this is why Constanta is so similar to Valencia, Spain (as the biggest tourist client for the Valencian coast was always Madrid).

And, as you know, this blog started out with a search for cities whose property prices and market would grow like Valencia's did (ie a 200% increase in property prices in the next five years).

However, I think that Constanta is more than 5 years behind Valencia, but the sustainable advantage will be hard to beat. So, the growth might take an extra few years, but I'm pretty convinced that it will come.

Cheers
Neil

PS. The big thing that Constanta needs is a visionary Mayor. It is possible the economics will drive a change?

PPS. Next - I'm moving into Bulgaria with a visit to Varna - which has enjoyed 5 years of coastal property boom - to see that the effect has been on this city...

You can join Neil on his trip via his blog, Max Growth goes in search of the best investment opportunities.

Please join in by commenting on the blog, giving your opinion on his findings. Neil is also keen for you to leave your candidates for entry into the 200% Club - is there somewhere you think has the potential for 200% property price growth in the next five years? We want to know about it!

» Click here to read all of Neil's updates from his search...