Bucharest, 8h of April 2020. Crosspoint Real Estate has issued its latest market report- Romanian Real Estate Market 2019, an in-depth analysis of all market sectors including investment, office, industrial, residential and land markets. We have further analyzed the state of the market in the first quarter of 2020 and its evolution in the following period.
Following a period of considerable growth, Romania’s economic evolution has continued on the same trend in 2019, although at a slower pace. Preliminary data from the National Institute of Statistics shows a 4.1% GDP growth rate for 2019, 2% higher than the European Commission’s forecast and similar to the one registered in 2018. For the time being, the uncertainty surrounding the global and local economy makes it nearly impossible to assess the magnitude of the impact, but both optimistic and pessimistic scenarios indicate a serious decline in 2020, up to a negative growth, at least for the first half of the year.
Taking into consideration the current global situation, Codrin Matei, Managing Partner at Crosspoint declares: “It is much too early for predictions regarding the real estate market, but given that 2019 has continued the series of positive evolution in recent years and that we are approaching the current situation from a much stronger position than in 2007-2008, the impact may not be so violent. The market is more liquid, the degree of indebtedness for individuals is much lower and the wages are higher. But it all depends on the duration of the pandemic, the measures taken by the government to sustain the economy, and especially on how investors, developers and owners will approach the situation”.
With regard to the investment market, 2019 registered a total investment volume of 608.85 M EUR, a 41% decrease yoy. The largest recorded transaction was the sale of The Office project in Cluj-Napoca, owned by South-African investment fund NEPI Rockcastle, to Dragos and Adrian Paval for almost 130M EUR. The significant drop in volume is partially due to the fact that a few major transactions initiated in late 2019 are set to close in the first half of 2020. Because of the complexity of the acquisition processes and the recent unpredictability on all sectors of the economy, it is possible that further delays might occur.
With a total volume of approximately 120 million Euro in the first quarter, the Romanian investment market had a similar start compared with the same period in 2019, when the volume of transactions was 117.5 million Euro. However, this volume is rather a result of market inertia, since most of the important transactions had already been initiated last year. An optimistic scenario puts the total volume of investments for 2020 at 750 million Euro, while a pessimistic one somewhere at 500 million Euro. Therefore, we do not expect the investment market to undergo a dramatic change in 2020 compared to the previous year.
Romanian investors have been the most active players in 2019, with a 35% share in the total investment volume, followed by South-African an US investors, with a 19% and 18% share respectively. So far in 2020 the large transactions have been carried out by established South-African and European investors, with national players still present, although acquiring smaller products.
Prime yields in Romania are still around 7% or higher in all market sectors, among the highest in Europe. Office and retail prime yields range between 6.75-7%, while industrial prime yield is around 8%. Capitalization rates registered in the first three months of 2020 have maintained the same levels.
In 2019, similar to previous years, the office sector continues to dominate the investment market, both in Bucharest and regional cities. An interesting aspect observed in 2019 is the fact that regional markets have attracted an important share of the office investments (32%), a sign that cities like Cluj-Napoca are turning into competitive alternatives for the capital city. The trend seems to continue in 2020 as well, with over 65% of the Q1 2020 investments made in the office sector, while the large industrial players have continued on with their expansion plans, in two transactions of over 40 M EUR.
The office take-up in 2019 was around 377,000 sqm, 5% higher than in 2018, with West/Central West being the most desirable areas for companies, with more than a quarter of the leases. As a consequence of the emergence of Expozitiei as an office hub in the past three years, the area reached the second place in the take-up top, with a 16% share. The dominant industry remains the IT&C sector, weighing almost half in the total take-up, followed by finance/banking sector. Relocations accounted for 44% of the total leasing activity, with tenants looking for the newest and most modern office spaces. Around 55,000 sqm of office space were leased in Bucharest in the first quarter of 2020, an almost 50% fall in demand yoy. Taking into consideration the record volume of leases in 2019, the drop in demand was already expected and the current situation is adding a further pressure on tenants. As expected, due to the large number of new products delivered or under construction, relocations continue to account for the largest part of the leases (36%) and pre-leases make up for 17% of the total leasing activity. The IT&C and Finance/Banking/Insurance sectors are still the main sources of demand for office spaces (74% in the total leasing activity). Office spaces in the West/Central-West and Central areas were the most sought after in Q1 2020.
