Romanian property market rising fast; yields still good

December 02, 2016

Romania house pricesWith low interest rates and an improving economy, Romania´s housing market has grown robustly over the past year. And there´s lots of construction.

"If I want to develop residential, it is a safe bet. The good news is that banks are financing such developments with good terms, so I might have quite a high return on my investment," says Ilinca Paun, Managing Director of Colliers International.

The average selling price of apartments rose by 8.40% (8.56% inflation-adjusted) to €1,045 (US$ 1,155.98) per square metre (sq. m.) during the year to September 2016, based on figures from On a quarterly basis, house prices rose by 2.45% (2.81% inflation-adjusted) in Q3 2016.

All major cities in Romania experienced rising house prices during the year to September 2016:

  • In Bucharest, the capital, the average selling price of apartments rose by 5.34% (5.49% inflation-adjusted) to €1,144 (US$ 1,265.49) per sq. m.
  • In Cluj-Napoca, Romania’s second most populous city, apartment prices were up by 9.52% (9.68% inflation-adjusted) to €1,231 (US$ 1,361.73) per sq. m.
  • In Timisoara, the average selling price of apartments surged by 10.73% (10.88% inflation-adjusted) to €1,022 (US$ 1,130.54) per sq. m.
  • In Brasov, the average selling price of apartments increased by 6.85% (7% inflation-adjusted) to €920 (US$ 1,017.70) per sq. m.
  • In Constanta, the country’s oldest city, apartment prices rose by 5.07% (5.22% inflation-adjusted) to €953 (US$ 1,054.21) per sq. m.

The Romanian economy grew by 3.8% in 2015, and growth of 5% is expected in 2016. In 2017, the economy will still expand but at a slower pace of 3.8%, according to the IMF.

"Both residential supply and demand are gathering steam as a result of the favourable economic outlook and the newly introduced fiscal regulations," say Knight Frank.

Romania´s new Fiscal Code was introduced on January 1, 2016. Most notably, it reduces the standard VAT rate from 24% to 20%, but also simplifies the tax collection process, to boost investment and economic growth.

There are no restrictions on foreign nationals acquiring dwellings in Romania. Ownership of land is tricky, but companies incorporated in Romania as well as resident foreign nationals and non-resident EU citizens can acquire land.

Residential market demand rising

The country´s largest bank, Banca Comercială Română (BCR), has generating new loans worth RON 3.8 billion during the first nine months of 2016, primarily driven by the government´s "Prima Casa" (First Home) programme which since 2009 has aided first-time buyers.

Knight Frank notes that although most residential demand during the first half of 2016 came from the "Prima Casa" programme, the middle class sector is also "increasingly active". The luxury residential market is attracting investors due to average gross yields ranging from 6% to 7%. An estimated 25% of new luxury apartments are bought to rent out.

2016 has been more active than 2015, which was more active than 2014, notes Colliers International. In 2015 Colliers observed a 60% rise in new apartment absorption in its monitored projects as compared to 2014, due to rising wages and to the return of small investors to the market. Land deals rose too. "2015 marked the second post-crisis year with large residential deals closed on Bucharest land market."

Romania´s great housing market collapse

Romania´s economy grew robustly from 2001 to 2008, with an average annual real GDP growth rate of 6.5%, according to the IMF. From 2002 to early-2007, property prices and demand rose in anticipation of EU accession, which took place in January 2007. But investors were disappointed by non-implementation of economic and political reforms which had been promised as part of EU accession conditions. Corruption remained rife, largely ignored (or tolerated) by the government.

Then came the Euro-crisis. GDP plunged by 7.1% in 2009 and fell by another 0.8% in 2010:

  • In 2009, house prices plunged by 20.62% (-24.18% inflation-adjusted) from a year earlier.
  • In 2010, house prices fell by 15.88% (-22.07% inflation-adjusted) from a year earlier.
  • In 2011, house prices dropped again by 4.07% (-7.02% inflation-adjusted) from the previous year.
  • In 2012, house prices fell by 1.31% (-5.62% inflation-adjusted) from a year earlier.
  • In 2013, house prices fell by 8.18% (-9.37% inflation-adjusted) from a year earlier.
  • In 2014, house prices dropped 0.78% (-1.80% inflation-adjusted) from a year earlier.
  • In 2015, house prices rose by 6.73% (7.46% inflation-adjusted) from a year earlier.

