Romania: The Economic and Financial Crisis Takes It’s Toll
The financial crisis continues to take it’s toll on the commercial real estate markets in Romania, as in most of CEE. The economy is closely linked to the health of the political system, and as the Government collapsed in Romania ahead of Presidential elections, depending on who wins the Presidency, there may be new Parliamentary elections at hand.
The focus of the few remaining investors is now the search for distressed assets and truly exceptional investment opportunities. Whereas in 2007, at the height of the commercial market, sellers were receiving in the 6% yield range for their highest quality properties, hoping for prices to go higher still (lower yields). Now, not even 2 years later, the tables have turned completely from a seller’s market and has become a buyer’s market. Yields have risen to the double digit range over 10% and 12%.
Credit is almost non-existent causing investors to purchase with a majority (or all) of equity and little debt. Major investors still in the marketplace are primarily institutional investors, private equity parties, and bottom fishing opportunistic funds. Buyers are highly selective and very cautious to purchase the highest quality properties in the best locations. They use conservative assumptions when doing their spreadsheet analysis regarding price, income growth, and exit strategies. In light of the increased risks, many major investors have abandoned Romania, even CEE, for their comfortable, stable western European markets such as Paris and London.
With significant problems still existing in the capital markets and financial sector and uncertainty where the market is heading several years into the future, active investors are offering considerably higher yields for properties, typically over 12%, often causing a disconnect as sellers still hope for top price in a rapidly sinking market. This credit crisis has had a devastating effect on both investors and sellers and a quick return to pre-2008 market conditions will not occur any time soon. Overall, 2009 is expected to be a very difficult year and the number of transactions will decrease due to lenders requiring more equity from the investor per deal, if credit is available at all.
A reassessment of risk has occurred on the part of investors and lenders due to the economic and financial crisis. Prior to the economic and financial crisis and due to cheap credit and the possibility of high leverage, similar to Western Europe, commercial property prices were headed toward the under 6% yield level. This is no longer possible and yields have nearly doubled. There currently is a re-pricing of risk worldwide. 2009 and beyond will be a time of aggressive opportunities – if any deal will be made at all.
As Warren Buffett astutely states, “There are times when cash buys more than at other times and this is one of those times when it buys you a lot more. You want to be greedy when others are fearful and you want to be fearful when others are greedy”.
