Investors still love Romania (Part III)
Romania: Debunking the Myths (Part III)

Romania:
Debunking The Myths

Crap times are here!

So, all that taken as a whole, the deals European Property Investments (EPI) and the Investors companies I manage together in Romania so far have returned annualised growth in excess of 50%.  Yes 50% per annum! That was exactly a year ago. YES I agree its stopped last year and now as there are fewer to no transactions and difficult to replicate. Even I, at my most bullish, know that kind of growth was NOT sustainable and not even desirable over the long term.

So what is happening is a cooling period and some distressed sales (I think a lot more will follow) which is exactly the situation right now. That is why it’s great news for the property investor with cash. I feel that the times I had just 2-3 years ago are back again and we have another opportunity to see those gains due to the demand and market drivers explained above. I will be raising another fund and if additional funds are received again over the next 3 months, I could still target key distressed deals from my network of sources.

I also agree and see the risks of unemployment in Romania, its all part of cost cutting everywhere in the world and performance tuning as Romania is becoming more driven with better western systems and with procedures. However it also has Investments and joining the EU has brought €30B over the next 7 years from the EU alone. This coupled with increasing amounts of BPO, new Foreign Direct Investments for outsourcing in Romania is also creating jobs. The other risks are of Presidential elections next year (well most countries in the world have that issue and how the PM or President will perform), the risk of currency fluctuations (but this is still at a lower level than the changes in the £-€ or $, and risk of recession as like the rest of the world, which due to demand and growth here where majority of the residential properties are owned by locals who have money or equity in existing properties, is a lower rate than other countries.

Where do you invest now?

So the limited number of the new deals that I would call “worth an investment in”, are mainly in the city with rentals or potential for rentals to feed the demand. The good deals that I see and get on a daily basis are from:

• Quick sales due to cashflow needs for bank debts
• Repossession sales from banks and liquidators (due to my contacts and network here early access to sell off from these are vital before auctions)
• Early heads up from my surveyors and assessors/valuers
• Friends in businesses that I meet in my social and Real Estate groups that I belong to (3 monthly meetings types of groups)
• Social networks on Romanian groups for Private Equity, real estate and Investors
• others

So, should an investor be put off by this cooling and, let’s face it, by these scary headline changes about inflation and so on? A fair question.  Let me answer it with another:

• Why is Ford spending €1 billion in the country?
• Why has Nokia – the biggest mobile phone company in the world – just closed its German operation and relocated lock stock and barrel to Romania? It will produce a phone every five seconds, incidentally. More importantly, it’ll employ around 3,500 people in and around Cluj.
• Why is major IT and communications companies such as Microsoft, Oracle, Siemens, Vodafone etc all investing  hundreds of Millions today with major relocations and employment in Romania?
• Why is the German group Daimler reported to be looking at opening a major new production plant in the country, probably in Cluj?
• Why is Fadesa (Spanish Developer) investing €1.1B in building a residential complex project with over 12,000 units in Stefanesti? Hot off the press !
• Why is OPUS building Cosmopolis development also in Stefanesti with over 4,000 units?… Sorry cannot miss this… Why did EPI target that area over 2 years ago and own with their Investors over 30 Ha? We knew these projects were going to happen and bought well ahead of time and will hold for them to start development. Cosmopolis has already started and sold the first tower.
• Why does the French retail giant Auchan have a massive expansion plan in Romania underway? They’ll have 20 hypermarket outlets here by 2010 and the CEO Regis Mougel jokes that their “expansion in Romania will end only when I retire.” They’re investing some €320 million over the next few years. This is even though their competitor Carrefour being here with similar expansion plans and 4 hypermarkets already in Bucharest alone.
• Why is the construction company Mivan spending €300milion on a massive new business complex in Bucharest, €100 million for a new logistics park in Bucharest and €700million for ten new shopping malls?
• Why is the South Pacific Group investing €300million in a grand prix circuit in Snagov?