Property prices fell by more than 56% from 2008 to 2013 due to the adverse impact of the global economic downturn and the ensuing Euro-crisis.

Record low interest rates

Romania interest rates

The National Bank of Romania (BNR) policy rate has been unchanged since May 2015, at a record low of 1.75%.

RON-denominated loan interest rates are at historic lows. In September 2016:

  • 1 year housing loan interest rates averaged 5.91%, a sharp decline from 8.64% the previous year, and down from 12.06% in 2009-10.
  • 1-5 year interest rate fixation (IRF) loans averaged 5.09%, down from 5.71% a year earlier and from 13.13% in 2009-10.
  • 5 year+ IRF housing loans averaged 3.36%, a decline from 3.96% a year earlier and from 10.93% in 2009-10.

Euro-denominated housing loan interest rates, 48% of total outstanding housing loans, also fell. In September 2016:

  • 1 year IRF euro housing loans averaged 4.93%, down from 5.67% the previous month and from 5.80% a year earlier.
  • 1 to 5 year IRF euro housing loans averaged 4.91%, almost the same as the previous month, but down from 6.03% a year earlier.
  • 5 year and over IRF euro housing loans averaged 3.91%, again unchanged from previous month, but down from 4.32% a year earlier.

Mortgage market´s rapid expansion

Romania housing loans

In September 2016, housing loans rose 16.2% y-o-y to RON 56.67 billion (US$ 13.88 billion), according to the National Bank of Romania. From 2008 to 2015 housing loans outstanding surged by 18.1% annually.

Around 47.2% of outstanding housing loans were RON-denominated in September 2016, up from just 5.5% from 2010 to 2013. The Central Bank has shifted homebuyers´s preferences to local currency by limiting the "Prima Casa" or "First Home" programme to RON-denominated loans ("First Home" loans are almost 50% of total outstanding housing loans).

Moderately good rental yields in Bucharest

Gross rental yields for apartments in Bucharest are moderately good, ranging from 6% to 6.24%, with smaller apartments having the highest rental returns, according to the Global Property Guide research dated May 2016.

A 70 sq. m. apartment in Bucharest can be rented for around €550 (US$ 608) per month, while a 120 sq. m. apartment can be rented for just under a thousand euro per month.

Romania is a nation of homeowners, with a homeownership rate of over 80%. Government policies encourage families to buy their own houses:

  • For first-time homebuyers, the government extends a state guarantee of 50% to banks, up to €60,000;
  • VAT on properties with an area of ​​up to 120 square metres is reduced to 5%.

In 2015, Romania´s total dwelling stock rose by 12.3% from 2000 to around 8.88 million units, according to the National Institute of Statistics (NIS).

New building in Bucharest is recovering

Romania residential building permits

Bucharest´s residential stock reached around 30,000 units in 2015, with over 3,000 newly built units, according to Colliers International. Some new deliveries came from multi-phase projects such as Greenfield, Cosmopolis, or Confort Urban, others from new completely developments such as Mihai Bravu Residence 3, and Plazza Residence. There were a lot of new launches in 2015, with plans to build around 7,000 new apartments over the next two years.

In 2016 residential building permits fell by 1.61% during the first three quarters to 30,047 units, but this is somewhat deceptive as total useful area permits rose by 10.52%. In 2015, the total number of residential building permits had risen by 3.82% y-o-y to 39,112 units, according to the National Institute of Statistics (NIS), and total useful area was up 9.80% y-o-y.

Political tensions remain, amidst anti-corruption drive

Romania is poised between future and past.  Does Romania want to be a modern state, in which politicians are elected on the basis of policies and are prosecuted and imprisoned for corruption?  Or does it want to be a clientilist state, in which politics is about who you accept money from?

The two most prominent voices of the progressive future are president Klaus Iohannis, elected in November 2014, and Laura Codruta Kovesi, head of the country´s National Anticorruption Directorate (DNA).   

Iohannis, previously mayor of Sibiu but an outsider to the country´s corrupt and warring political elite, was elected President in November 2014 on an anti-corruption platform. Since Iohannis´ election there have been a series of arrests for corruption, and increased support for the DNA. 

