Colliers Romania 2010 by Annual Reports Europe

ROMANIA 2010

REAL ESTATE REVIEW OFFICE I RETAIL I INDUSTRIAL I LAND I INVESTMENT I CONSULTING I VALUATION I BUILDING SURVEYING

CONTENTS

ECONOMIC OVERVIEW 4 OFFICE 6 RETAIL 8 INDUSTRIAL 10 LAND 12 INVESTMENT 14 CONSULTING 16 VALUATION 18 BUILDING SURVEYING 20 HOTEL 22 TAX ASPECTS 24 LAW 26

When will the market recover? The answer may be less technical and more linked to the consumers’ conﬁdence and the psychology of the masses.

Dear friends, After 14 years of intense activity on the Romanian real estate market, I can say we have been fortunate to live through a major boom and a major crisis, experiencing all the ups and downs that come with these. We have quickly grown from a team of 5 in 1996 working to service our ﬁrst clients from a one room oﬃce: Microsoft, Coca Cola, Unilever and MobiFon to over 100 people and hundreds of clients serviced in 2008 across all major industries. And then came 2009 and everything changed. The global crisis hit Romania much harder than anyone imagined and brought us back to reality, working hard for every client and rethinking the way we run our business. It became imperative to change the attitude towards clients, to understand them better and address their needs with innovative services – we had to make a change.

There is not much to say about the Romanian market in 2009. The overall lack of confidence affected demand for space of any type, most companies choosing to “wait and see” the effects of the crisis and so the market activity dropped by 70 – 80% compared to the boom years. Nobody knows when the market will pick up again. Optimists say that 2010 is going to bring more activity and growth in the economy while pessimists say that 2010 will bring another major crash in the over-leveraged financial markets pushing the global economy into the deepest recession ever. While watching closely the macro-economic changes and learning about crisis management and new customer strategies, I believe the answer may be less technical and more linked to the consumers’ confidence and the psychology of the masses.

And we did. We restructured the firm, closed a division (the residential sales), added a new business line (focused on servicing banks) and changed the whole mentality of the team by going back to our values. It was not easy but, looking back at 2009, I think we made the right decisions given the situation the market was in and we allowed the company to fight and survive. I can say with confidence that after the crisis, Colliers Romania will emerge as a new company, with stronger values, better services and most importantly, as a more human company. Our young and energetic team is putting all their efforts this year to offer a personalized touch for each client, with more attention paid to details and a fresh air in the solutions they provide.

Are we a generation/nation of optimists or pessimists? Are we strong enough to take the faith into our hands and change the legacy of the history? Like Winston Churchill, I am an optimist, there is no much use of being anything else. Yours sincerely, Bogdan Georgescu Managing Partner, Colliers International

Colliers International, Real Estate Review – Romania 2010

ECONOMIC OVERVIEW

After Romania’s economy recorded an average growth of 6% per year between 2001 and 2008, the global developments of last year reversed this trend with a series of negative effects. A contraction of 7% was announced for the economy, while Foreign Direct Investments halved to EUR 4.9 billion in 2009. Unemployment has grown throughout the year and was estimated to reach around 8% by year-end. Unemployment is expected to grow further in 2010 as bankruptcies loom and the public system is in need of reform. The accumulation of foreign-currency denominated debt by households and companies and a depreciation of about 10% of the local currency against the Euro during the second half of 2008 put a strain on debt servicing by borrowers in 2009. The budget deficit was expected at more than 7% of GDP and the government was obliged to agree to EUR 20 billion of international aid led by the IMF. On the positive side, the current account balance has significantly improved. The deficit contracted by 69%, from EUR 16 billion to EUR 5 billion, which represented 4.5%* of GDP (versus 12.3% at the end of 2008). Although the FDI volume represents roughly half of the activity recorded in the same period a year before, it indicated continued interest of investors towards Romania and has successfully covered the current account deficit up to October. Inflation was at 4.74% at the year end and is targeted at 3.5% for 2010 and 3% for 2011. In 2010 the Romanian economy is expected to return to growth (albeit by a modest 0.5 – 2%) based on expectations that western economies will rebound and improve our export activity, banks will re-start lending and consumption will start to grow. For 2011 the World Bank estimates a growth rate of 4.6%.

* National Bank of Romania 4

Lending is currently very tight due to both lack of credit supply and its very high cost. Banks started to compete fiercely for attracting local deposits at the beginning of the year as foreign funding has dried up. Interest rates for deposits in local currency recorded as much as 16% in January to March, while the price of new loans exceeded 20% in the same period. The cost of money has come down significantly by the end of the year towards 15% in local currency, while interest rates on deposits have fallen below 10%. The year-end exchange rate between the Euro and RON (4.25) was considered sustainable by most analysts and the RON could even strengthen in the following year. Some traders in Bucharest and London are already betting on this strengthening of the local currency in 2010. A large domestic market, a cost effective labor pool, a correction in real estate prices and a stable currency add up to significant opportunities for businesses and investors, as was the case five years ago. The major positive difference to add is that Romania is currently a European Union member, a status that provides it with significant stability. MACROECONOMIC INDICATORS

Real GDP (% change) CPI (%, yoy, eop) Current account balance (% of GDP) Unemployment rate (eop, %)

2008

2009

2010F

–7

6.3

4.7

4.0

– 12.4

– 4.8

4.4

7.6

8.3

Sources: FocusEconomics, National Commission for Prognosis

GOVERNMENT: ROMANIA HAS A PRESIDENT AND MAJORITY COALITION GOVERNMENT Last year’s demise of the coalition government arose in a delicate period amidst the deterioration of public finances. Planned disbursements of funds from the country’s EUR 20 billion aid led by the IMF were put on hold until the country has a strong government in place able to commit to strict IMF requirements on reforms in the public system (among others to reduce the fiscal deficit to 5.9% next year).

Last year brought negative eﬀects: economic contraction, rise in unemployment and increase of the budget deﬁcit. But in 2010, the Romanian economy is expected to return to growth, based on exports and a revitalization in consumption.

Therefore December elections were eagerly expected when Romania’s former president, Traian Basescu, was freshly re-elected and a new government was appointed headed by the former Prime Minister Emil Boc of PD-L. After being able to secure a partnership with UDMR and other minority parties, as well as the joining in the party ranks of some PSD representatives, PDL is mathematically the leader of a majority coalition, having the prerequisites to eﬀectively lead the government in a coming period that demands for serious reforms. ��

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69% Contraction of the current account deﬁcit FDI volume was half of the activity recorded in 2008. Investors continued to show interest towards Romania.

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Source: National Bank of Romania

Colliers International, Real Estate Review – Romania 2010

OFFICE MARKET By the end of 2009 a record supply of new buildings were developed, taking the total stock of office space to 1,250,000 sqm. Concurrently, however, adverse economic conditions led to a major decline in office space transactions leading to higher vacancy rates and lower rents. Therefore 2010 represents a an ideal time for tenants to reduce their rental costs by securing convenient office space at sustainable financial terms. Now is the right time to assess the market and make a move. SUPPLY Office supply peaked in 2009 as close to 405,000 sqm of modern quality space was delivered on the market, double the amount in 2008. This was a result of projects that started during the 2007 – 2008 period of boom for the real estate industry, projects that took between 12 to 20 months to deliver, some suffering postponements. From the total delivered space, only 15% was located in the city centre, while the remainder was evenly split between the semi-central and peripheral areas. While office stock in the latter areas has grown steadily since 2006, the evolution of CBD supply registered a slower pace due to the reducing availability of land plots for development. Taking a glance at who delivered office buildings in 2009, the majority were foreign developers. Among them, three Greek companies delivered 30% of new supply, a similar volume to that delivered by domestic firms on the market. ��

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DEMAND In 2009, over 90,000 sqm of space was leased, uniformly distributed between the three office areas. The average space leased on the market was around 1,300 sqm. Most companies that leased space in 2009 had done so due to one of the following reasons: • Their current leasing agreement expired • The opportunity to find superior quality space at lower rents and also a good chance for companies to relocate their headquarter closer to the centre • Force majeure incidents created immediate demand for roughly 13,000 sqm on the market. Compared to 2008, office take-up decreased by 60% last year. To put this into perspective, more than 80% of the leasing activity in 2008 was driven by preleasing, whereas in 2009 none of the transactions represented pre-lets. This situation has two main causes. Firstly, the office vacancy rate has increased materially since 2008 so pre-leasing was no longer essential as companies could find space in most of the existing buildings on the market. Secondly, taking into consideration the economic downturn, most companies were confronted with the insecurity of their future operations or with downsizing and lay-offs. As a result, expanding the necessary office space was not on their agenda. Finally, companies with the need to extend space prospected the market but did not commit in 2009. Sub-leasing was an option for companies looking to cut costs, especially for those with leased areas larger than 2,000 sqm. Companies that took such measures were from the auto industry, the construction sector and also those in the consultancy field.

