Friday, March 7, 2008

Romania: Real Estate Opportunities

Oxford Business Group Latest Briefing

Romania's real estate market, particularly in the commercial sector, is likely to remain robust for the next few years, according to a number of recent assessments. The retail and logistics segments also offer opportunities for growth, though demand is likely to slow down in the longer term.

In February, international real estate broker CB Richard Ellis Group (CBRE) announced that it would be acquiring Romanian firm Eurisko for $35m as it looks to develop its interests in central and eastern Europe. The Los Angeles-based firm said that it would help service its clients looking to invest or set up offices in the region.

CBRE is bullish about the opportunities for growth in Romania, particularly in the office sector. "Romania has become a country of strategic interest to our clients as they continue to look East," reported Mike Strong, CBRE President for Europe, Middle East and Africa.

"We expect the Romanian commercial real estate market to see substantial growth over the long term," Colin Waddell, central and eastern Europe managing director, added.

CBRE is looking to move into a real estate market that has remained remarkably buoyant, despite global property woes and fears that a "bubble" was soon to implode.

Yields on real estate averaged 6.5% for office property, 7.5% for retail and 8% for logistics in 2007, according to research by Milan-based "European bank" UniCredit.

UniCredit sees particular potential in the logistics sector throughout the region. It expects the market to be worth around $370bn by 2012, up from $272.3bn at the end of 2007. Romania, the CIS and the Balkans, as well as the Black Sea, could be ideally placed to benefit from this, particularly if motorway building schemes planned by the government proceed smoothly after years of delay. According to some reports, it has the only really significant logistics market in south eastern Europe, although southern neighbour Bulgaria is catching up.

Meanwhile, a major real estate company has said that it expects the strong growth in commercial property seen in 2007 to continue this year. According to its research, BucharestBelgrade (244,200 sq m). Romania's larger geographical size and population are factors which have led to the faster development of its capital's high-end office provision. However, it is still barely keeping pace with demand. Last year, on average less than 2% of the city's overall office space was available for purchase at any one time. Some 200,000 sq m are therefore expected to be added in the first six months of this year alone, though the rate will slow considerably in the second half.

Bucharest's commercial sector is expanding quickly for several reasons. Firstly, it has started from a low base; even a few years ago, there was very little high-end office property available. Many businesses were shoehorned into communist blocks or old villas. Secondly, a large number of foreign companies have been establishing operations in Romania in recent years, and, no longer happy to run their Romanian interests from Budapest or Vienna, have demanded high-quality offices in Bucharest. Then, of course, are the expanding local companies, which, in order to compete for staff and clients internationally, require better offices.

However, the market may slow in coming years. As large amounts of office space come onstream, easing the bottlenecks, and growth decelerates due to global factors, saturation may be neared. Additionally, Bucharest may no longer seem the best place for companies to set up regional headquarters; Bulgaria's 10% flat-rate income and profit taxes and generally better infrastructure make Sofia a competitive rival to Romania's capital, while Belgrade is well-located between the Balkans and Central Europe, and still has great market potential. Nonetheless, Bucharest is most unlikely to see a large number of offices left unrented in the near future. Meanwhile, regional centres such as Timisoara, Cluj and Constanta are likely to see increases in grade A office space as companies set up or upgrade local operations.

The same is likely to be true of retail space. Romania is seeing a shift from small-scale high street shopping to hypermarkets and malls. While Bucharest nears saturation for the time being, dynamic provincial cities will become the new focus of developers. For example, on March 3, AFI Europe, a branch of Israeli company Africa Israel Investments, announced that it plans to invest around $3bn in Romania over the next 14 years. It will start work on three developments in the country this year, two of which will be shopping centres in provincial cities, namely Arad in the west of the country and Ploiesti, north of Bucharest.
currently has 608,200 sq m of class A office space, well ahead of regional cities of similar size such as Sofia (369,000 sq m) and

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