In March 2015 former Finance Minister Darius Valcov of the Social Democratic Party (SDP) was arrested (though in June the Supreme Court ordered his release to stand trial in conditions of freedom).  Former Prime Minister Victor Ponta, also of the SDP, resigned in November 2015 after some 20,000 people took to the streets in protest against a Bucharest nightclub fire. 
On November 17, 2015, Dacian Cioloș, replacing Ponta, became Romania´s prime minister.
“In my opinion, it is much more than a mere government change," said Iohannis of Ponta´s resignation.  "I believe we are talking about a paradigm change in the Romanian politics and I believe it is good..."

The other force pushing the country towards modernity is the DNA, which has charged or convicted no less 18 ministers from governments that have been in power in Romania since 2004, as well as thousands of lower-level politicians, media moguls, judges and businesspeople.

“I do believe DNA is helping to create a new Romania, and I believe this is part of the reason DNA has had such good results, because the team working within DNA believes in this,” Kovesi has been quoted as saying. “We are people who want to change the country, to live in a cleaner country.”

However progress was set back by the SDP triumph in the December 11, 2016 Parliamentary elections. The SDP´s support is strong among the poor, whose perception is that almost all Romanian politicians are tainted, so why seemingly target the SDP?

The SDP appointed the relatively clean Sorin Grindeanu as Prime Minister.  But the real power is the SDP´s Liviu Dragnea, convicted of bribery and ballot-forging during the 2012 parliamentary election and thus barred by law from becoming prime minister.  One of the Grindeanu government´s first steps was to pass Emergency Ordinance 13, effectively decriminalising official misconduct in which the financial damage is less than 200,000 lei (£38,000) - clearly a step towards Dragnea becoming prime minister. 

This unleashed a storm of popular protest and mass demonstrations.  The demonstrations had their effect.  Ordinance 13 was repealed and justice minister Florin Iordache resigned, a scapegoat for Ordinance 13.

This is progress of a kind.  Hard yet to be certain, however, that good will triumph in the end. President Iohannis is still in place, the DNA´s Kovesi is in place, but there are an awful lot of murky political wheeler-dealers in the country unhappy with the restraints imposed by the rule of law, who may yet wreak their revenge.  Time will tell. 

The economic crisis and after

Romania gdp inflation

Romania suffered severely during the global financial meltdown, with real GDP contracting by 7.1% in 2009, and by another 0.8% in 2010. Centrist alliance leader Traian Basescu ´s imposition of austerity response to the crisis made conditions intolerable for many, resulting in many demonstrations and the collapse of his popularity. Real GDP grew by a meagre 1.1% in 2011. In 2012 economic growth slowed sharply to just 0.6%.

In 2012, the country went through three governments. Prime Minister Victor Ponta replaced Mihai-Razvan Ungureanu, who in February 2012 had succeeded Emil Boc, who was forced to resign amid violent protests at his government´s drastic public spending cuts. Thousands of laid-off workers took to the streets in protest against mass layoffs. But now, Romania´s economy is growing fast again.

Romania is Europe´s fast-growing economy

Romania unemployment

In Q2 2016, Romania posted 6% y-o-y economic expansion, its highest GDP growth since Q3 2008, according to the National Institute of Statistics (NIS), beating an earlier growth forecast of 4.1%. The rise of private consumption, as a result of the tax cuts and the 25% public sector wage hikes, have powered recent growth.

Romania is predicted have the highest economic growth in Europe this year, growing by around 5% in 2016, followed by Ireland (4.9%), based on the IMF´s latest World Economic Report in October 2016. Then over the next two years the economy is expected to slightly slow, with growth rates of 3.8% and 3.3% in 2017 and 2018, respectively.

The country´s budget deficit is predicted to decline to be 2.9% of GDP in 2016. During the first nine months of 2016, Romania´s consolidated national budget had a deficit of RON 3.7 billion (US$ 896 million) (0.49% of GDP), down from a surplus of RON 6.16 billion (US$ 1.49 billion) (0.87% of GDP) in the same period last year, according to the finance ministry.

In September 2016, Romania´s unemployment rate was 5.9%, significantly down from 6.9% in the same period last year, according to the NIS.

The country´s annual inflation was -0.6% in September 2016, according to the NIS. In 2015, inflation was also at -0.6%, a decline from 1.1% in 2014. This was also a sharp drop from 4% inflation in 2013, 3.3% in 2012, 5.8% in 2011, and 6.1% in 2010, according to the IMF.

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