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Why are Romanian property prices high? Free markets, construction costs and Grannies
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A lot of people – myself included – were initially surprised by the prices of property in Romanian and need reassurance that we are not buying inflated prices or deals that are designed to fleece the foreign investor!
Now, obviously, the price of property shows huge variation based on city (Bucharest vs Sibiu), location (city centre, prime locations, outer-centre and suburbs) and type/ quality, but nevertheless there is a general expectation that the property would be cheaper.
There are two main things to say about this.
Firstly, the Romanian property market is a thriving free market and therefore when anything is being sold it is being sold according to what people will pay for it. Currently, property in Romania is selling to the local people and selling fast and this will inevitably drive prices higher.
This is good news for property investors who have already bought into Bucharest, Brasov of other Romanian cities. However, investors still considering Romania may need to hurry to avoid further prices rises or quite soon will probably have missed the boat in some of the more obvious areas – such as the central areas of Bucharest.
It is worth nothing that a number of developers have noted that their buyers have quite ‘ordinary’ jobs - such as a bank teller or a semi-skilled worker from a Siemens factory.
In addition, a number of developers have pointed out (again, with some surprise) that large numbers of home buyers are using a mortgage to obtain the property.
This means that the ordinary white collar workers can ‘afford’ today’s prices – but many are concerned that they will not be able to afford ‘tomorrow’s’ prices – so they are jumping into the property market as quickly as they can and of course, driving up prices in the meantime.
Also, there is clear evidence that the labour market in Romania is showing similar signs to that in Spain. That is, that there is massive differentiation between subsistence farmers (perhaps on €50 euros per month) and bank tellers /supervisory workers who might earn €600+ per month. (Note we know of some building site workers currently be paid €1,000 per month – such is the need to finish a project).
(Clearly, managers and (especially engineers) are earning considerably more – but I am sticking mainly with ‘ordinary jobs’).
The second similarity that I am seeing between the Spanish and Romanian labour market is that both partners – husband and wife – go out to work. This effectively doubles the salary for the couple – so long as there is no cost of childcare – and here lies the Latin secret – that Brits and north Europeans will easily overlook – the grandparents!
The family – and grandparents – play a very important part in Romanian life. It is very common for grandchildren to be left with grandparents whilst the children (now adults of course) go out to work.
And by golly – they know how to work!
I was surprised by standard Spanish working hours – typically 9.30 to 7.30 and a number of successful managers working on Saturday’s too.
Equally, have spent most of my last two weekends working – all day Saturday and Sunday too if necessary – it is clear that the work ethic is alive and well in Romania just as it is in Spain.
Why? Well, firstly, people don’t have huge wages, so the only way to access the things they want is to work hard – and progress via pay rises, promotions and new jobs, and more immediately, they just work more hours and earn more money!
So, I believe that whilst Nokia may have made its decision to place its factory in Cluj-Napoca and INA Schaeffler in Brasov – both investing upwards of €100m each – based on low costs – this doesn’t prevent smart or hardworking (or both) Romanians from earning much, much more.
Lastly, this phenomenon of massive jobs growth and low productivity growth was a key feature of both the Spanish and the UK jobs market during the early and middle years of the property booms in those two markets. (It is only now that productivity has become the watch word in those two countries – mainly because everyone is already working all hours in the day and it is the only way to take this forward).
Secondly, the price of land and construction has risen massively and any fat margin that the developers may have had is now seriously at risk.
As a reminder, there are 3 components in any new build development
- land cost
- construction cost
- development margin (which covers the promotion, negotiation and the equity risk)
It is important to remember that the constructor quotes for a job and gets paid by the developer for following a schedule. In the world of corporate finance this is a very secure income with little risk and therefore historically the profit margin will be slim – as not much risk is being taken by the constructor.
The developer on the other hand carries the investment risk or equity risk. He stands to make (or possibly lose) large amounts of money and therefore, for it to be worth his while, he needs to have a project that shows a large margin – in Romania this can be upwards of 40%.
Clearly, in new emerging markets there are more risks that in established markets and I’d expect that with time the developer’s margin would reduce – but that this would be a 3 to 5 year cycle.
However, things aren’t happening like this in Romania at the moment.
To start with the cost of land has surged and secondly (and most importantly) the cost of construction has risen any where between 30 and 55%.
The construction costs have risen partly out of necessity (ie cement is 50% more expensive in Romania than in Austria and there is a world shortage of steel – which is also driving prices) plus the fact that higher quality developments need to important more non-Romanian materials to finish a project and these are currently very expensive (due to the lack of volume).
