Hi Marcus P

I've asked Stan to confirm that in your example above you'd take home 65%.

However, we are finding that more and more staff in Romania want to be paid in Euros.

Why?

Well, this makes sense if your costs are based in Euros - ie your mortgage (hey - who is going to pay 9%+ interest rate when you can pay 4%+???)

Therefore, the long term currency basis will be the currency in which people get paid AND use to pay their mortgages - therefore Euros.

I think this explains why Romanian professionals want to be paid in Euros - they've worked it out!

Luckily, by buying new build - your apartment will sell into this Euro minded part of the local market - and not the panelaks which are more likely to be priced in Ron.

We are seeing - as Charles says - that everyone wants to work in Euros and given the experience of seeing this pattern repeated in other countries (Poland and Bulgaria / Slovakia - where the local currency is in a fixed peg to the Euro for example) I think this is highly likely to continue.

The answer, therefore - is that you are right that you can not easily predict currencies - but the only real currency questions is - will the GBP strengthen against the Euro?

My long term answer is that I think any change will be minor compared to your gain.

Short term - yes, you willl have fluctuations - but only if you transmit the money back to GBP.

If, on the other hand - you can say that you will either
a) keep the property long term or
b) sell the proeprty and re-invest in another 'euro influenced currency' then you have removed all the risk. So, you choose your timing to bring the money back to GBP to take advantage of the best exchange rates. Or just use it to buy the retirement home in Spain - and pay for your winter lifestyle!

What I am saying is this - that you need never bring back the Euros to GBP - therefore it is quite possible that you can completely remove any exchange rate risk.

So, if you believe that the central and Eastern Europe property markets have great potential - then you have practically zero currency risk (unless you are forced to sell and repatriate to GBP to meet UK debts / desperate circumstances etc...).

If you don't believe the performance of cental and Eastern Europe over the past 3 years - or you believe that it will not continue - then I'd suggest you don't invest in the first place.

So - this is really a question of confidence - do you or don't you believe that this is the best property investment region?

This is not - if I may say so - really a currency question - it is in truth a question of whether you have confidence in this region.

I think if you do your research and answer this question for your self, then all the other issues will quickly fall away.

Hope this helps clarify things a bit?

Cheers
Neil

If your sales contract includes a statement: 'the price is an equivalent of 100,000 EURO payable in Lei at the rate of exchange of the date of transaction' then the weakening or strengthening of the local currency does not have much impact on your profits as the amount of the EUROs you get is always the same. So, if there is 50% growth in prices based on Euro, you are right saying that you profit in Lei is 65% as you can buy more Lei for the same amount of EURO. But it does not mean that your overall profits are higher than 50% as you also need to spend more Lei to buy the same amount of Euro. I would call your 15% profit a local profit. You could probably buy 15% longer spaghetti but at a local shop in Bucharest only. Please not that the above mentioned statement protects you also when the rate of exchange goes in the other direction i.e. if the rate is 3.0 Lei /1 EURO. You still get the same amount of EURO.

You assumption to calculate price growth in Lei is rather unlikely. We used to have similar situation in Poland. We never based the price growth on Polish zloty. It was always calculated first in USD and later on in EURO. Developers used to give prices in this currency, sales offers in magazines and on the websites were in USD and EURO. Nobody wanted to risk signing a contract in local currency without any reference to the equivalent in hard currency. Naturally the transactions had to be expressed in Polish zloty, therefore the invention of the 'equivalent' was so important for the investors. Only now when the real estate market is much more stable, inflation is under control and the exchange rates do not change 10% per day, the prices are given in the local currency. I think that Romanian real estate market is about two years behind Polish market. But in two years there will probably be EURO on both markets and lei and Zloty will be history.

Thanks everyone for addressing the questions. The answers have been helpful and I'm sure put a few peoples minds at rest. For those of us who do not deal with these issues on a daily basis, figuring out how the dynamics of these situations work, is not always straight forward!

I still think that Romania has great potential and fully intend to invest there in the very near future.

I also appreciate that PS (and others) have addressed any questions I have raised. I think that the forums work well and are a great way for us to learn together and appreciate the issues of each other. We never stop learning!


Many thanks,

Marcus P

Hey Marcus P

We're really glad you like these forums and this way of communicating... it's all a bit new a takes some getting use to - but it is healthy - we think - to get more than one point of view on some of these topics.

Cheers
Neil

Neil,

So what you are saying is that the local romanian resale market can be conducted in euros? I am not very familiar with this market but in my experience other CEE markets e.g. czech/slovak/hungarian etc. prefer to deal in their local currency for rents/resales/mortgages etc. (even though slovakia is likely to join euro next year).

Obviously being able to resell and rent in euros will reduce any currency devaluation effects but i still feel that there is bound to be some knock on effect on the local economy (majority of people still paid in local currency) and indirectly on the property market.

Hi Pag

Yes.

The Slovak Crown is already on a fixed peg to the Euro - therefore there is no movement between SKKs and the Euro - therefore, for our purposes the value is the value in Euros - fixed - done - no change.

Hungary - I'm not going there - I'm not recommending investment there because of the high taxes, low growth, squeeze on spending and risk to currency. Clearly - this market is not linked to the Euro in my view.

Czech - there is strong evidence that the Czech currency tracks the Euro. I believe most resales are in Czech Crowns - but I believe the variation between the two countries is small - and will get smaller as Poland moves closer and Slovakia become Euro denominated.

A lot of these currencies either have pegs / fixed or floating / or under the influence of the Euro to such an extent that the currency differences are ceasing to matter.

The only country where it does matter is Romania - because there has been movement between the Ron and Euros - but that is a country where salaries and big purchases are being made in Euros - and therefore, with new build - we are pretty much outside the risk of currency fluctuations.

That's my view anyway.

Hope this helps.

Cheers
Neil

also re-sales of property mostly (+95%) take place in EURO. So there's no need for a conversion in the local currency (being the RON) , and effectively there's no loss on the currency ...

My understanding is that in Romania all real estate transactions between Romanian companies must take place in RON even if the companies concerned have Euro accounts.

Therefore if anyone is buying their property or land in the name of a Romanian company and they are planing to sell to another Romanian company in the future, they should consider that the transaction must be in RON.

Hope this helps

Sorry, I forgot to mention that I was talking about transactions between physical persons, rather than legal entities.

In case of legal entities, it is correct that a conversion to RON is obligatory.

Dear Neil

Somewhere in this line of discussion I raised the issue of changes in the fiscal code concerning TVA. I've heard today that there is a contradictory law from 2004 which states that the buying and selling of property should not be considered as economic activity.

Are property investors engaging in economic activity for the purposes of TVA? Can you become liable retrospectively and how does it apply to flippers? From questions raised here it seems one hell of a mess. You mention it to a notary and the arms are thrown up in the air. As far as I know, no methodological norms have been issued as yet. Does the lack of norms in itself renedr the primary legislation redundant?

Questions...which need answers from someone sooner or later.

regards

Charles