Romania: Romania

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

With fairytale castles, majestic mountains, seaside resorts, traditional villages and cities full of architecture, Romania has been said to be where the Czech Republic was around a decade ago in terms of tourism status. Lying in south-eastern Europe, the country is bordered by Ukraine, Moldova, Bulgaria, Hungary, Serbia, Montenegro and the Black Sea. The Danube flows along the southern border and forms a beautiful delta. The Carpathian Mountains and Transylvanian Alps divide the country into Wallachia in the south and Transylvania, famous as the home of Vlad the Impaler (aka Count Dracula), in the north. Spring is pleasant, summers hot, autumns cool and winters regularly below freezing, when abundant snowfall provides ideal skiing conditions. The average annual temperature is 11°C in the south and 7°C in the north, but records of extreme temperatures range from 44°C to -38°C.

Since 2000, the Romanian government has been working towards EU accession, and has begun to pursue a programme of economic reform which is largely in line with IMF requirements for fiscal restraint and economic restructuring. The economy is now growing strongly – GDP growth was at 4.4% in 2003, 8.1% in 2004, and 5.2% in 2005 (a drop largely attributable to the heavy rainfall and flooding in the country as well as domestic currency appreciation, competition, rising energy tariffs and subsidy cuts). Inflation has fallen from astronomical levels – in 1997 it stood at 154%, but then plummeted until it reached 8.9% in 2005. There has been a rising demand for Romanian exports of machinery, textiles and furniture, and unemployment is low (6.5% in 2005). Foreign investment is on the rise and Romania’s economy is now one of the fastest-growing in Europe. With EU accession scheduled for 2007, much is expected from the country, and its growing popularity and potential raises great hopes for the property market.

Is this a good place to buy?

With a stabilising economy and foreign investment from multinational companies like Renault, Wrigleys, Delloite & Touche and Avon flooding in faster than in almost any other country in Europe, Romania has the potential to be the next economic miracle. As a result of this increasing interest, the entire real estate market has already altered beyond recognition – turnover is rapid and prices have risen significantly over recent years. This is likely to continue – interest rates in the country are dropping, which will open up the domestic market to hundreds of thousands of new borrowers (who were not permitted housing loans until 2002) and push prices up further. Demand is therefore currently strongly exceeding supply. Huge infrastructure spending is in the pipeline (on telecoms especially – and a number of new highways are also being planned across both Romania and Europe), and the country has a motivated and educated labour pool that is still incredibly cheap. The economic indicators therefore show that Romania is a country ripe for investment.

Due to the recent nature of these developments, prices are still surprisingly low, with some apartments selling for £15,000 ($25,000) and amazingly modern holiday homes at a mere £45,000 ($75,000). House prices are expected to rise four-fold over the next ten years, however, as Romania benefits from its entry into the EU in 2007. For this reason, and in terms of its status and potential as a tourist destination, Romania is currently one of the best countries in Europe to invest in.

Price history

Romania has registered some of the highest rates of property growth anywhere in Eastern Europe over the past few years, with annual rises of 30-45% in the price of flats and houses and a doubling or tripling of land prices. House prices in the country currently average just £17,000, but it has been postulated that £100,000 ($170,000) spent now could be worth £514,000 ($850,000) in ten years’ time due to the impact the EU membership is expected to have on the property market (see Chapter Two: Where to Buy Abroad for a discussion of the effect that EU accession actually has).

Which type of property should you go for?

Under Romanian law, property is divided broadly into three categories: dwellings and businesses; agricultural or forest land; and community or religious properties. Foreign investment is usually concentrated on the first category, as the only way for a foreigner to buy land is by forming a Romanian registered company. This is expected to change after EU accession, and it may suit some investors to set up a company, buy land on the Black Sea for 300-400 euros (£200-£270) per square metre, then sell it for a profit in a few years time, after the rules are changed (they are set to change and allow foreign ownership of land five years after accession).

