Romania: Real Estate Concerns

Oxford Business Group Latest Briefing

Romania's real estate sector has seen dramatic growth in the last several years, but worries about a bubble are beginning to loom on the horizon.

While the fundamentals of the boom remain strong - Romania's economy continues to grow, personal income has grown steadily and FDI remains strong - many analysts worry that the increasing involvement of land speculators and property funds is eroding the sector's otherwise solid footing. While banks, funds and investors may be able to weather the storm, the average Romanian is ill equipped for such turmoil.

Romania's real estate boom started in 2000 when banks first began issuing mortgage loans. Common in western economies, these loans have allowed many Romanians to upgrade from their cramped Soviet-bloc-style apartments. This initial surge of homebuyers was sustained by rising personal income, a booming economy and foreign denominated loans - which allowed borrowers to benefit from the Euro area's low interest rates over the past years.

Demand for housing, land, retail space and prime office locations has increased steadily and has yet to show signs of slowing. While developers have been scrambling to keep pace, the backlog of apartments and office space continues to grow. Analysts now claim the current untapped market demand accounts for approximately two years worth of construction capacity.

With Romania's persistent labour shortage, real estate supply's inability to keep up with demand may only get worse. When Romania entered the EU, many blue-collar workers chose to leave the country for the booming markets of Spain, Italy and Greece. While Romanian expatriates have been steadfast in their support of the Romanian economy through remunerations, they have also drained the country of one of its most needed resources: labour. Among the areas hardest hit is the construction industry, which sector analysts claim is 700,000 workers short of its needs. This problem has forced wages up and catapulted many such labourers into the quickly growing homebuyer category, only making the situation worse.

The combination of these issues has resulted in heavy competition among homebuyers, rising real estate prices as well as leading to the entry of foreign developers. They are not the only ones to take notice of this promising market; property funds and individual speculators have flooded into the market in search of high yields, which sometimes surpass 100% year-on-year.

While analysts worry about the long-term effects of property funds, their main concern is the multitude of speculators who have entered the Romanian market and fixated on Bucharest.

Meanwhile, property funds prefer to diversify, avidly investing in land, apartments and even single-family homes. Importantly, they have been credited by some as having had a positive effect in broadening the real estate boom by investing outside of the capital and into some of Romanian's regional cities such as Cluj, Sibiu and Timisoara. Developers have privately told OBG that their main concern is the funds will eventually become competition when they sell off their holdings to the public.

Unlike the property funds, which rent or lease their assets for the short term, land speculators keep their holdings out of the market. This not only creates artificial demand, it also decreases actual supply. This crunch has put enormous pressure on the market and has had the effect of turning an already red-hot market into a potential boom-then-bust scenario.

Land prices in some areas have risen over 500% in the last several years and are now comparable, if not greater, to prices in Western Europe. If the funds or the speculators were to leave the market for fear of a meltdown, or as part of a broader strategy of liquefying assets in emerging markets, the real estate market would be swamped and prices would almost certainly plummet.

Funds, which often use complicated hedging strategies, might be capable of absorbing such downturns. The average Romanian homeowner, however, is not. Many have sunk their savings into homes, which they were promised would appreciate in value. It is largely unclear what exactly a bursting housing market would do to their spending levels and the broader Romanian economy. What is certain is that the speculators have not been simply gambling with their own money. Their bets have put the Romanian economy, and the Romanian people, in an increasingly precarious position.