However, construction costs are also rising because labour costs have jumped and there simply are not enough construction teams to meet the surge in construction demand.
In fact, a number of developers in Romania are turning to Turkish construction firms because they have large teams (500+) who can be brought to bear on a project and ensure swift completion.
In addition, the construction firms are now spoilt for choice – they can pick and choose their projects such that they are able to pad their prices.
This leaves the developer with a dilemma – do I sell the land now and take a profit – or do I persist with development?
Most are deciding to persist with development and have come up with clever ideas on how to reduce the construction costs. Some developer have decided to become constructors and subcontract the different parts of the work others have been more imaginative and are building cement factories on their building sites (so that they don’t have to worry about Bucharest traffic and the unreliable deliver of cement nor the very high prices).
Either way, it is clear to me that whilst money is clearly being made in this market, no developer is ‘cleaning up’ nor ‘fleecing foreign investors’.
It is understandable that investors should have these concerns – especially as a lot of so called property investment groups invite developers to add 10 to15% to the price (this was reported to me by an experienced developer who was recently working in the Budapest, Hungary market) before selling it on to the UK investor.
It is also a valid concern since the black sea coast is not far from here – and again the agent commissions on many of these apartments are very high (15% typically- which is why agents are so keen to promote them!).
However, it remains that case that the developers I have met have decided to work through this difficult phase (rising costs and shrinking margins) and not sell their land because they want to build a property development company and brand and recognise that this will take 5 to 10 years.
This is excellent news for property investors, because it means that they can not afford to get it wrong for their early property buyers and that ‘overpricing’ of units is going to destroy their longer term plans.
I am not saying that there aren’t sharks - nor am I saying that property developers will knowingly undervalue their property – but I am saying that the long term view of that they have of their business means that they will not work with the wrong partners and they will price their property according to the market.
Hence, I am confident that the prices being paid by our property secrets investors are fair market price (or better where we have either negotiated a discount or are able to buy below market value in pre-phase 1 – where a developer will knowingly keep his prices slightly below the market for a small number of units in order to quickly prove the concept of his project).
I am also confident that the nature of the labour market – massive expansion of the number of jobs – and both partners working – plus the promotions and 10%+wage increases – will create the affordability to buy and own property now and in the future too.
Having said that – I also think we will see property prices quickly lift (ie within the next 12 months in Bucharest and 24 months in 2nd and 3rd tier cities) to reach the current affordability ceiling – at which point the annual growth will be more inline (but slightly about) wage growth.
Lastly, the Granny influence will have one last effect. Adult children will want to buy property near their parents - so that the Grannies and Grandpas can look after the children. Developers are also noting that this is a very strong influence in decisions to buy.
Some one once told me that the Spanish economy rested on the grandparents love for their grandchidren - I think it will be the same in Romania.
Cheers
Neil
ps. One last thing to note - old apartments have been rising in value by 25%+ each year for the past 3 or 4 years. Why? Simple - people moving to the cities to take up jobs that have been created by the massive economic expansion taking place in key Romanian cities. This is a trend that will drive up all property prices AND because the properties are owned without a mortgage a seller can easily take a loan for €20,000 to pay for the new property.
Currently, new build property is priced only slightly (10 to 15%) above existing property - and therefore, new build property is still in its 'take-off' stage.
Lastly, will a big expansion in supply dampen the demand and price growth? Unlikely, planning is still slow and therefore acts as a brake on development, but take Spain as an example - this country was able to build 600,000 units per year in 2004 and enjoy 25%+ per year growth.
Current projections show Bucharest with 15,000 units per year (this might be 30,000 across the country) and therefore currently just 5% of the Spanish peak in construction).
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POSTED BY
NEIL LEWIS
ON
WED 1ST AUGUST
AT
05:11 GMT
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TAGS:
Spain Property, Spain Property, Romania Property, Cluj-Napoca Property, Bucharest Property Prices, Brasov Property
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 Neil Lewis, CEO and founder of Property Secrets, is an experienced property investor in his own right and author of two highly successful property investment books, Buy To Let Secrets and Property Developer Secrets.
Neil owns property in the UK, Spain, Poland, Romania and the Czech and Slovak Republics. He is a regular columnist for Property Week magazine and has been quoted in a number of UK and European broadsheet newspapers and magazines.
A regular speaker at property investment events, Neil has appeared at CEPIF in Warsaw and the Property Investor Show and the Homebuyer Show, both in London.
His business background is from publishing to a wide range of industries such as Finance, Music, Travel, Economics and Politics before setting up Property Secrets seven years ago. Neil studied Philosophy and speaks German, Spanish and a lot of English.
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