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Colliers International monitors class A buildings, over 3,000 sqm.

2009 economic conditions changed the market rules, as business downturn led to significant increase of the vacancy rate. The lack of pre-leases commanded no ground breaking for major projects. As rents dropped, 2010 is an ideal time for tenants to reduce their rental costs by securing convenient office space at sustainable financial terms. Horia Moldovan – associate director, office leasing division

By December 2009 vacancy grew considerably in all areas and the overall rate hiked to 18% after an almost zero vacancy in 2007 and 3% in 2008. The CBD area registered an unusual 10% vacancy, together with the semi central area, while the periphery peaked at a record 30%. RENTS While it was common to pay between 22 and 24 EUR/sqm for CBD office space in 2008, rent levels in 2009 dropped by 20%, below the EUR 20/sqm threshold. A similar drop has been registered for the semi-central and peripheral areas. Although the new market conditions brought space at significantly lower rents, relocation costs were rather high, determining most companies to find short term solutions and try to renegotiate or sub-lease some of their space. In an effort to make their projects attractive to tenants, landlords became flexible in offering incentives such as rent free months and allowances for fit out expenses. For tenants, such measures have the advantage of lowering the net effective rent. For a five year contract, it is common for a company to benefit from a three month rent free period. For longer lease terms, free rent periods can increase. Overall these extras lower the net effective rent by 10% or more. RENTS (EUR/sqm/month) CBD

Semi-center

Periphery

Average rent

18 – 20

14 – 15

10 – 12

Parking price

120

100

Service charge

4–5

3–4

2.5 – 3.5

FORECAST Our research shows that 2010 will bring another ca. 200,000 sqm of new office space, 50% less than has been delivered in 2009. This potential supply will be found mainly in buildings where construction was held up in 2009. In addition, unlike previous years, 2009 witnessed no ground breaking for new major projects. There are in total around 500,000 sqm of office projects in pre-construction phases, but with very low likelihood that any of these will be started in the next six months, meaning that for 2011 – 2012 expected new deliveries will be low. Overall, rents will maintain their downward trend established in 2009 by another 10 to 15%. In some areas, where vacancy is already high, we may even see a 20% decrease in rents. Due to this trend, companies occupying multiple spaces/ leases will have a great opportunity to consolidate. Also centrally located buildings, with good access, will be available at lower rates compared to 2009 and 2008, becoming financially attractive for a larger base of clients. For the CBD, vacancy rate is anticipated to stay within 10%, while the overall market vacancy rate is expected to further increase to reach 20 – 25%. We expect that those companies who have closely prospected the market in 2009 for better space at affordable rents, but did not commit to a space, will close their searches. This would lead to more than 50% increase in leasing activity compared to 2009, according to our estimations. On the other hand, landlords will remain flexible in their negotiation with potential tenants, continuing to offer incentives for fit out and free rent periods, thus lowering net effective rents. Agreements will be more advantageous for tenants.

LEASE VS. PRELEASE 2008

2009

Lease

18%

100%

Prelease

82%

On the longer term, as we don’t expect to see signiﬁcant new supply in 2011 while the economy and business is forecasted to grow, the market equilibrium will change again. For all these reasons, 2010 will likely be the ideal time for tenants to make their move.

Colliers International, Real Estate Review – Romania 2010

RETAIL MARKET In a market shaken by the diﬃcult economic period, where overall private consumption levels dropped by 15%, retailers’ main focus in the ﬁrst half of 2009 was the optimization of their store network.

Despite such measures, some retailers did not manage to meet their ﬁnancial obligations towards creditors and were forced to declare insolvency. Even though insolvency is seen as a drastic undertaking, for retailers with cash ﬂow issues, it represents a legal protection from creditors that provide them with the opportunity to restructure and renegotiate their contracts with suppliers and with landlords. Therefore, even if a retailer is under insolvency, they are still in a position to maintain well performing stores and to expand in new locations if very good opportunities arise.

SUPPLY 2009 witnessed the highest discrepancy between the number of shopping centre projects oﬃcially announced for delivery and the actual delivery of space. Some projects were delayed for 2010, while others were postponed for an indeﬁnite period of time. Thus, although more than 20 projects were announced to be completed in 2009, totalling 835,000 sqm of GLA, only 27% of the announced retail space was actually delivered – 158,000 sqm of GLA in Bucharest and a further 70,000 sqm of GLA outside of the capital.

The first part of the year was very poor in terms of leasing transactions. In the second half we noticed a significant increase in demand for retail space, especially in existing shopping centres. Thus, retailers that managed to adapt to the new economic conditions started to look strategically towards the future and seize the good opportunities that appeared on the market: obtaining locations in well performing shopping centres at competitive rent levels. Moreover, 2009 also marked the entrance of a few notable brands such as Decathlon, C&A or Kiabi. The new brands focused first on opening locations in Bucharest where they targeted both the existing and the newly delivered shopping schemes.

The supply of existing retail space available for leasing was reduced by the closing down of two retail schemes (Armonia Braila and Trident Sibiu). Concurrently it was boosted by rising vacancy levels in existing shopping centres. Adding all the sources of retail space supply, namely current vacancies in existing shopping centres and new projects with anticipated delivery in 2010 and 2011, total availability of modern retail space now stands at around 337,000 sqm. Of this, 128,000 sqm are available in existing centres while 209,000 sqm are oﬀered for prelease in future developments both in Bucharest and other locations nationwide. DELIVERIES

NEW TENANTS – 2009

In Bucharest

In the countryside

Retail type

Brands

Militari Shopping Center, Grand Arena, Cotroceni Park, Extension of Plaza Romania

Galleria Suceava, Galleria Piatra Neamt, Era Oradea, Extension of Iulius Timisoara, Extension of ERP Focsani

Fashion

Desigual, Franco Feruzzi, Xside, Jack&Jones, Vero Moda, Sasch, Brooksﬁeld, C&A, House, GAP, Yamamay, Kiabi

Total GLA: 158,000

Total GLA: 70,000

Accessories & Jewelry

Coyoco

Health & Beauty

Marrionaud

Sportswear

Go Sport, Kix, Decathlon

Kids

Sergent Major, Smyk

Home déco

Next Home

Food

Cinnabon

DEMAND In an attempt to ensure the survival of their brands, retailers started to implement various restructuring strategies by looking at each of their stores as a proﬁt centre. Thus, they applied cost reduction measures ranging from rent renegotiations to the closing down of unproﬁtable locations. 1

The GLA we presented excludes the hypermarkets and other big boxes from the retail schemes.