Over 288,000 sqm of new office space have been delivered in 2019, the total office stock in Bucharest has now reached 3.19 million sqm and 13 new projects have been announced for delivery in 2020, adding 257,000 sqm to the stock. In light of the recent events, deliveries might be delayed or postponed until a more stable environment will allow the market to bounce back. Developments in infrastructure, such as the opening of the new M5 | Drumul Taberei-Pantelimon metro line, will create a favorable context for the emergence of new office hubs in Bucharest. 75,500 sqm of new office space in four buildings have been added to Bucharest’s stock in the first quarter of 2020: Ana Tower (33,000 sqm), Globalworth Campus C (32,000 sqm), H Victoriei 109 (6,000 sqm) and Mendeleev 5 Office (4,500 sqm).
The prime office rents remained unchanged at 18-19 EUR/sqm in CBD, 16 EUR/sqm in the city centre, 13-15 EUR/sqm in the West and North and 10-11 EUR/ sqm in the South and East. The areas with the lowest vacancy rates are Floreasca/Barbu Vacarescu and CBD (2% and 3% respectively, compared to the overall 9% in Bucharest for 2019). Given the current situation, the vacancy rates will most likely go further up, even with fewer deliveries than initially expected, as tenants will have a more cost-conscious approach.
With regard to the industrial market, over 500,000 sqm of new industrial space have been delivered in 2019, which is an impressive 13% addition to the previous levels. Bucharest continues to be the largest market, with the West and North-West areas accounting for 40% of the total stock. Over 80,000 sqm were added in Q1 2020, mainly in the capital city.
The capital city remains the target for demand, although the leasing activity has witnessed a slight drop compared to 2018 – a little over 455,000 sqm. One possible factor influencing the drop in demand might be the relocation to self-built facilities, another being the boost in relocations expected for 2020, caused by lease expires. The industrial leasing activity in Q1 2020 amounted to around 67,000 sqm, with a 60%-40% split between Bucharest and the western area of the country.
In the following years it is likely that new areas will be developed, such as Constanta or Craiova. Production companies will choose to expand by building smaller, satellite facilities around their larger compounds. In the north-eastern part of the country, logistics companies will seek to open smaller hubs which can be supported by the existing infrastructure. 2020 will mark the development of industrial facilities in untapped areas such as Bacau. Infrastructure continues to be a challenge, with only 43 km of highway delivered in 2019, half of the official estimated number.
“The industrial and logistics market will be less affected compared to the other real estate segments. However, the dynamics will be lower by the end of the year. Some companies delay their expansion but there are signals in the market which show that there are positively affected industries, especially those related to e-commerce. In addition, there are no large projects built speculatively and the vacancy rate registers lower levels. Thus, overall, I think the market will remain stable” says Emilian Podaru, Head of Industrial & Logistics, Crosspoint.
The series of macroeconomic changes such as the 3.8% inflation rate and the high EUR/RON exchange rate have affected the residential market in 2019. The surge in prices of new dwellings was caused by the increase in material costs (a 30% increase yoy in 2019), the lack of qualified workforce as well as the raise in the minimum wages, that led to a 25% increase in the workforce costs for developers.
An all-time record for the Romanian residential market was the delivery of 15,000 units in Bucharest in 2019. While the southern area remains the largest market for affordable dwellings, western Bucharest is seeing a surge in prices and the North is becoming a mixed mid-class to upper-class area. The southern and western peripheries remain the cheapest (around 1,000 EUR/sqm), while in the Center-North prices continue to exceed 2,000 EUR/sqm. The raise in wages, especially in Bucharest, has resulted in a higher demand for residential developments within the city and in established mid to high income areas. Moreover, we can see a shift of demand from one-bedroom apartments to two-bedroom apartments.
The Bucharest rental market continues to be one of the most profitable in the CEE region. The average rental yield is around 6% and a price/rent ratio of 17 years.
As the most vulnerable to the threat of a downturn, the residential sector is also the most dependent on the economy’s quick recovery in order to keep afloat. In case of a positive outcome, deliveries might just be delayed for a short to medium period, but a more pessimistic scenario would be that some projects will not be able to recover from this sudden blow.
As regards the land market, most of the acquisitions for commercial development (mainly retail) have been registered on regional and secondary markets, whereas Bucharest continued to attract investors on the residential segment, because developers of office projects due for delivery in the following three years have already secured their land plots in the 2016-2018 period. Due to the fact that available land plots in established areas have become smaller and scarcer, land prices have significantly gone up, nearly doubling in some cases compared to 2018. Given the economic slowdown expected for 2020, land investments, be it for commercial or residential purposes, are expected to be approached with foresight.