Baneasa Investment

Total land area: 221ha, Bucharest Sector 1, North side of the city. Major components:
Residential: 3,000 units, selling price > 3,000 EUR/sqm
Commercial: Retail park, with Shopping Mall, Furniture (IKEA, Mobexpert), DIY (Bricostore), Cash & Carry (Metro), Hypermarket (Carrefour), B&W (Flanco, Media Galaxy), vehicles showrooms, Baneasa Shopping Mall,etc
Office: Baneasa Business & Technology Park (max 130,000sqm GLA, currently 26,000sqm existing
Other proposed: Hotel, private healthcare
Phases and completion schedule: 3 phases, 2005-2015

Cosmopolis

Total land area: 100ha, Stefanestii de Jos, to the North-East side of the city, 15km from city centre Major components:
Residential: 4,600-6,500 units, selling price < 1,300 EUR/sqm
Commercial: 220,000sqm facilities
Other proposed: Hotel, private healthcare, offices
Phases and completion schedule: 7 phases, 2007-2014

 
Bonaire

Total land area: 64ha, Stefanestii de Jos, to the North-East side of the city, 15km from city centre. Major components:
Residential: 12,000 units, selling price not available
Commercial & Offices: up 450,000sqm facilities
Phases and completion schedule: 6 phases, start date 2009

City Ring

Total land area: 20ha, Bucharest Sector 1, North-West, exit to Chitila, adjacent to Ring Road. Major components:
Residential: 3,000 units, selling price not available
Commercial: 10,000sqm
Office: 10,000sqm
Other proposed: kindergarten, outdoor sport facilities, children playground, restaurant, drugstore
Phases and completion schedule: 2 phases, 5 years, start date 2010

Ok, I’ll stop there. I could go on, and on. And I’m sorry to labour the point. But it’s an important one. All these investors and dozens and dozens of big spenders like them have a crucial factor in common. They aren’t just talking about the country being a great place to invest with beautiful scenery and great lifestyle – they’re putting their money where their mouths are. That’s the first thing they have in common.

But there’s something else that I think is just as telling. Each of them is making a statement about the long term potential for their various businesses, whether they are in BPO, IT, Agricultural products, manufacturing or retail – they are investing for the long-term as they see the country has a skilled labour force (staff often with 2 degrees on the CV) that is cost effective compared to other parts of the world yet still in the EU.

(continued in Part III)

Romania:
Debunking The Myths

Today I want to talk about what I believe puts some people off investing in Romania. And I want to explain why the reasons are rubbish!

Before I get into this I apologise for being blunt, but (and as anyone who reads my newsletters and knows me will know), I will say it as it is with little to no gloss ! I’m still passionate about Romania as an investment location, but First, let’s make one thing clear – I’m talking here ONLY about making money.

Sure, I think a great deal of the country after all I spend over 75% of my time here with the full sacrifice of family life to make this journey with success at the end of it. It has a Buzzing capital of Bucharest,  Beautiful scenery, great lifestyle and the people are great.  But, I’m a property developer and investor and I’m fundamentally fascinated by the place because I want to make profits. I assume you are too, otherwise you wouldn’t be reading this, or you are an investor with me and want to read whats really happening here.

Over Christmas, I took 5 weeks off to specifically look at my life, catch up on family neglect, music (my other passion) and investment strategy. I returned in Romania and continued again for a further 3 weeks. I reassessed why I am still in Romania. Do the key fundamentals still stack up for my reason to go there in the first place? Does the research analysis still hold true?

When I researched Romania 5 years ago, I did a complex spreadsheet (my IT analytical background kicking in) looking at every major aspect of why invest in the country, ranging from GDP, Foreign direct investments, population, finance, growth in middle class etc through to country related real estate market, supply, demand, growth, who is buying, prices, costs,  rentals, disposable income, intrinsic property value etc. I am convinced the country still holds good grounds for good returns on investment, albeit with the current tide has become slightly longer (but NO way as long as UK, USA, Dubai, India etc). I have not read one report or heard any expert in those countries markets say that the prices will recover or get back to where it was in the peak within 5 years.