Demand for retail space and the number of transactions are expected to increase in 2010, although not suﬃcient to determine a rise in the rent level. The outlook for the Bucharest prime high street in 2010 is promising as demand from luxury brands is expected to increase. Georgiana Andrei – manager, retail division

RENTS In the cost cutting mindset that dominated the economy in 2009, retailers started extensive rent renegotiation campaigns in almost all shopping centres. The magnitude of the renegotiations varied dramatically from one unit to another and it depended on the retail segment, the reputation and performance of the shopping centre, as well as on the importance of the retailer for the centre. Rent reductions ranged between 10% and 50% and thus created significant differences in rent levels between shopping centres, especially in the countryside. Regardless of the level of discount, renegotiations were usually concluded for limited periods of six months up to one year. The strong negotiating positions of retailers that still have the financial power to expand also forced a significant rent decrease in projects under construction. The conditions that some of the anchors are requiring in order to enter a shopping centre can include, apart from a low rent, free rent months or fit out allowances. The rent concessions are usually granted for 1 or 2 years, though landlords are trying to limit their loss as much as possible. FORECAST Based on official shopping centre announcements, 2010 should bring six new shopping centres to the market, totalling 209,000 sqm of GLA. Some of these projects may still be delayed until 2011, while the supply of retail space in other regional locations might continue to be impacted negatively by further closures of poor performing shopping centres. Nevertheless, we expect that improving economic and financial conditions could help some of the projects that are currently on hold to restart construction works, but none of these could realistically be delivered by the end of this year.

On the contrary, the current renegotiated rents are expected to be maintained at least until the second half of 2010. For the worse performing centres, they are expected to see further rental decreases last long into the end of 2010. HIGH STREET The general declining trend of the retail market was felt throughout Bucharest’s high street market. Nonetheless, the prime retail area still significantly outperforms the secondary and peripheral areas both in terms of vacancy and rent reductions. In order to secure new tenants, landlords were compelled to reduce their asking rents by an average of 20 – 25% compared to the beginning of the year (or 30 – 35% from the peak reached in H2 2008). Even retail spaces with well performing tenants suffered rent reductions through renegotiations of 15-30% that were concluded mainly for a temporary period of 1 to 2 years. Demand for prime high-street locations came mainly from luxury fashion brands and coffee shops. Apart from the decrease in rents, the flourishing of the coffee shop segment was also facilitated by the progress of infrastructure works in Bucharest’s “Old City Centre” (Lipscani area), the solving of legal issues with some of the retail properties and the area’s increasing appeal to the younger crowd. The outlook for the Bucharest prime high street in 2010 is promising as demand from luxury brands is expected to increase. Rents, however, will continue to witness slight reductions, especially in the secondary and peripheral areas, as the demand from banks, telecoms operators, pharmacies and casinos – the main clients before the crisis – will remain low. HIGH STREET

The demand for retail space and hence the number of transactions are expected to increase in 2010, especially towards the second half of the year. Demand will remain focused on existing shopping centres, while pre-leases will only be signed for shopping centres with a strong chance of being delivered (proven ﬁnancing, active construction works) and with a good location and tenant mix. The demand for retail space in the coming year will not be suﬃciently high as to determine a rise in the rent level.

Area

Vacancy

Rent decrease Available spaces2

Occupied spaces3

Prime

10%

15 – 20%

10 – 20%

Secondary

15%

20 – 25%

15 – 25%

Peripheral

20%

25 – 30%

15 – 25%

2 asking prices 3 following renegotiations

Colliers International, Real Estate Review – Romania 2010

INDUSTRIAL MARKET 2009 was a silent year for the industrial market. Due to modest deliveries, the stock of industrial space increased very slightly, while the demand for logistic space was also very weak during the year. The ﬁrst important transactions could be seen to the end of the second semester.

DEMAND AND VACANCY Demand for industrial and logistic space also registered a decrease. A total of almost 100,000 sqm was leased in 2009, roughly 50% of the volume recorded in the previous year. Market uncertainty, driven by worsening economic conditions in late 2008 and early 2009, meant many occupiers froze their expansion plans. This is the main reason why Q1 2009 recorded very low activity – only 6,000 sqm of space being leased. As companies adapted to the new reality and moved on, leasing picked up in the latter part of the year.

SUPPLY At the end of 2009, the industrial stock for Inner- and Greater Bucharest had changed very little compared to 2008. Only 33,000 sqm of new stock was delivered on the market, a y-o-y decrease of 90% in new supply, taking total stock to 900,000 sqm.

In an attempt to reduce costs, tenants renegotiated rents, reduced occupied space or relocated. These movements have increased the vacancy rate threefold since 2008, settling it at 12% at the end of 2009.

Influenced by the recent economic downturn developers stopped or postponed the construction of their projects. New deliveries, which occurred only in the first quarter, represented extensions of existing industrial parks which were started in early 2008. In these conditions, availability started to become a visible problem on the market. Large scale space was difficult to find, only one unit larger than 10,000 sqm being available to potential tenants. Most logistic parks only had units of between 1,000 – 3,000 sqm on offer. Outside of the capital, Helios Phoenix delivered 15,000 sqm within Olympian Logistic Park in Brasov. Other projects have been postponed, driven by a lack of financing and increasing levels of risk.

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In the most important transaction closed on the Bucharest market in 2009, Antalis leased 10,000 sqm in Portland Trust’s Bucharest West logistic project. The transaction was intermediated by Colliers International. The landmark transaction last year took place outside Bucharest. Unilever, the consumer products conglomerate, was advised by Colliers International in securing a 30,000 sqm industrial space including over 1,000 sqm of annexed oﬃce space in West Park Ploiesti. The space will serve as a regional distribution centre for Unilever.

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As market conditions improve, we may see a decrease of the available space by the end of 2010. With the occupation of the available spaces, however, landlords will not stay as ﬂexible as they are today, which makes the current period most attractive for potential tenants to renegotiate or relocate their operations. Viorel Opait – manager, industrial division

RENTS The winners of changing market conditions were smaller scale tenants who were able to find more options on the market. Tenants looking for warehousing units smaller than 3,000 sqm could find readily available space at rents representing a 10 to 15% discount compared to the previous year. However, larger units were more challenging to secure, and rents have not moved significantly in this area. As a result, the rent range between maximum and minimum rents on the market has decreased substantially.

12%

FORECAST Millennium Logistic Park was the only speculative development under construction at the end of the year and will add 12,000 sqm of new space to the industrial stock in southern Bucharest. Considering this, we will have only very limited new stock delivered on the market before the second half of 2010.

Vacancy rate Business uncertainty led to cost cutting options. Tenants renegotiated rents, reduced occupied space or relocated.

As a result, tenants with large requirements will have to secure space by pre-lease agreements or in built-to-suit facilities in order to obtain a good level of rent or to simply secure space. On the other hand, smaller tenants will enjoy the current vacancy levels in terms of finding optimum locations, competitive rent levels and favourable contract terms. As absorption of the available spaces continues, however, landlords will not stay as flexible as they are today, which makes the current period most attractive for potential tenants to renegotiate or relocate. The vacancy rate is expected to increase further in the short term, up to 14% in 2010, due to tenants who are expected to release occupied space in the first quarter of the year. Markets outside Bucharest are also developing in terms of industrial space supply, most notably cities like Ploiesti or Timisoara. In 2010 West Park in Ploiesti will bring 30,000 sqm of modern warehousing space to the market, fully leased by Unilever. In Timisoara, Invest4See will deliver the first phase of 12,000 sqm in Timisoara Airport Park, the construction of which started in 2009.

INDUSTRIAL SPACE RENTS

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Area (sqm)

Evolution

E/sqm/mo

Outlook

< 3,000

Decrease

4.50 – 4.75

Stable

3,000 – 10,000

Stable

4.00 – 4.50

Stable

> 10,000

Slight increase

4.00 – 4.25

Stable

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Colliers International, Real Estate Review – Romania 2010

LAND MARKET After nine months of standstill, the land market in Bucharest started to revive towards the end of 2009. Despite the substantial re-adjustment of prices that fell back to 2006 levels, the value of land assets transacted last year hardly reached 10% of the value recorded in 2008. However, the change in perception over the last months brings confidence that the market will witness a positive development in the coming year. DEMAND The demand for land properties was very limited throughout 2009. The abrupt slowdown on the end-user markets (residential, office, retail, industrial space) combined with the fear of a potentially extended economic crisis determined investors to be extremely cautious in acquiring land. The lack of bank financing for land purchase was another underlying factor of the steep fall in acquisitions. The most active buyers in 2009 were the large retailers, especially discount stores (such as Plus Discount, Penny Market) and Do-It-Yourself (e.g. bauMax) that are still continuing their expansion plans at the national level. These buyers prefer semi-central plots in densely populated neighborhoods or peripheral locations benefiting from very good exposure. Demand also came from private high net worth individuals that were searching for very good properties at highly discounted prices. Even some developers chose to use their surplus of cash to take advantage of the opportunities that appeared during this period rather than continue with projects that were proving difficult to sell or lease. The most relevant example is the EUR 30 million acquisition made by Liebrecht & Wood for approx. 60 hectares of land for commercial use located at exits from Bucharest. The new restrictions of the Urbanism Law that came into force on October 1st represented a big factor of concern for potential buyers. The new regulation limits the construction density allowed therefore some investors have conditioned the acquisition of land upon obtaining Building Permits, in order to insure against the risk of attaining lower than desired building coefficients.

