The long term view

In the light of the current financial crisis, it's probably difficult to focus on a market's fundamentals and think long-term. But that, we believe, is the way for property investors to treat their assets. Every property market goes through cycles and investors should take that into account when considering investing, especially if the property market is immature.

Take a look at Romania. The market has been growing and developing very fast in very short term, for much less time than Poland or Czech Republic. The first mortgages were offered by banks in 2001/2002, while the first non-luxury new housing project was for sale only in 2006! (Property Secrets investors know this project as Quadra Place).

Rapid development was followed by a slow down.

What really matters is where the market will potentially be in the next 5-10 years.

Affordable finance is key, along with rising disposable income and growth in the number of jobs and salaries. No less important for defining the market's potential is Supply.

Let's look at the supply pattern in Romania.

Great supply imbalance

In the 1960s and 1970s around 100,000 - 200,000 housing units were delivered in Romania every year. Then during the 1980s the number dropped to 80,000 units. After the 1989 revolution, virtually no residential developments were started for then years.

As a result, Romania had only 384 units per 1,000 population in 2007, one of the lowest ratios in the CEE region, which indicates huge housing need. The average for the EU is 458/ 1,000 population.

There are several estimates of housing need in Romania - some sources quote the need of a million houses in the country and 300,000 in Bucharest alone. The Polish consulting company REAS estimated that the Romanian capital city needs 135,000 units to meet the EU capital cities benchmark of 490 units/ 1,000 population.

We can't forget that the bad quality of the existing housing stock adds to total housing needs in Romania.

At the same time, the number of completed units per year has been low, although it has been slightly increasing. For example, in 2002 only 27,722 units were completed, while in 2007 it was 47,299. But that's still far off from matching the results achieved under the communist regime.

If we look at the supply breakdown for cities, we can see that the number of units completed is small compared to the size of the city.

This discrepancy is high in Bucharest. In Bucharest (2 million population) only 2,570 units were delivered in 2007. In the same year, Warsaw (1.7 million population) gained 15,729 new apartments. Around 8,000 units are expected to be finished in Bucharest in 2008 - still half Warsaw's figure.

In Brasov (278,000 population) some 530 units were completed in 2007. To compare, in Slovakian city of Kosice (250,000 population) the number was almost twice as high.

The low completion is not only down to a small number of projects under construction, but also because of delays in delivering units to the market.

Our Romanian expert, Tavi Bota estimates that around 70% of projects in Bucharest are delayed. There are several reasons behind this.

One of them is am acute labour shortage and large staff turnover from which developers across Romania suffer. Entire teams don't show up to work because they are offered better pay by another developer. Many Romanian builders work in Spain or Italy. Worsening conditions of the construction industry in Spain should force Romanians to go back home, but so far we haven't seen this happening on a large scale.

Importing labour is not really considered in Romania, mainly due to the low (although rising fast), Romanian wages. Consequently, finishing a development takes longer. Currently it takes on average 2.5-3 years.

Another important factor is difficult access to bank funding for developers. The international financial crisis has made banks in Romania,like everywhere else, think twice before giving support to residential projects. As a result, a great number of projects have been put on hold.

The rising cost of land and construction materials is another factor influencing supply in Romania. According to the Romanian Association of Construction Materials and Producers, raw material, transportation and utility costs led to a 61-370% increase in prices of construction materials in the past eight years. For example, steel has increased by some 40% in the last six months.

Price hikes put more pressures on developers, forces them to delay projects or to rush to create stocks says Tavi Bota. He adds that Romania pays one of the highest prices for cement and concrete as a result of the cement industry being split between large multinational players (Heidelberg, Lafarge and Holcim), which creates a lack of competition.

For these reasons, it should not be expected that the number of completed units will dramatically increases in 2008 and the near future. So, if the supply situation does not improve dramatically and housing needs won't be satisfied, this creates fundamental long-term driver for the Romanian property market.

A supply driver together with affordable finance is likely to create an excellent situation for the market to enter a second wave of growth. The timeframe for this will depend on further development of financial market in Romania - AND the effects of the global financial crisis on the country.