A number of property investors are still a little shy of investment property in Romania.

Property Secrets members will be familiar that we have regarded this country as offering some of the most exciting (and admittedly ‘raw’) investment opportunities available anywhere in the world – but within a low risk (EU, stable, democratic, reform lead, mortgage based, booming country).

However, many British (and Spanish too) investors get hung up on one question – that is…

How can Romanians afford to buy property when the average wage is around 350
Euros per month?

The answer is simple – most Romanians either earn a lot less – perhaps 50 to 150 Euros per month – and a large number of Romanians living in big cities earn a lot more (600 to 5,000 Euros per month).

The average comes out at 350 per month – which, by the way, only a few people earn!

Still, low manufacturing wages are a key reason for companies investing in plants in Romania.

But it is not the only reason! Also, the IT skills of Romanians are second in the world market to only those of Indian expats.

And Romania is now a key logistics centre and a booming consumer economy (2nd largest of the recent accession countries after Poland) which is generating considerable internal demand for supermarkets to superbrands!

The truth is that Romania is a country of ‘haves’ and ‘have nots’ in a way that is not familiar to West Europeans unless they have spent some time travelling in Asia or similar countries.

This ‘have’ and ‘have not’ structure extends to cars (Audi Q7s to those who hitch-hike daily or walk many miles per day) and property too (4 people crammed in a 30m2 studio flat built in the 1960s according to a crumbling North Korean style vs modern 1 bed-roomed flats with 60m2 space and a balcony).

– I bet if you are still reading this you might still be thinking – ‘hmm… not sure I believe that…’

Well, let me give you a comparison.

As anyone living in a Latin country will confirm, Coffee is a staple food! More so that hamburgers, I believe.

In Spain, Italy and any other Latin country Coffee is consumed the way the Brits drink tea – only, it is always drunk in a bar (and not made at home).

That means it is bought and consumed by people who work in fields along side people who clean the streets and others who work in smart suits and shinny new offices.

(Actually, this is exactly the make up of the average coffee drinker in the coffee bar next to our Spanish Property Secrets office in Valencia).

Therefore, like the Economist’s famous hamburger test – if I compare the cost of a Café Con Leche/ Cappuccino / Milky Coffee – then I can see the actual spending power of the local population?

To carry out this test, I have tasted and bought a Cappuccino equivalent in the trendiest bar in town (Yes, it’s a hard life!). These are my results so far

Valencia, Spain, main square– 2.20€ (not long ago it was 1€)
Budapest, Hungary, main square – 2.90€
Cluj-Napoca, Romania, main square – 1.50€

Now, what is important here is to remember that the average wage in Romanian (remember ‘average’ is just a calculation – it doesn’t mean anyone actually earns it) is just 350 Euros per month.

So, those investors who fret about average wages and the ability to buy and sell and rent property would want to know that an average wage would buy 230 cups of coffee per month – that is just over 7 cups per day.

It is quite common to drink 3 or 4 coffees per day. This would, therefore, be the equivalent of half of a monthly way – before tax!

Add the taxes and you can see that on average wages you can drink about 6 cups per day! This is not allowing for food or shelter or clothes or transport or anything else!

What this shows – I hope – is that the average wage is a crazy way to judge the spending power of Romanians – because the country is so sharply divided amongst the ‘real earners’ and the ‘subsistence earners’.

The important point here is that the coffee shops I visited in the centre of Cluj-Napoca weren’t just surviving but thriving! They were creating a young trendy fashionable environment in which you could sip your Cappuccino, Moca, Shake or Cocktail of any variety or type. (Please see the photo above - note, there are a number of people sipping Cappuccinos - these are your likely property buyers and renters)

Such conspicuous consumerism is a clear sign of a booming middle class – of aspiration – and of people who want to move from rotten old north Korean designed 60s block architecture to something modern, clean, bright, functioning and new.