SUPPLY As a consequence of the difficulty in obtaining bank financing for developments due to the very strict conditions (40 – 60% equity; 40 – 50% pre-lease for office projects, 50 – 60% pre-lease for commercial centers and minimum 30% off-plan sales in case of residential projects), developers were forced to put projects on hold. In some instances large portfolios of land were put up for sale most of which having mortgage loans attached. Thus, they were looking for investors that would either acquire the land by taking over the loan or enter into a joint-venture agreement in which to bring fresh equity into a development. However, in the majority of cases, the mortgage loan exceeded the price that potential investors were willing to pay for the properties. Towards the end of the year, some banks started the long-awaited liquidation of guarantees for nonperforming loans. However, what they brought so far on the market were mainly unattractive properties. In the case of good properties, banks preferred to restructure rather than execute loans. Towards the end of the year the market also witnessed the first bankruptcy cases among developers. The most noteworthy example was EFG Crevedia Development, owner of approx. 124 ha of land in Buftea, which was finally sold by the liquidator at approx. a 75% discount from the expected price. ��

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The land market was probably the quietest segment of real estate during 2009: very few and mostly opportunistic buyers, only low-value transactions actually completed and in small number, delayed reaction of landowners with respect to adjusting price expectations. Sinziana Oprea – broker, land division

PRICES If during the first part of 2009 landowners and investors found it difficult to estimate property values in the context of the general uncertainty in markets, by the year end the market got closer to an expected price balance. The average decrease in asking prices for land plots in Bucharest ranged around 40 – 60% of the levels registered during the peak period. However, not all landowners were ready to accept the market downturn and, as a consequence, we witnessed situations of similar properties being marketed at significantly different prices.

90%

The total value of transactions completed during 2009 was almost 90% lower compared to that of the previous year. The price discount diﬀered signiﬁcantly depending on the type of buyer involved. While retailers and companies buying to develop projects for their own use accepted discounts of approx. 50%, investors proved to be extremely opportunistic and ready to acquire only at 20 – 30% of the price they would have paid in 2007 – 2008.

Drop in transaction volume Large retailers were the most active buyers in 2009. Demand also came from private high net worth individuals.

FORECAST The market signals towards the end of the year, including the increasing number of closed transactions, gave landowners the conﬁdence that 2010 will bring more activity on the land market. We estimate that prices have almost bottomed out and only slight downward adjustments, if any, will be seen.

Distressed land has been extremely scarce in 2009.

We expect the ﬁrst part of 2010 to remain dominated by the quest for distressed land that has appeared only in very limited amount untill now on the market. By the end of next spring, we should have a clearer understanding whether banks will proceed with the execution of non-performing loans at a larger scale than in 2009, including also good properties. Nonetheless, investors on the land market will likely start having a less opportunistic approach and will make decisions based on the absorption potential of the local market for end products rather than for speculating purposes.

AVERAGE ASKING PRICE FOR LAND IN BUCHAREST (EUR/SQM) Area

Sub-area

Price

Central

Aviatorilor, Dorobanti, Romana, Universitate, Unirii

1,500 – 2,500

Semi-central

Baneasa, Crangasi, Progresului, Vacaresti, Mihai Bravu, Colentina

500 – 800

Peripheral

Sisesti, Pipera, Ghencea, Berceni, Pantelimon

200 – 400

Colliers International, Real Estate Review – Romania 2010

INVESTMENT MARKET Beyond the turmoil of 2009, the new year will provide many opportunities for investors to buy assets in the Romanian market. The low liquidity levels of 2009 and the less intense competition for assets led to adjustment of expectations by vendors and indicate towards a bottoming out in the market. The forecasted return to growth of the economy, the long-term undersupply of stock in occupational markets and the return of banks’ support are the primary reason for an up-turn in transaction activity. Investors who will be first on the market will benefit most. TWO TRANSACTIONS IN 2009 In a harsh global economic environment the Romanian investment market came close to a standstill in 2009. However, two transactions of reference were closed with a total value of EUR 120 – 150 million, indicating that this period still provided opportunities for investors able to close transactions. The start of the year saw the acquisition of Fabian Romania Limited from the London AIM market by Black Sea Properties. The London based fund owned 11 properties, six of which were income producing offices, with a total Net Asset Value of around EUR 80 million. In the second half of the year, European Retail Park Braila, a retail scheme of 53,000 sqm developed by BelRom, was acquired by New Europe Property Investments (NEPI) in a transaction estimated at EUR 63 million. The deal was financed by a mix of debt, conditioned share swap and buyer’s equity – tying the announced yield of 9.4% to these particular conditions.

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With core funds out of play and not expected back earlier than the second half of the year, only private equity funds were looking at opportunities. Their targets were yielding products that could provide 25% IRR’s on invested capital. Some funds had also yearly cash-sweep requirements, around 15% on equity. With difficult financial markets and no distressed sellers, these were challenging targets. Moreover, buyers estimated rental value of proposed projects very conservatively, which led to a substantial discounting of the price estimated by vendors. Although the price changes on international markets have reduced the expectations of local vendors, the above conditions by investors led to prices that were mostly rejected by vendors. In terms of product classes, buyers were looking at all commercial property assets, a sign of trust for both the business and consumer markets. Bucharest was singled out as a target market only by some active players, while other funds were looking at opportunities in the region as well. PRICES Four reasons made it difficult to determine fair prices in the market last year. First was the very low liquidity. Second was the complexity of the closed transactions either in terms of the assets traded or the financing structure. Thirdly, the high bid/ask spreads between investors and vendors highlighted aggressive positions by both parties. This was facilitated by the lack of pressure on buyers, not rushed to spend money in an unsafe context, as well as sellers, unforced by their creditors. The anticipated volume of distressed sales failed to appear and some banks have even publicly stated that they would not execute debtors but prefer alternative solutions. Fourthly, most investors (although not all) were focused on their IRR targets and not yields, which varied greatly depending on the specific parameters of each player and project.

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PRIVATE EQUITY FUNDS LOOKING FOR HIGH RETURNS

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The positive outcome, however, is that the yield gap started to close. If the estimated spread was as much as 250 bps in the ﬁrst semester, it had closed to 100 bps in some cases, in favor of buyers, by year end. This is an important indication of a thawing market.

The positive outcome of 2009 is that the yield gap started to close. If the estimated spread was as much as 250 bps in the ﬁrst semester, it had closed to 100 bps in some cases, in favor of buyers, by year end. This is an important indication of a thawing market. Blake Horsley – manager, investment division

FORECAST Most of the fundamentals support an attractive investment environment in the following year, inviting investors to act on the opportunities lying ahead. First, conditions in the international economic and ﬁnancial markets have markedly improved and investors have commenced activity in the more developed markets. Secondly, the reducing bid/ask spread is the most important sign that there is interest to trade by parties on both sides and that agreements are getting closer.

120 – 150 Mil. EUR Total value of the two major transactions closed in 2009 Black Sea Global Properties bought Fabian Romania Ltd.