This is no way Biased as I am of Indian origin and have invested there, a UK citizen (also have small investments, a home, friends & family there), My wife and kids and a lot of my family are also American citizens, a Dubai resident and an Investor in Romania. So I could return to any of those countries as I know opportunities exist there too, and be closer to friends and family. I strongly believe Romania is better and will explain/debate why.   Hence, I will continue to spend most of my time here because for any major investment (and most importantly managing friends and family types of Investors too) one needs to be very close to the ground and live there to be in real touch with the locals unlike a lot of Investors and Investment companies here who fly in and out on a fortnightly or weekly basis for a few days and “Partner” with locals !

The Romanian market summary is as follows:

• Old apts have crashed to approx 30-40% from peak (as new apts become available) 
• New apts have kept their prices due to demand but I see some developers offering discounts for multiple purchases or special offers (how ever NOT more than 10% max. The developer friends I have here are willing to do early investment deals with higher returns (as with most parts of the world) 
• Offices and commercial buildings are still in demand and have kept their prices
• Office rents are still the same or even increased in some areas due to demand and fallen by 10-20% in areas of over supply, largely in the north area.
• Land prices are very difficult to say as this is where the transactions have fallen so there is NO real view of pricing, however as a whole from the fewer transactions it has fallen in general by some 10-20% from a year ago purely because of desperate sales bringing them down (most sellers are holding!)
• Romania is not hit as badly as other countries as it does NOT have much debt, mortgaging and finance is new and the National Bank asks the retail/investment banks to put 40% of the credit loaned to the client as security with the National Bank.

I then compared the above with whats happening with UK, USA and Dubai. The picture was a lot worse and the recovery period from most analysts a lot longer !

One of the first reasons I come across – or have more recently – is the idea that Romania is in some way risky. Why?

Well, one reason is unfamiliarity, I’m convinced. People just don’t understand this market, this country, very probably because they haven’t been there and they find the startling economic transformation taking place hard to believe or fathom. Anyone living in Dubai or a major Chinese city probably wouldn’t. Anyone living in Ireland for the last ten years or so probably wouldn’t have trouble either. But it is a hard task for many to see this kind of transformation without concluding that it is in some way risky or some kind of bubble.

The main difference here is the Romanians are avid owners of property and majority of the real estate here is owned by the Romanians who aspire to move to better accommodation and locations. They absolutely would do anything to live a better life and have dreams of quality homes, cars, food, lifestyle products etc. All the big brands are doing well here often sold at higher prices than in the U K. There are ample luxury cars from Phanthoms, Lamboghinis, Ferraris, Maseratis, Bentleys, through to thousands of the usual Mercedes, BMW, Audi etc. Last year Porche/Audi said it was their highest performing country in EU. Just Bucharest alone sold over 300,000 cars with a population of 2.5M. 

Romania is also advantaged with natural resources like oil, gas, iron ore, gold, crystal etc and the second largest exporter of key agricultural products like Corn, Wheat, sunflower seeds/oil etc. This is a key criteria for the Export/GDP ratio where Romania is growing and hence why the shock is NOT as large as countries where that ratio is small e.g. Germany, France, UK, Dubai etc. A recent report I read from BCR (Owner is Erste Bank, the largest Austrian bank here), stating that the economy in 2008 was still not bad (GDP growth at 8.2%), and will slow down in 2009 due to the recession, but NOT go into negative situation like in some countries.

The foreign direct investments (FDI) grew in 2008 by over 26% to €9.02B, from €7B in 2007. Just yesterday I heard 2 new development projects still going ahead worth over €1.9B and starting next month having secured the finances etc. The Spanish and Israeli developers building in the suburbs are very close to some of the lands EPIS & Investor partners have bought.

But, OK, let’s face some reality here. There is a severe recession and I even hear depression talks constantly in UK, USA, Dubai and India. There is a nervousness around generally where to invest and what to invest in or even just hold and do nothing, sit tight, hold on to cash (Cash is King!) etc which is inevitable. We’ve had a period of incredible global growth and now we are seeing a slowdown and price crashes and a lot of organisations going under… another discussion about my favourite topic of Banking and Bankers in general !!! And I hear people talk about deflation, balance of payments, rising interest rates later in 2009 etc. I’m not dismissing any of these factors. They’re real. They are having an effect on economic growth and in turn slowed the property price in some countries and crashed in others.

(continued in Part II)