The biggest capital rise in 2003 was for block apartments built before 1989, which usually sell for below 30,000 euros ($35,000). Glossy new builds, conversely, can be about 40% more expensive than most property in Romania, but with development at an early stage, these properties may be a worthwhile investment as long as you sell before supply and demand equalise.

Romania has a very ownership-centred culture, making the property market more suited to capital growth investments rather than rentals. However, as tourism increases in the country, this is likely to change, and the holiday market will increase – not only along the Black Sea coastline, but also in skiing resorts or urban properties, especially in central locations. The short summer season in fact means that those hoping to profit from rentals would be better advised to find the latter types of properties to ensure year-round suitability – in the summer months the ski resorts make for spectacular hiking country.

The true romantic may prefer to buy a “conac”, the Romanian name for a cottage owned by the aristocracy of the country at the turn of the 20th Century, where gentry would spend their weekends and summers sipping wines from the surrounding vineyards. These homes are often in need of some repair work, but are worth it as the lingering aroma of the wine harvested on their estates continues to fill the premises with a sense of days gone by. Another alternative might be a mountain home or getaway, for which prices start at around 20,000 euros ($22,000). A superb villa in a choice location would be about 100,000 euros ($110,000), and most homes in these areas come with spectacular mountain views and are surrounded by pine tree forests and meadows.

Buyers this market will appeal to

Romania is a very new market, and still represents a great deal of risk for the potential investor. This means that the type of buyer who would most likely be interested at this stage would be those who have an investment portfolio to provide security in case of a failure. Other interested parties might be those willing to take a relatively serious risk, or second home buyers looking for a low-cost property in beautiful surroundings.

Hotspots

Property hotspots are plentiful in Romania, and as the market is still young, Bucharest is the obvious choice for current investors. The city is grandiose, with wide boulevards, neoclassical public buildings and ornate private villas. Its transformation into the Paris of the East began in the 1860s (it even has its own Arc de Triomphe), but under Ceaucescu some parts of the city began to look more like North Korea. The number of multinational companies in Bucharest makes the city a good bet for rental properties. A number of companies publish details of their properties and the rentals that have been returned, and in the centre of Bucharest returns have reached 17-18% of the initial purchase price over the first year. The smarter districts, such as Primaverii, have spectacular 1920s villas which sell for anything from £300,000 to well over £1 million ($500,000-$1.7 million). Further out towards the airport are their modern equivalents, aimed at the expat communities and the Romanian nouveax riches. Some of the properties here are close to £1 million or more, but two or three bedroom villas can be bought for around £200,000. An alternative would be a more modest apartment in one of the blocks in Bulevardul Unirii, the avenue leading to Ceaucescu’s palace, or an off-plan flat in one of the new developments in the west of the city. Prices are around £800 ($1,400) per square metre, and should earn 8%-9% in rent.

For those interested in investing in Bucharest but who cannot afford the high prices, South Bucharest and the Olt Valley are recommended due to lower prices and urbanisation plans. North Bucharest is becoming saturated with investors, and growth potential is limited. The Olt Valley, while close to Bucharest, is underdeveloped and underpublicised but has superb landscapes, spa towns and low prices. Building or purchasing in the suburbs and outskirts of Bucharest also has the potential for substantial longer-term returns as the city expands and the properties become more central.

The high rental yields in Bucharest are likely to be maintained for the foreseeable future due to the fact that the city’s hotel industry is limited. Hotel room rates are some of the highest in Europe, and the only real alternative for international businessmen is to rent apartments or rooms. Most investors purchase an apartment and let it to a rental company which will sublet it for 50 euros a day, giving a good rate of return.

For those interested in the potential tourist market, other areas are recommended. Romania’s main sea resorts are centred on 45 miles of fine sand beaches, a coast long known for cures of arthritic, rheumatic, internal and nervous disorders. During the summer months, resort towns such as Constanta, Costinesti and Mamaia are packed with tourists from across Eastern Europe and Russia, although facilities and beaches are some way behind the expectations of western tourists. It is also useful to remember that the summer beach season in Romania is only four months long, and therefore better returns are to be expected in the mountain and ski resorts.