Thirdly, with time passing it is more likely that banks will put pressure on non-performing products and some quality assets could feel the heat too. Fourthly, we may soon see a new phenomenon of “forced buyers”. The clock is ticking on the committed capital that needs to be spent or returned to shareholders, which makes the least sense for money managers.

New Europe Property Investments aquired European Retail Park Braila.

Finally, many investors believe long-term in Romania due to the size of its market and the economic and political safeguard of its EU membership. The country is now post-elections and there are forecasts for positive economic growth this year. At current stock levels, the commercial property market will be in short supply once business grows again. We believe that the main risks to real estate investment in 2010 will be related to Romania’s coupling to the international economy. In the unlikely but possible event of a second round of disruptions, Romania will feel the impact. The un-friendly ﬁnancial and sluggish lease markets of last year persuaded investors to consider more innovative schemes for ﬁnancing and structuring deals. We will see more of these approaches in the year ahead as buyers and vendors bridge the gap.

Colliers International, Real Estate Review – Romania 2010

CONSULTING

residential market

Whereas until 2008 the supply of new apartments came solely from developers, last year the market witnessed a new supply source of new appartments: the investors. Thus, after several years of being the largest consumers of new residential projects, during 2009 investors entered into ﬁerce competition with developers to oﬄoad stock.

The most common method of payment for off-plan apartments required an advance payment when signing the pre-agreement and a final installment to be paid at the delivery of the project. As a result of the impossibility to meet the final payment, a large number of units could not be sold and eventually became available for sale.

Demand evolved from a standstill during the ﬁrst quarter to modest activity in the second quarter and to an increase in sales towards the year end due to the start of the ‘Prima Casa’ program in July.

The delivery of new ﬂats continued to increase in 2009 as modern residential stock reached almost 11,000 units at the end of the year. 2,000 units were completed during the ﬁrst half of 2009; a further 4,000 units were delivered in the second half of the year.

SUPPLY The end of the year found the residential market with a total supply of approx. 9,000 unsold new apartments available for sale either directly from developers (6,000 units) or from investors (approx. 3,000 units). Compared to 2008, however, the volume of modern residential supply available for sale registered a decrease of 18%. The 6,000 unsold units are available in 35 projects, already delivered or under construction. Although no new residential project started during 2009, supply levels witnessed changes either due to projects or phases being put on hold or due to apartments reentering the market as a result of pre-contracts being cancelled by customers. Several projects that registered great success during the booming years (100% off-plan sales) were severely affected during 2009, as their delivery date occurred in the middle of the financial crisis and many pre-contracts were cancelled because buyers could no longer complete the sale.

DEMAND In total, approximately 1,300 apartments were sold during 2009 (in apartment complexes with over 200 units), a 63% contraction compared to 2008. Putting aside investors’ demand share in 2008 (around 30% of the total sales), the reduction in end-user’ demand compared to last year was 50%. In 2009 investors did not buy on the residential market. Demand behaved differently throughout the year. The first half of the year started with a three months deadlock period and ended with total sales of 515 units, driven by projects that accepted the new market conditions and offered smaller prices and favorable methods of payment. In the second half of 2009, demand was supported by the governmental program ‘Prima Casa’. However, the program only influenced the sales activity of those projects that reduced their price and offered apartments in the limit of 60,000 EUR. Consequently, during the second half of the year, approx. 800 more units were sold.

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During 2009, the residential market witnessed an oversupply of delivered apartments. In addition, the market lacked in oﬀ-plan sales. Most likely, 2010 will follow a similar pattern to last year, with little changes in supply, while demand will remain dependant on governmental initiatives and end-users’ conﬁdence. Stefania Baldovinescu – manager, consulting division

63%

PRICES The 2009 end of year analysis shows moderate reduction in prices for new appartments (19%) comparable to the prices decrease for old units (20%). The average price for new dwellings closed the year at 1,300 EUR per built sqm (without VAT), marking a 19% reduction from its December 2008 level. The price had a steady evolution throughout 2009, with a similar decrease for each half of last year.

Reduction in total demand in 2009 Investors did not buy residential properties.

Most developers preferred to keep higher asking prices on their lists, but were more flexible when negotiating with clients. Therefore, the effective price for a closed transaction may be up to 10 – 15% smaller. Moreover, developers offered a variety of incentives such as: fully furnished and equipped kitchens, parking spaces, storage rooms or discounts for a limited number of units.

End-user demand has halved.

FORECAST Most likely, 2010 will follow a similar pattern to last year: supply will witness very little change, demand will depend greatly on governmental initiatives and end-users’ conﬁdence, while prices will continue their falling trend, but at a smaller rate.

Prima Casa program supported demand in the second semester.

The stock of 9,000 unsold units at the end of 2009 qualiﬁes the residential market in Bucharest as oversupplied at the moment. However, when comparing the stock of new apartments in Bucharest to other capital cities in Central Eastern Europe, it is easily noticed that Bucharest lags behind signiﬁcantly on a stock per capita basis. Thus, over the medium-long term, we believe that Bucharest’s residential market has great potential for further development. Over the short term (2010), real demand will greatly depend on the ‘Prima Casa’ program and any new governmental initiatives (e.g.: 5% VAT for all new apartments regardless of price and size).

Note: The Consulting Division monitors quarterly the residential market in terms of new supply, sales and prices.

Thus we expect the downward trend in prices to continue, although at a slower pace. We estimate that the price decline for 2010 will be moderate, up to a market average of 10%. Sources: National Institute of Statistics, Czech Statistical Office, Hungarian Central Statistical Office, Central Statistical Office (GUS)

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Colliers International, Real Estate Review – Romania 2010

VALUATION MARKET WHY ETHICS? Recent events in the financial world have demonstrated the destructive effects of unethical conduct and made this a very important concern in political and business thinking. Ethics also became a major topic in the real estate community over 2009. Did appraisers play an important part in the inflated values on the market or were they only witnesses to the tremendous change which happened during 2006 – 2008? Have they remained impartial and correctly reflect underlying market fundamentals? Did they respect the code of ethics recommended by regulatory institutions or surrender under the short-term pressures of fast emerging markets? In this paper we would like to discuss how ethics in valuation can be measured and controlled. Clients of valuation services have the right to receive clear answers about what measures are implemented by a service provider in order to assure high levels of professionalism and ethical standards. The importance of ethics is also crucial for the provider company itself. Research completed by RICS and issued in May 2010, surveyed major real estate firms to reveal the extent to which ethics matter: “All the firms involved in the study recognize that high ethical standards are essential to maintaining… the reputation of the firm and that of the wider profession. It is well recognized that individual professional reputation, as well as corporate reputation, has an economic value which is enhanced by high ethical standards. Ethical principles therefore have a commercial value. Perhaps more significantly, the absence of ethical values has a commercial cost, and sometimes the cost can be devastating where the outcome is loss of business and/or serious adverse claims1.” ETHICS IN THE VALUATION FIELD The definition of professional ethical conduct endorsed by the Royal Institute of Chartered Surveyors, a governing body for the real estate profession globally, is simple and explicit: “giving of one’s best to ensure that clients’ interests are properly cared for, but in doing so the wider public interest is also recognized and respected”.