I am not denying that many people living in rural areas (still a large amount of people) are living a peasant / subsistence way of life. Nor that some people living the in the cities – perhaps 30% living in very poor conditions.

Not at all.

I am simply saying that this ‘average’ view of Romania does not help you understand what is really happening in the new and booming cities. Nor does it help you make wise property investment decisions.

However, there is a very important point about Romanian cities…

The trick – and it is a very important trick – is to figure out which cities are booming and which are not.

Bucharest, the capital, clearly is going through a massive boom phase.

However, where else? Well, I believe that Cluj-Napoca (on the wealthy western border of Romania) is positioning itself to become the 2nd city of Romania (perhaps challenged by Constanta at the opposite end of the country and on the black sea).

This is a city that is drawing jobs away from neighbouring Hungary as well as pulling in building and factory workers from nearby towns such as Bistrita and Dej.

Cluj-Napoca is also pulling more than its ‘average’ share of funds from central government and has an ambitious plan to tap a large share of EU funds too.

Either way, the road transport – the major European highway from Budapest to Vienna – will pass by the edge of Cluj Napoca and its population is (ambitiously) forecast to grow from 500,000 in the metropolitan area to 2m in the next 10 years.

Hence, Cluj Napoca is the best candidate I’ve seen so far for our 200% club – and I think it has many of the features that Valencia, Spain had 5 years ago. (Valenica’s property prices have grown 200% in the past 5 years – and we are looking for more of the same…).

And… in 5 years time… a coffee on the main town square of Cluj-Napoca will cost much more than 1.5€. I reckon it will be well past 3€ and average property prices will be 250,000€ and not 80,000€.

For Property Investors it is time to wake up and smell the coffee – while there is still time and a cappuccino costs just 1.5€.

Cheers
Neil

Ps. Tomorrow I am off to the smaller Romanian city of Sibiu – European capital of culture for 2007 and another city that is drawing investment and inhabitants away from other cities as it builds its position as the capital of the local Saxon area (strong cultural ties with Germany and a lot of German spoken).

Pps. After Sibiu, I’m off to Brasov, Bucarest and Constanta – all of which will be strong candidates…. (how on earth am I going to put these cities in an ordered list?)

In my earlier blog on Constanta, the major Romanian container port on the Black Sea (with a thriving ‘local based’ tourist resort on its door step) I stressed the fact that I believe that the true property investment opportunity is always in the nearby city and never on the coast…

… unless you happen to be a local land owner or developer…

However, my experience of the Spanish coast and watching investors catch a cold by buying holiday homes dressed up as investments, led me to write why I believe the real money is to be made in the local city – which you can read by clicking here.

So, a part of my reason for visiting Varna was to see if my experience of Spain was going to repeat on the Bulgarian coast and also to see if Varna represented a model of how Constanta might become, as well as potentially offering investment opportunities of its own.

I also wanted to visit the Black Sea coast to see if our dire warnings on the likely fall in holiday property prices was likely to happen.

Well, the first thing I can report is that whilst property is being sold to Brits up and down the coast, there was no evidence of anyone claiming the property to be an ‘investment’.

This by itself is encouraging, because if the purpose of buying a Bulgarian holiday home is to own a cheap summer holiday home (and not with the expectation of making money) then it is unlikely that the holiday home buyers will be disappointed.

The risk is that as an investment the holiday homes simply will not pay off.

What I saw was extensive selling of property – but not too much buying. I saw a large number of new blocks in Golden Sands that have now been completed and a large number of for sale signs litter the blocks. Many of the for sale signs appear to have been erected by developers and agents.

At the same time, the national tourist board is expecting a large number of Bulgarian hotels to go bust – essentially, any hotel outside a major resort that is not able to significantly reduce its rack rates will not attract sufficient holiday makers.

This actually highlights the real problem with the Black Sea coast – from the investment angle – and that is that it is just a 3 to 4 month season and in some locations it is near impossible to rent out an apartment.