The central Transylvanian region is firmly on the tourist map, thanks to its association with everybody’s favourite vampire and its reputation for eerie landscapes and atmosphere. The province is home to some of Romania’s most intriguing towns, from the medieval splendour of Sighisoara to the homely charms of Brasov and the sweeping valleys of the Carpathians. The ski resort of Poiana Brasov is another main tourist attraction, offering some of the cheapest yet most challenging pistes in all of Europe.

Poiana Brasov was founded in 1895 as a tourist resort for local aristocrats. Since then, its development has been slow but steady, and it can now rival any of the more established ski resorts found in the Alps or elsewhere in the world. The town lies over 1000m above sea level and is surrounded on all sides by towering mountains and sweeping valleys. The countryside is alpine and remote, yet wholly self-sufficient, boasting luxurious hotels, restaurants and apartments. The skiing itself is some of the best in Europe, with twelve slopes catering for skiers of all levels, and in the summer, the area becomes a heaven for outdoor activity enthusiasts, with hiking, mountain biking and hang-gliding.

Purchase process

Prices are expected to continue increasing over the next couple of years, making investment worthwhile, but a fair amount of property market knowledge is necessary when investing in Romania. On the whole, foreign investors are treated in much the same way as local buyers, although as yet foreigners are not permitted to have a mortgage or to buy land. It is possible to get around the latter restriction by forming a Romanian company, which can purchase both property and land, but subsequent sales are subject to VAT of about 19% and a further 16% tax. This restriction is likely to be lifted once Romania joins the EU, though it is also expected that property prices will have increased dramatically by then.

Other fees include a flat income tax of 16% on any rental income – this is also applicable to capital gains. As with all overseas markets, it is wise to employ a reputable lawyer or agent who is well-versed in the purchase of Romanian property, as they will be able to guide you through the purchase process. Agents’ fees are usually 2-3% and legal fees will come to between 2 and 10%.

Key risks and opportunities

The US Trade Representative reported that investors’ most common concerns included: the frequency with which Romanian laws are changed (almost overnight in some cases); weak enforcement of existing laws; concerns about judicial competence; lack of impartiality; and corruption. According to the US Department of Commerce, the judiciary is still unfamiliar with the functioning of a new market economy, international business methods, or the application of new Romanian commercial laws. Investors also point to the excessive time it takes to secure necessary zoning permits, property titles, licences and utility hook-ups. All these complications can significantly add to the costs of doing business and make it difficult for investors to develop effective business plans. It is wise to remember also that corruption has been part of everyday life here for many years, although the government is attempting to change this by discouraging the payment of bribes.

Another aspect of the corruption issue is the fact that there are often issues with regard to title – many of those who had land and property confiscated under Ceaucescu are entitled to reclaim it, and a number of cases are still running through the courts. This is another good reason to find a local expert to guide you through any purchase.

Though Romania is set to join the EU in 2007, the country must fulfil a number of obligations before accession can happen, and it has been suggested that the planned entry may be put back to 2008. However, entry will happen, so investors prepared to wait patiently for a few years will profit from the rise in prices that EU accession usually creates.

One crucial factor that could prove to be a problem to many foreign buyers is the fact that as yet mortgages are not available to outside investors. Anyone looking to buy will need to have cash to invest up front or find alternative means of financing their investment – one idea would be to remortgage another property to release funds. The positive side of this is that very few foreigners are currently buying, keeping prices low.

The main thing with investment in Romania is to proceed with caution. Many figures predicted for the future are based on projections of economic growth and rental returns. Much can change, legally, politically and economically, and it is always advisable to do some careful research before committing any funds.

Opportunity rating

Romania presents the opportunity seen in many emerging economies, resulting from the fact that prices are low, probably undervalued. EU accession as well as increased advertising could lead to speculative growth, however the fundamentals underlying this growth have yet to be proven.

Rating: $ $

Risk rating

The main risks in Romania stem from the nascent nature of its market, and from possible over-speculation from investors wanting to get in at the beginning of the growth curve.

Rating: * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in Supplied by ...

“Where to buy a property abroad – An investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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