RICS Research Report – “Ethics for surveyors, an educational dimension. Commercial Real Estate Practice and Professional Ethics” – May 2009 18

Taking only the first part of the definition would be a mistake, especially for the appraisers who are often under client pressure. The “wider public interest” is an essential reason why an appraiser should remain an independent party in the valuation process (consider for example the relationship between a borrower and a creditor). WHO ARE THE REGULATORY INSTITUTIONS IN THIS MATTER? The Royal Institute of Chartered Surveyors (RICS) has developed the most recognized code of conduct for the Real Estate profession in Europe and beyond. RICS membership requires respecting the rules of conduct developed by the Institute. The most important companies on the real estate market in Europe employ RICS members or are member firms themselves. The general principles and rules of conduct by RICS are presented in their “Red Book” publication, Practice Statements and Guidance Notes. In addition to the Practice Statements RICS issues separate, but consistent, Rules of Conduct for Members and Firms. A similar code of conduct, specially devised for appraisers, is presented in the International Valuation Standards by the International Valuation Standards Committee. In Romania, these rules are officially adopted by the National Association of the Romanian Appraisers (ANEVAR). RICS standards and rules are mandatory only for its members, while the norms imposed by International Valuations Standards and ANEVAR are mandatory for all the authorized appraisers in Romania. WHAT ARE THE MAIN PRINCIPLES OF CODE OF CONDUCT IN VALUATION? The main common values promoted by RICS, IVS and ANEVAR are: Integrity, Competence, Confidentiality, Transparency, Independence and the Management/Avoidance of Conflicts of Interest. In the following we will briefly describe each of these. Unless otherwise noted, quotations are made from the “Rules of Conduct for Members”, June 4th 2007, or the 6th Edition of the Valuation Standards, both issued by the Royal Institute of Chartered Surveyors, or the International Valuation Standards, 8th edition, 2007.

Clients of valuation services have the right to receive clear answers about what measures are implemented by a service provider in order to assure high levels of professionalism and ethical standards. Ethical principles have a commercial value. Raluca Buciuc – associate director, valuation division

Integrity is related to overall professional behavior of the valuer, advising him to be honest and trustworthy in his or her activity: “never deliberately mislead, whether by withholding or distorting information”. This code expects the appraiser to not put his own gain above the interest of clients and consider the wider interest of society in their judgment. Competence is related to the technical knowledge of the appraiser and to the concept of specialization. “Members shall carry out their professional work with due skill, care and diligence and with proper regard for the technical standards expected of them”. A valuer should deny an instruction if it is outside of his or her professional competence or there is a limited awareness about the proper approach of the valuation subject. In this latter case the valuer should form a team together with an expert in the field. Acceptance of any competence makes a valuer accountable for all his or her actions. Confidentiality is one of the most important concerns in the relationship between the valuer and client. It also affects third parties as the real owner of the valued property or the lending bank. “There is a general duty to treat information as confidential where that information becomes known as a result of the professional relationship, and is not in the public domain”. If due to an existing conflict of interest, the confidentiality cannot be kept, then the instruction should be declined. Conflicts of interest is another important pillar. The valuer “should declare any potential conflicts of interest, personal or professional, to all relevant parties”. This issue appears especially when the appraiser has previously analyzed the subject property before the current instruction or in the case when the valuer is part of a larger company, including other departments that have different interests in the subject property. In this case the appraiser or the firm should complete several actions in order to avoid such a conflict. The creation of “Chinese walls” is such an example. A potential conflict should be disclosed in writing to the client, agreement sought and obtained as to how it will be managed and the result should be included in the terms of engagement.

Independence and transparency are the main values that should be achieved by an appraiser in order to avoid conflicts of interest. A valuer should not let sentiments or their own interest to effect professional judgment and should “share the full fact with the clients, making things as plain and intelligible as possible”. Independence is endangered, for example, each time the valuation result is discussed (read “negotiated”) in advance of its completion with either the client or another party interested in the valuation. “It is necessary for the valuers to identify any threats to their independence and objectivity and take the appropriate action before accepting the instruction”. WHAT SHOULD A CLIENT KNOW BEFORE SIGNING THE TERMS OF ENGAGEMENT? The client should understand how the valuer must translate into reality the ethical principles presented above and insure that his interests are not in conflict with the service provider. Please, find below these and several other issues that the client should address before signing a service contract: 1. What is the relevant experience of the valuer with similar properties? 2. Are there any possible conflicts of interest regarding this instruction? 3. Might the valuer manage the conflict, if any? 4. How does the valuer ensure confidentiality for the information provided by the client? 5. What is the complaints handling procedure within the valuer’s company? 6. What is the level of the valuer’s professional indemnity? A client should know before signing the terms of engagement if the company has working complaints handling procedure and professional indemnity insurance. Also, the client may ask if the valuer has undertaken continuing professional development or if he or she has recent experience in the relevant area. These issues do not exhaustively cover all the ethical standards, but they should help the client create a proper relationship with the valuer.

Colliers International, Real Estate Review – Romania 2010

BUILDING SURVEYING As the market followed the negative trend of the last year, no new greenfield developments managed to obtain financing for medium and large projects, either commercial, office, residential or industrial. In the present business context, the importance of Project Monitoring has substantially increased as it provides to the stakeholders, most importantly to the banks and investment funds, a useful tool for risk management in the construction process. Professional building surveyors can provide not only technical supervision but also leasing contract analysis, expenditure completion scenarios according to market segment, demand forecasts on specific real-estate markets and detailed expenditure cash flows. Currently, in Romania, there are approximately 90 supervised projects under development. The monitored projects, controlled by the most active companies in this field, represent residential compounds (45%), office buildings (20%) and shopping centers (35%) and a few infrastructural developments and building refurbishments. In the present article, we would like to offer a brief insight about two important aspects which contribute to the success of one project from the construction perspective: FIDIC contracts, and proper management of soft costs. FIDIC CONTRACT – GENERAL CONDITIONS REGARDING THE INSURANCE

Therefore, the FIDIC terms and conditions recommend that the insuring party (the Contractor or the Developer) shall insure the Works, Plant, Materials and Contractor’s Documents for not less than the replacement cost including the costs of the demolition, removal of debris and professional fees and proﬁt. In addition, an insurance which shall cover liabilities for claims concerning Contractor’s Personnel must be maintained during the entire working period for the involved human resources. The insurance terms should also cover the situation which may arise when one party is charged in respect of an incident for which another is responsible, either partially or totally. So, it is recommended that the insuring party maintains insurance against each party’s liability for any loss, damage, death or bodily injury concerning any physical property or person (other than the ones mentioned above), as a result of his entrepreneurial activity. SOFT COSTS MANAGEMENT When estimating the construction budget, the main focus is usually set on the hard costs, more precisely on the direct costs of the construction and utilities. Besides these, it is very important to take into consideration all the indirect costs related to the project, also known as the soft costs, and to estimate them not only considering the particularities of the project, but also considering the trend of the market. The soft costs usually include project management expenditures, consultants’ costs, building permits, design fees, brokerage fees, marketing costs, ﬁnancial costs and contingency costs.

In the present real-estate market, only the experienced developers managed to succeed in delivering announced projects within reasonable targets of budget and timeline. For the parties involved in a construction agreement, it is recommended to follow the conditions of a FIDIC contract (Federation Internationale des Ingenieurs Consultants), which can signiﬁcantly reduce their risk exposure. Still, a special care should be paid to the implementation of the General Conditions of the FIDIC contract which must be aligned to the Romanian law.

An accurate estimate of these costs, as well as the presence of a professional project management during the construction process, assures a successful completion with minimum overrun. Excesses became common phenomena in the market during the last two years and lots of projects were delivered with cost overruns of at least 5 – 10%. These undesired additional costs can be prevented during the development process, conditioned by a careful monitoring and analysis of the expenditures correlated with a distribution of soft costs per category.

The requirements for the construction works insurance serve to protect the involved parties against the potential risks related to the construction process.

Our experience shows that a higher percent of soft costs is usually allocated to project management and design fees (around 3% of the hard costs each). Project management costs are related to the construction administration team, while design fees vary depending on the size and type of the project.

When estimating a construction budget, the main focus is usually set on the hard costs. Moreover, it is very important to take into consideration all the indirect costs related to the project, also known as the soft costs. An accurate estimate of all these costs assures a successful completion with minimum overrun. Raluca Laudoniu – manager, building surveying division

Other costs, which are usually estimated as percentage of the hard costs, are the Building Permit fees, including the costs of the building permit and the municipal taxes – estimated to be 2.4% of the hard cost – and the Consultants costs (real estate, legal etc.) which are generally calculated based on the market evidence at 1.5% from the hard costs.

The graphic below shows how soft costs (estimated as percentages out of the hard costs) can ﬂuctuate during the diﬀerent phases of the construction period. Even though real estate markets are in continuous change, the underlying trends must be understood for a correct estimation of soft costs in future projects.