The winter can be very cold and the wind can be bitter (slightly to the north the sea has been known to freeze over – which gives you an idea of the kind of winter climate in this area).

Equally, the resorts to the south of Varna – Sunny Beach especially – has seen huge amounts of development and in fact too much over-development.

The local view is that resorts to the north of Varna will ride out the storm better because fewer holiday apartments have been built because the land is hilly with cliffs – and this significantly restricts construction.

Perhaps the worst ‘holiday investments’ of all will be large new developments inland.

However, as I said before, if Brits and Irish are buying these as summer holiday homes – then they will not be disappointed and will have no reason to sell at cut down prices.

The risk is that some buyers are expecting to make a profit and these people will face – at best - a long term hold of an under performing asset and at worse they’ll sell in a hurry at cut down prices and lose money.

We’ve covered the Bulgarian coast and its likely problems here if you want to read more.

However, my main interest was in Varna.

Yes, the town is prosperous. It has many beautiful buildings in the centre and is a leafy city with an air of confidence.

It also has a booming population – which is thought to be around 500.000 people which may swell in the summer season to (possibly) 1m.

The key though, is that until recently, the population was thought to be slightly about 300.000 – which placed it as Bulgaria’s 3rd biggest city.

However, the way in which city populations are counted (ie those people who register their permanent address in the city) has become a less and less reliable measure of actual population.

Why?

Every Bulgarian citizen carries an ID card – just as I carry a Spanish ID card because I am a permanent resident in Spain.

However, because of the relaxation of control and also the right to travel in the EU, the need or urgency to re-register your ID card when ever you move to a city is sharply reduced.

For instance, students on three year courses do not bother to re-register their address in their student town – but maintain their address at their parent’s home.

Equally, in Varna, many students stay on in the city after finishing their studies. Whether they take a permanent or temporary job doesn’t really matter – because most 1st jobs outside university are pretty temporary anyway (ie you either decide you don’t like the work, decide to study some more or get promoted and move to another location).

So, this habit of not re-registering continues.

And, as this habit expands and the population becomes more mobile (in search of better jobs, better places to live etc) so the official population statistics become less reliable.

Hence, based on the broad pedestrian boulevards of Varna and the teeming night life on the city beach, the town was full when I visited it.

Varna has also clearly benefited from a 4 to 5 year boom in the nearby coastal regions which, whilst foreigner investors may catch a cold or two, has clearly left wealth and prosperity with the Varna based land owners and property developers.

Now, it is pretty clear to me that these newly wealthy are spending their money on homes in Varna and buying new cars from some of the fancy show rooms on the edge of town.

Thus, Varna now has a thriving service sector and the city centre renovation is well underway.

It is reasonable to think that Varna will continue to grow and so will offer great opportunities for investors. But remember I am talking about the city of Varna – not the coastal region!

I also heard that the local mayor has announced a two year construction ban in Varna to allow the infrastructure developments to catch up!

Whether this is a sign of overdevelopment, an indication that city property isn’t selling or a sign that development laws and rules have been flouted – or all three – I don’t know.

However, such a temporary ban can only tighten supply of property – and if the new population numbers are true, then this will drive up city prices.

Varna’s population growth also makes it the clear second city in Bulgaria and propels it ahead of Plovdiv (which is so close to Sofia that it is losing population to the high salaries of Sofia).

Varna’s coastal appeal also means it has clear benefits (lifestyle etc…) over Sofia, but I would expect that its salaries will only be marginally less than those in Sofia and so, its property prices will be marginally less too.

Hence, Varna has now leap frogged Plovdiv into Bulgaria's second city and from here its future looks prosperous.

Unfortunately, I forgot to sip a cappuccino in the pedestrianised centre – so I can’t make the coffee comparisons (see previous blog - wake up and smell the coffee) – but I’m sure we can find someone willing to carry out this onerous task?

Cheers
Neil

Ps. Next I’m off to Sofia to see if the property investment environment is ripe or if the 15% foreign commission agents have ruined the market for real investors…