Brokerage and marketing fees are usually approximated based on revenues generated by the project on completion. Marketing fees are typically estimated at 1%, while brokerage costs at 12.5% of revenues obtained during the first year – for commercial properties – or 1% of total revenues for residential developments. Soft costs also include financing fees which are usually set at 9% of the financed amount.

A signiﬁcant amount of soft costs is spent at the beginning of the project, in the pre-development phase, when the costs with Consultants, Design, Marketing and Building Permit are considerable higher than the ones registered in the following period. In the next phases, all these costs will know a downward trend, with the exception of Consultants, which will slightly grow at the end of the construction. If the movement of Contingency depends of the Hard Costs evolution and Financial Fees depends of the total costs evolution (hard and soft costs), the Project Management fees are usually constant during the project development. Also, from the experience of previous projects, Brokerage fee is rather stable during the construction, larger fees being registered in the last phase, before the ﬁnal completion.

In addition to these types of costs, it is recommended to allocate a safe amount to contingency (roughly 5% of hard costs) in order to cover the possible price changes and costs arising from special risks. From our experience, we noticed that diﬀerent overruns can also appear due to unexpected soft costs, and the above contingency does not always cover these additional costs. A special care is recommendable to be paid during soft costs’ estimation, in order to avoid supplementary expenditures. ��

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Colliers International, Real Estate Review – Romania 2010

HOTEL MARKET

NATIONAL HOTEL MARKET ANALYSIS The tourism industry was one of the most affected by the downturn of world economy, whose effects were visible from as early as Q3 2008 and which finally led to a severe decrease for both hotel services demand and tourist expenditure. The cutting down of travel budgets determined travelers either to decrease the length of stay, either to downgrade transport and accommodation to a lower, cheaper solutions or to use new technologic solutions as a substitute for travel. Business and conference tourist segments were the most impacted and destinations that relied on those types of customers were the most affected.

The number of transactions has also decreased significantly, with an estimated volume lower then EUR 15 million. Even though many properties were on sale due to the difficulties that arose, buyers failed to appear because they either found it difficult to finance such acquisitions or they decided to wait for the price to go even lower. ��

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The decrease in demand for hotel services was confirmed in Q4 2008 and has continued across 2009, and consequently, the number of tourists seeking accommodation in Romanian hotels reduced with 14% y-o-y and the average length of stay dropped to less than 3 days. As a result, the occupancy levels went down by 20% as compared to the figures registered in 2008. The second half of last year has however, showed signs of slight recovery thanks to room rate adjustments operated by hoteliers and to a stabilization of the economic climate in Western European countries, which are the main tourist generators for Romania. The most important overnight generators were still the neighbor countries: Hungary (25%) and Bulgaria (12%) which have decreased y-o-y by 4% and 20% respectively. The most significant drops in the number of tourist arrivals were registered by Germans (15%) and Italians (14%). The hotel offer was relatively constant as compared to the previous year, most projects that were in the pipeline at the beginning of 2009 being delayed or canceled, while no new developments were started due lack or cost of financing. Around forty hotel projects are however announced for the following years which will add almost 6,000 rooms to the existing supply. The penetration rate of international brands is still one of the lowest in Europe, with little over 7% of hotel inventory, currently being affiliated to an international chain of hotels.

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BUCHAREST HOTEL DEMAND Tourist arrivals decreased on average by 8% in Bucharest in 2009 and the average length of stay reduced from 2.1 nights in 2008 to 1.8 last year. Since 80% of tourism in Bucharest is business-related, the Capital has been seriously impacted by the economic crisis that forced companies to reduce their expenses for traveling and inflicted major changes in tourists’ behavior. Upper segments of hotels were the most affected, especially in terms of rates. The occupancy for the Bucharest hotel market was 56% in 2009, a decrease by 7% y-o-y, significant drops being seen in the first 6 months of the year, while towards the end of 2009 the values came close to the levels registered a year before. The real problem for hotels was the room rate, which staid constantly and consistently below levels of 2008, with an average value of EUR 73 in 2009. The average daily rate decreased by 30% y-o-y, and the biggest challenge in the following years for hoteliers will be to build-up ADR again.

FORECAST

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BUCHAREST HOTEL SUPPLY At the end of 2009, Bucharest accounted for 153 hotels, with little over 11,800 rooms on the Bucharest hotel market. Even though the accommodation supply has increased by 12% y-o-y, the Bucharest hotel market still shows signs of immaturity with regards to the hotel oﬀer: the majority of hotels have under 50 rooms (60%), segmentation is severely unbalanced (over half of hotels are 4-star properties), brand penetration is still low (13% of the total number of hotels).

After a difficult year 2009, the following year 2010 shows some moderate signs of optimism. Western European countries have started to post quarter to quarter increases of the GDP and Romania’s economy is expected to rise by 0.5% in 2010. As GDP has historically been a good indicator for the appetite to travel, an increase in demand for hotel services is consequently expected. In the same time, hotel supply will remain relatively constant on the short term since access to financing will continue to be difficult. Subsequently, many of the existing projects in the pipeline will remain blocked and new ones are will be very scarce. This is the reason why we believe that occupancy levels will continue to recover from the drops they previously registered. Rebalancing demand and supply ratio will determine also the ADR to stop falling, and star to increase but in a smaller pace than the occupancy. The problems which hotel owners are facing will raise opportunities for investors: both the acquisitions of distressed properties priced below their market value, and the investment in new build hotels, thanks to the decrease in land value and construction costs. Despite the difficulties, opportunities for hotel investment still exist especially for midscale hotels, in secondary cities and in mixed-use developments and. Hotel chains and operators will strengthen their presence as financial institutions will require professional operating solutions as an guarantee for good results.

BUCHAREST HOTEL STOCK Segment

# of Hotels

# of Rooms

<50 Rooms

50–100 Rooms

>100 Rooms

5-star hotels

2,038

4-star hotels

5,899

3-star hotels

2,640

2-star hotels

912

1-star hotels

375

Total 2009

153

11,813

Trend Hospitality Baneasa Business & Technology Park 42–44 Bucuresti–Ploiesti Ave., Building A2, 4th ﬂoor District 1, 013696, Bucharest, Romania Phone: +4021 203 5065; Fax: +4021 203 5061 Email: tinu@trendhospitality.com Web: www.trendhospitality.com

Colliers International, Real Estate Review – Romania 2010

REAL ESTATE INVESTMENTS IN ROMANIA – TAXATION ASPECTS

The recent legislative developments in the area of tax law that entered into force starting 1 January 2010 have brought some important changes for Romanian taxpayers. However, the real estate business environment in Romania is not signiﬁcantly impacted by these changes.

Alternatively, individuals also have the option of deducting actual expenses. If an individual closes more than 5 rental agreements, he/she has to register as merchant and pay a 16% tax on rental income less relevant deductible expenses.

We are presenting below some key aspects that should be considered by individuals or companies investing in Romanian real estate properties either directly or via a Romanian entity.

Capital gains obtained by Romanian companies from disposal of Romanian real estate properties are subject to a 16% profits tax (minimum income tax rules was introduced starting 1 May 2009). The taxable gain is determined as the difference between the selling price and the fiscal value of the fixed assets sold. In the case of depreciable fixed assets (buildings), the deductible fiscal value is defined as the entry value less fiscal depreciation.

TAXATION OF RENTAL ACTIVITIES Rental income is subject to a flat 16% tax that is applicable to both companies and individuals but with certain differences in the computation of the tax base. Specifically, in case of Romanian companies, apart from other tax deductible expenses, the tax base is decreased by the fiscal depreciation of the building (except for land which may not be depreciated). Further to the latest changes of the tax regulations introduced in May 2009, reserves from the revaluation of fixed assets, including land, performed after 1 January 2004 will be gradually recognised as taxable income proportionally with the recognition of tax depreciation of these assets or at once at the time of their disposal. This rule concerns the revaluation reserves that are deducted from profits for tax purposes through depreciation or through expenses with alienation of assets. In effect, this change eliminates the tax revaluation of assets which was available for several years. With regards to the rental income obtained by individuals, the tax base is determined by deducting a 25% expense quota from the gross income, which in effect reduces the tax rate to 12%.

DISPOSAL OF REAL ESTATE ASSETS

Distribution of net proﬁts is further taxed with a 16% dividend tax. However, there are situations when the tax can be reduced below 16% and even to nil (e.g. via tax treaties, EU Parent-Subsidiary Directive). As an alternative, the shareholders of a Romanian company can opt to sell the shares of the company rather than selling the company’s property. In this case, they are liable only to the 16% income tax applied to the capital gain obtained through the company sale. In case of capital gains obtained by individual investors from disposal of real estate property, the tax depends on the period of time the property was owned for. Namely, the tax for real estate properties sold within 3 years of acquisition stands at 3% of the transaction value for transactions up to RON 200,000, while for transactions exceeding RON 200,000, the due tax is RON 6,000 plus 2% of the amount which exceeds RON 200,000.

Sales of properties held for more than 3 years, are taxed at 2% of the transaction value for transactions under RON 200,000, while for transactions exceeding RON 200,000 the due tax is RON 4,000 plus 1% of the amount exceeding RON 200,000. Individuals performing sales of real estate as a business cannot apply the above rules but instead they need to follow a taxation scheme similar to that applicable for companies. VAT ASPECTS Rental of real estate property is normally VAT exempt. However, any taxable person performing rental activities may opt to charge a 19% VAT on such transactions. As a rule, the sale of old buildings/parts of buildings and the underlying land, as well as of any other type of land is VAT exempt without deduction right unless the taxable person performing such transactions opts to tax the sale with 19% VAT. This exemption is not applicable to sale by a taxable person of a new building or land on which buildings can be erected. Starting with December 2008, a 5% VAT tax rate has been introduced for the sale of social housing (including related land) under certain conditions (i.e., houses of maximum 120 square meters and not exceeding RON 380,000 in value – net of VAT). Individuals trading in real estate as a business are to be treated as taxable persons. Thus, when performing taxable operations (e.g. sale of new buildings) the individuals are liable to register for VAT purposes if the volume of their transactions exceeds EUR 35,000.

LOCAL TAXES Owners of buildings are liable to pay an annual building tax to the local authorities. For companies, such building taxes range between 0.25% and 1.5% of the book value of the building. However, the building tax may increase to up to 10% if the building has not been re-valued for 3 years. For individuals, the tax rate is 0.1% and is applied to the value of the building, which is calculated based on minimum established values provided by law (starting from 2010 these values were increased by approximately 20%). Hence, for equivalent property, the tax base for individuals can be considerably lower than for companies. With regards to the tax on land, both companies and individuals owning land are liable to pay a tax which is established as a ﬁxed amount per square meter, depending on the location of the land. Local councils may grant exemptions from payment of building and land taxes to companies under certain state aid schemes established for regional development.

Ernst & Young provides a range of services including assurance, advisory, tax advisory and compliance, and transaction advisory. Ernst & Young srl Premium Plaza Building, 15th Floor 63–69 Dr. Iacob Felix Street, 011033 Bucharest Alex Milcev, Tax Partner Phone: +40 21 402 4000 Fax: +40 21 310 7124 Email: oﬃce@ro.ey.com Web: www.ey.com

A building is ‘new’ if sold by the end of the year following its ﬁrst utilization/occupation, or is transformed in certain conditions. 25

Colliers International, Real Estate Review – Romania 2010

CHANGES TO THE CONSTRUCTIONS PERMITTING PROCEDURE

On 14 October 2009, the Law no. 261/2009 approving the Emergency Government Ordinance no. 214/2008 entered into force, modifying the Construction Law, i.e. the Law no. 50/1991. This normative deed brought a series of significant changes to the procedure for authorization of constructions in Romania. These changes have been further implemented by the new methodological norms to the Construction Law, approved by the Order no. 839/2009 of the Ministry of Regional Development and Housing and producing effects as of 23 November 2009. The legal novelties are a consequence of the integration in the European Union and of the correspondent obligation of legislative harmonization; this time the aim was to harmonize the construction legislation with the environmental assessment procedure under the Council Directive 85/337/CEE. The stages for obtaining the authorization of construction works have been reconsidered for including those allowing the assessment of the environmental impact of a particular project. Any applicant for a building permit (demolition permits excluded) must, after obtaining the urbanism certificate, apply to the environmental protection authority for an initial assessment. This authority will decide whether the respective project falls into the category of projects subject of the environmental assessment.

The applicant shall then notify the competent public authority confirming its initial application for obtaining the building permit. The procedure for environmental assessment shall take place after the submission thereof, but prior to drafting/finalizing the technical documentation and shall be completed by issuance of a statement/point of view of the environmental protection authority, or by issuance of an administrative deed of the environmental protection authority, which shall be different depending upon the environmental effects of the investment objective: an environmental permit or a Natura 2000 endorsement. Another concern of the law maker was to implement a mechanism for ensuring the transparency of the endorsement/ authorization procedure. To this aim, the public is informed and consulted in relation to the proposed investment. The building permit and its annexes must be published on the local public authority’s website or posted at its headquarters. Furthermore, any person whose rights or legitimate interests has been prejudiced by the issuance of the building permit or by the refusal to issue the building permit is entitled make a claim in relation thereto. The suppliers and the administrators of urban facilities are under the obligation to post at their headquarters and on their web pages all the data necessary for drafting the technical documentation for obtaining their approvals. Steps have been taken for standardizing the permitting related requirements when the intended development exceeds the administrative territorial unit of a county (or Bucharest city limits, as the case may be).

Furthermore, some clarity has been brought in relation to the major changes in design; the “changes of the theme” have been expressly deﬁned. In case of changes of the theme, a new building permit has to be issued; the changes of theme will lead to starting the permitting procedure of the project again to the extent they exceed the limits of the original endorsements/environmental administrative deeds. In case such changes occur, the developer/owner must stop the performance of works until a new building permit is obtained. In respect of the local changes to the technical solutions, under limited conditions, they do not require the issuance of a new building permit; those conditions have been clariﬁed to a certain extent.

The mandatory contribution of 0.5% of the estimated value of the construction works to the Construction House, provided under the Emergency Government Ordinance no. 214/2008 has been now removed. However, it continues to be provided for in other pieces of legislation, maintaining the subject matter under debate. Consequently, a clariﬁcation of the law maker in this respect would be recommendable. The recent amendments are a small step in the direction of streamlining and transparency of procedure and could lead to a more predictable process and increased responsibility of the individuals involved.

In addition, the rule that the building permit and the permit for the works for site organization have to be issued in the same time has been introduced by Law no. 261/2009. The celerity of the permitting process remains a grievance, but some positive measures have been implemented in this respect. To the extent the documentation is complete, the bodies competent to issue the endorsements required under the urbanism certiﬁcate must comply with their obligation to issue the respective approvals/endorsements within 15 days from the date of the application. Failure to do so is deemed to constitute tacit approval (except for endorsements issued by the environmental protection authority). The sanctioning regime has been amended in several respects, making the law rougher.

Oana Albota, Senior Associate oana.albota@pelifilip.com Floreasca Business Park 169A Calea Floreasca Building B, 5th floor 014459 – Bucharest, 1st District, Romania Phone: +40 21 527 2000 www.pelifilip.com

For example, buildings erected without a building permit on land belonging to the public or private domain of the state or administrative-territorial units may be demolished without a demolition permit and without a court ruling ordering the demolition, on the oﬀender costs. The complaint against the sanctioning minutes shall not suspend the demolition of such buildings.

Colliers International, Real Estate Review – Romania 2010

Floreasca Business Park 169A Calea Floreasca, Building A, 7th ďŹ&#x201A;oor Bucharest 1, 014459, Romania Phone: +4021 319 77 77 Fax: +4021 319 77 78 Web: www.colliers.ro

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